At London Climate Action Week and other recent climate gatherings, I have been hearing two very different narratives about finance, each claiming the authority of realism.
The mainstream narrative claims a realism about what finance can do. It can’t drive the climate transition. It had a go, but that’s not its bag. Responsible investors must allocate capital based on what is expected to happen. Climate risk means financial, idiosyncratic risk. Sustainability professionals need to be seen as a driver of value for their companies. If there’s a societal role for finance in climate, it’s in adaptation, which is consistent with the classical finance problem: given the future as we expect it, how do we maximise risk-adjusted returns?
This narrative is a logical reaction to missing the 1.5C target. New SBTi rules endorse the new direction. It’s good to think it is not at all a reaction to geopolitics. And the plausibility of that claim has been hugely helped by the weather. Who can criticise a focus on adaptation in a week where the LSE’s extreme heat event had to be cancelled because of extreme heat?
But a second narrative has also been percolating in London and elsewhere, claiming a realism about what finance needs to do. It argues that the mindset above comes from finance thinking at the scale of the enterprise, while it needs to think at the scale of the enabling infrastructure. Finance has been disowning responsibility for tackling the systemic risk that, as it recognises, is the major risk for our societies. It is not helping to build the society decision-making capacity we need.
Finance says that’s not its role, and that it needs the right conditions created for it first, so it can come in and operate safely and profitably. But as one speaker in London described this argument: “Capitalists have been domesticated to the point that they are not hunting value anymore. They’re not big cats; they’re tabbies.”
The contrast between these two realisms goes to the heart of what finance is for. The fudges that sought to reconcile the two have been exposed. Who cares doesn’t win. Systemic risk is not the sum of idiosyncratic risks. Setting targets and aligning portfolios don’t reallocate capital in the real economy. Engagement isn’t closing the gap.
The issue is no longer a mechanistic debate about whether the financial industry is somehow addressing systemic risk through these indirect means. It is a bolder debate about whether it should even be trying to. And today the prevailing narrative from the finance world says “No”.
But it can’t be as simple as that, because the systemic problem has not gone away. It’s getting more acute. And alongside the systemic climate issue, a systemic AI issue is forming. In AI, too, investors each managing enterprise-level risks is not going to solve for the systemic risks.
The difference with AI is that this dynamic is likely to play out faster, more pervasively and more tangibly than it is doing for climate. The AI debate is exposing the same fault line in months that climate exposed over two decades. And we are already sensitised. With AI amplifying the climate argument, an emerging narrative from outside the finance world is beginning to say: “But we need you to.”
This is no longer an argument about climate. It is an argument about whether finance should be responding to the future or helping to create it.
So finance professionals who are feeling a moment of relief and reassurance in the first narrative should perhaps enjoy it while it lasts. Because with the systemic risks we face, and the transitions we need to navigate, society depends on capital being allocated to influence the future, not just adapt to it.
This is the core issue dividing the two narratives. And if finance doesn’t take on that challenge when society demands it, it can’t expect to enjoy the licence to operate that it currently takes for granted.
It’s a legitimate view that systemic problems are for governments to solve and investors to adapt to. In the short term, it’s a practical one. But the risk is that the prevailing realism in finance becomes politically unrealistic. Modern finance treats the future as an input. But in the context of climate and AI, society increasingly expects finance to treat the future as an output.
If enough people conclude that finance is serving itself rather than society, the response may be to change the terms of its licence to operate. That would be nothing new: the rules have been rewritten in response to such divergences many times over the past 200 years.
Finance spends enormous effort modelling climate risk, transition risk and geopolitical risk. It spends remarkably little time considering licence risk: the risk that society concludes the current freedoms, privileges and objectives of finance no longer command democratic legitimacy.
Today, it’s not enough to say: “We can’t do what society needs because fiduciary objectives don’t allow it.” It’s time to turn the question around: “Recognising the urgent and systemic needs society has, what do we need to change in the financial industry’s licence to operate so that it can service those needs?”
Simon Glynn is founder of Zero Ideas.
