In light of the latest IPCC synthesis report it becomes (again!) evident that a much stronger focus on internal organisational dynamics/cultures of corporations and financial institutions should be a key element of climate-related risk assessments. Despite a mass of sustainability pledges from all sides – corporations, policy makers, but also financial institutions – to become net zero or carbon neutral, we are, after all, nowhere close to the path set out in the Paris Agreement proposes to prevent an increase of 1.5 or even 2 degrees Celsius.

Among financial institutions there is plenty of awareness that climate-related physical, transition and liability risks may impact their financial position. Stranded assets can entail serious financial losses, and climate-related lawsuits may decrease the value of companies included in their investment portfolios, for instance. Financial institutions as well as corporations have to a certain extent acted upon these risk assessments. Yet the lack of slowing emissions demonstrates that contemplating these risks hardly changes the course of events. As a result, risks rather increase than decrease, due to the unpredictable physical, social and financial outcomes following from a further rise of emissions.

A main cause for this lack of success, I argue, are ‘stranded mindsets’, that is rigid mentalities, worldviews and practices among the C-suite and employees of financial and corporate institutions. Subsequently, internal organisational dynamics are not conducive to seriously mitigating climate-related risks. Stranded mindsets, rather than concerns about stranded assets, are the main hurdle and the overarching risk for reducing global emissions and protecting biodiversity. Unfortunately, these internal dynamics are entirely missing among the risk indicators.

There are some hopeful signs of change, such as Norway’s sovereign wealth fund’s engagement with companies over their management of climate risks and the threat of UK pension funds to vote against the renewal of the CEOs of BP and Shell. However, these actions look predominantly at the top, and miss out on a much-needed all-inclusive assessment; the New York Fed’s Governance and Culture Reform Initiative demonstrates that poor organisational cultures in the financial industry can indeed be addressed with a broader – and long-term – inclusion of, among others, dialogue and education, but it lacks a focus on climate change.

Institutional investors, ranging from large asset managers to sovereign wealth funds, pension funds and (re-)insurers, should particularly lead the way to develop such all-inclusive assessments. With their immense financial power, they have the potential to seriously alter the dynamics within global finance, and, with the long-term nature of their liabilities, institutional investors have to consider assessing internal corporate dynamics – as one of the main causes of rising global temperatures.

To move forward, I suggest institutional investors – as well as financial institutions, corporations and regulators more generally – to:

  1. Include a profound analysis of internal company dynamics/culture as an essential part of (climate-related) risk assessments. Beyond the C-suite and boardroom, institutional investors should, for example, assess whether the operations of human resources entail a risk. This to grasp whether the hiring process (what is the profile of new hires?), as well as internal career trajectories (what kind of actors are promoted, those with traditional or more forward-thinking mindsets?) facilitate or hamper change. Is the supremacy of the return on investment for shareholders reconsidered in favour of more systemic changes? With such a broad scrutiny, asset managers will be in a much better position to assess whether their portfolio companies will be capable to successfully manoeuvre through the coming decades – and to contribute their part to the protection of planetary boundaries.
  2. Actively help (portfolio) companies to change their internal dynamics. An assessment of increased risks of stranded mindsets should not directly lead to disinvestment, so to speak. Companies that may struggle to change, yet express a willingness to reduce the risks of outdated internal dynamics, should receive all the support they need. At the same time, the message should be evident that refraining from any serious attempt to change corporate mindsets comes at a cost. Due to joint disinvestment strategies of institutional investors, affected corporations will face higher interest rates on their commercial bonds and loans, which in return will lead to weakening competitiveness – and increase the risk of stranded assets.
  3. Collaborate. The active re-calibration of internal corporate dynamics is not a straightforward task, and institutional investors should seek collaboration with a range of stakeholders, such as NGOs, scientists and politicians; once there is a beginning, I am sure the McKinsey’s of the world equally step in, as reducing the risk of company cultures will provide a new business opportunity. Collaborative efforts will increase the support for and also facilitate the private sector to create employment respecting the planetary boundaries and reduce the climate-related financial risks that currently receive most of the attention.
  4. Put bolder pressure on the political apparatus. Like the financial and corporate world, politicians around the world are subject to similar stranded mindset. Institutional investors should use their combined lobbying power, together with other stakeholders, to convince governments to assist companies that are willing to change their internal dynamics, and to also implement regulations to uphold long-term sustainability risks. After all, the support of politics – and their regulatory power – will be essential to the success of the collaborative effort needed for an all-inclusive systemic change.

Undoubtedly, the change will have to start with some serious soul searching among institutional investors, as many of them are equally affected by stranded mindsets. When they are to be serious about a better understanding of potential risks, in-depth assessment of how their internal logics hamper change will help them move towards developing investment and operational logics that are conducive to change. The inclusion, let alone the actual transformation of the internal organisational dynamics with their many ins and outs, will be an elaborate process and more of a challenge than looking at the top only. Yet without this the risk of failing to honour future liabilities will be immense!

Photo by Viktor Forgacs on Unsplash

31 March 2023
Macht? Macht nix! (virtuelle Workshop-Reihe)