Financial markets are trapped in short termism mindset

We believe financial markets, critical to society’s ability to function, are under threat. For too long, it has been widely accepted that short-term performance, growth, risks and financial returns should be maximised at the expense of environmental and social outcomes.  

But the downsides of this short-term thinking have become clear. Well-functioning financial markets need to be built on well-functioning economies and societies. Climate change, biodiversity loss, modern slavery, discrimination and housing affordability are systemic and local issues that do not support a well-functioning financial system. And yet, the financial system contributes to these issues by failing to operate within environmental, societal and human constraints. In our view, it has become a vicious cycle that has overlooked the associated environmental and social costs in favour of elevating financial outcomes. If the financial system fails to change the way financial decisions are made, we will continue jeopardising the health of our people and our planet. Change is a necessary must.

With the Australian government consulting on a Sustainable Finance Strategy in 2023 and 2024, and corporate Australia showing a willingness to consider Environmental, Social and Governance (ESG) impacts and risks, opportunities for change abound. However, to do so in any meaningful way requires a whole of system approach. It requires an intersectional perspective alongside coordinated action from governments, companies, investors and other stakeholders to ensure systemic issues are not managed in isolation. This level of change requires a deep understanding of the systems that we are operating in – the challenges, limitations, inner workings, and an understanding of where responsibility sits. More so, it honours the sharing of information, continued learning, considering broader stakeholders than immediate peers and considering what is not quantifiable.

We believe that a step away from short-termism and financial outcomes towards a focus on long-term, intergenerational prosperity is key. Shifting the focus allows for consideration of longer-term environmental and social value, costs and risks. It will also widen the levers available to make change and intervene. These levers include enhancing financial wellbeing and inclusion, preservation and restoration of the environment, a focus on a broader set of stakeholders, delivery of United Nations Sustainable Development Goals, and an understanding of sustainability-related risks and opportunities.

In acknowledging there is no silver bullet for change, the B Corp community came together at Assembly 2024. The conference provided an opportunity for individuals and companies to discuss what and how they could influence change. As part of a session led by First Sentier Investors, “A systems shift to a new economy”, around 50 participants representing a cross section of industries came together to discuss the interventions to support change in the financial system. Below is an overview of potential interventions proposed by participants.

1. Increase and refine mandatory reporting of non-financial measures: In addition to increasing mandatory reporting, we also need to ensure these are continually refined to minimise risks of ‘greenwashing’ (the act of making false or misleading statements about the social or environmental benefits of a product or practice), ‘green hushing’ (the act of hiding or downplaying the social or environmental benefits of a product or practice due to a fear of criticism or backlash), and ‘virtue signalling’, ensuring tangible actions are taken to cultivate a more sustainable financial system.  Whilst better disclosure is critical to enabling a range of stakeholders to make better informed decisions, if those decisions are still being made within a system that prioritises short term financial returns, then the benefits of better disclosure will be limited.
2. Enhance financial wellbeing and inclusion: Financial literacy needs to be simplified, linked to real-world examples, and be inclusive for a broad range of stakeholders to understand the impact of finance in everyday lives. Financial education should also be expanded beyond certain subjects at schools and universities, and tailored for different age groups and settings.
3. Look beyond immediate peers to engage a wider range of stakeholders: Too often, financial decisions are made solely by those within the financial industry and do not take into account the stakeholders the industry is supposed to serve. With greater reporting and better financial literacy, a broader range of stakeholders across disciplines and industries can be involved in the financial system, to provide broader perspectives for a model which considers long-term intergenerational prosperity for all.
4. Collective and collaborative action: In engaging with a broader group of stakeholders, collective action can be more effectively mobilised. This includes sharing information and resources on sustainability, taking collective action through groups (such as the B Corp community) to engage with government, policy makers, professional accreditors and certifiers, regulators and other governance bodies.
5. Tapping into the power of personal finances: With more stakeholders educated and engaged, there is an opportunity for individuals to tap into the power of their personal finances to shift the financial system through the decisions they make. For example, choosing which financial institutions to bank with or directing finances to investments that are more environmentally and socially sustainable. 

The session was a useful starting point on the changes that need to take place in the financial system. We are excited to continue the momentum of the discussions with the B Corp community and beyond – the multiple perspectives that are shared can help to test and challenge our assumptions and views.

We look forward to further discussions and action towards how we can change the financial system in line with a new focus on long-term intergenerational prosperity for all.  An initial step we will take to address points 2-5 above, is to produce a resource guide around financial literacy, the power of personal finances, and how individuals can lobby for change, which will contribute to B Lab’s regional strategy. 

Kate Turner, Global Head of Responsible Investment at First Sentier Investors, led the session: “A systems shift to a new economy.” She discussed the need for change in the face of growing climate, biodiversity, wellbeing, and inequity challenges and led an interactive workshop at Assembly 2024, a conference for the B Corp Community taking place in February 2024 in Cape Schanck, Victoria.