Thread by @bbaue

The Anthropocene reality of financial risk by @BeatriceCrona Carl Folke & @vgalaz

sciencedirect.com/science/articl…

Aligns closely w/@r3dot0 Sustainable Finance Blueprint r3-0.org/wp-content/upl…

@BeatriceCrona @vgalaz @r3dot0 "Complex dynamics, such as threshold effects (tipping points) and strong interactions resulting in cascading effects, are all known drivers of systemic failure in any complex system. Yet
state-of-the-art risk analyses still do not adequately account
for them."

@BeatriceCrona @vgalaz @r3dot0 "Furthermore, most financial risk assessment still relies on historical data, and would underestimate or completely miss the potential for thresholds and cascading effects not previously experienced…"

@BeatriceCrona @vgalaz @r3dot0 "While the exact effects of crossing tipping points in the Earth system may still be 'unknown unknowns’ … the existence of planetary-scale thresholds is becoming an increasingly well-established part of the risk landscape (a known unknown) that deserves attn & deliberate action"

@BeatriceCrona @vgalaz @r3dot0 "In systems science it is well
established that thresholds in systems are easily overshot
when feedback has long delays, leading to collapse.

Since shortening the time lag of how the Earth system operates
is not possible..."

@BeatriceCrona @vgalaz @r3dot0 “...two things will be key to achieve a financial system that fundamentally promotes long-term sustainability:

(1) incorporating the necessary information feedback and

(2) developing structures by which this information is taken
into account and acted upon."

@BeatriceCrona @vgalaz @r3dot0 "The two cannot be treated in
isolation.

Incorporating information (i.e., impact metrics) that can assess the degree to which investments move us toward or away from planetary boundaries and tipping points is paramount."

@BeatriceCrona @vgalaz @r3dot0 The paper also addresses the shortcomings of ESG:

"The irony is that current ESG ratings are based on a risk
perception that does not account for externalities, and therefore is unlikely to address the root causes undermining sustainability."

@BeatriceCrona @vgalaz @r3dot0 "Today, unintelligent accountability appears to be rising in the financial sector, as a result of misalignment between sustainability ambitions and current risk frameworks and risk assessment measurements. This hampers the crucial role finance can and needs to play.”

@BeatriceCrona @vgalaz @r3dot0 "Shifting financial sector norms and practices is therefore not
about altruism, but about self-perseverance.”

This ties into Ellen Quigley’s notion of universal investors as "norm entrepreneurs” papers.ssrn.com/sol3/papers.cf…

@BeatriceCrona @vgalaz @r3dot0 "Norm entrepreneurs help to establish, socialise, and normalise attitudes and behaviours in a certain domain.

Once these norm entrepreneurs have succeeded in convincing enough people, the norm achieves a 'threshold or tipping point’”

@BeatriceCrona @vgalaz @r3dot0 I’ve suggested to Ellen that she integrate sustainability thresholds (tipping points) into her work — namely, leveraging desirable social tipping points to avert catastrophic ecological (and undesirable social) tipping points.

Likewise to Beatrice, Carl, and Victor.

@BeatriceCrona @vgalaz @r3dot0 We at @r3dot0 have been addressing these intersecting issues for years.

For example, even before I joined r3.0, colleagues and I proposed the notion of “threshold investing”

theguardian.com/sustainable-bu…

sustainablebrands.com/read/new-metri…

@BeatriceCrona @vgalaz @r3dot0 Our 2018 Transformation Journey Blueprint has this to say:

"...traditional risk management continues to assume that risk is generally an external event
that afflicts companies – and so companies lack agency in risk creation, and can only manage risk."

r3-0.org/wp-content/upl…

@BeatriceCrona @vgalaz @r3dot0 We call this "outside-in risk, and believe it is vital to complement this perspective with inside-out risk; in other words, the risks that companies create, which then impact other companies (as outside-in risk)…"

@BeatriceCrona @vgalaz @r3dot0 “...and also circle back to impact the company that created the risks in the first place (we might call this 'bite-you-in-the-butt risk').”

Seems like a good place to end this thread ;-)

@BeatriceCrona @vgalaz @r3dot0 Oh, one more thing:

the phrase “unintelligent accountability” to describe current ESG and “sustainable” finance deserves particular praise for its pitch-perfect accuracy…

Attn @SarahLizCornell