The future of finance is distributed, ecological, and multidimensional. Let’s give each of those words their due:
- Finance is projected investment value, established through the early allocation of funds; it may be interest-bearing, equity-building, or grant-based, but it always, by its nature, insinuates values into future conditions.
- Distributed systems move more agency and influence out to more people, across a landscape; this pulls in additional insight and capability, builds redundancies that add adaptive capacity, and creates new opportunities for value creation in more places, for the benefit of more people.
- Ecological systems arise out of long-running natural interactions; they can be hard to predict and can induce evolutionary innovation; they thrive through a complex pattern of competitive symbiosis, in which the whole is more than the sum of the parts.
- Multidimensional performance means a financial arrangement or business activity can produce meaningful benefits in multiple ways, in addition to producing financial returns on investment; this enhances investability and reduces risk.
Investability and risk are major determinants of capital availability. To put it simply: If you have $100, and you want to grow that asset without putting it at risk, you might invest in a business that is high-performing, successful, and likely to produce a better than average return. Maybe the $100 becomes $110 after one year and $121 after two years. At some point, you might decide to be more conservative, and look for a bond or other financial instrument that will guarantee you at least 5% per year, still ahead of inflation.
Most human activity falls outside of those options for low-risk investment. Depending on the risk appetite of a given institution or investor, the less solid the guaranteed return, the higher the risk.
In the age of deep and pervasive climate disruption, most of the urgently needed improvements to our overall economy fall outside of this risk-free menu of options.
- Cities need infrastructure to guard against sea level rise, saltwater intrusion, storm surges, county-sized wildfires that make their own weather, toxic fungus-filled wildfire smoke that travels 2,000 miles and is still thick enough to block out the Sun.
- Small farmers, in both wealthy countries and in the most vulnerable and conflict-prone, need to acquire information, data, tools, and practices that allow them to reliably grow food, in spite of major climate shock events, both slow-moving and sudden.
- Energy system innovators, using new technologies and untested business models, need the opportunity to test-run their strategy, grow to scale, and take market share from long-established fossil fuel interests, which have been a kind of hedge for banks and investors for over a century.
- Green infrastructure, including ecosystem restoration that helps to manage watersheds, to ensure clean water, clean and productive agicultural lands, and better resilience against shock events, needs investment, though it may not produce a direct return.
At the same time, investments that would produce reliable and increasing returns, in a stable climate, may not be able to do that in a stressed and disrupted climate. Too many of the moving pieces of the wider economy are disrupted by climate stresses and impacts. Availability of capital for some activities can dry up quickly, if insurers decided they cannot afford to operate in a given context.
This is why the future of finance must be multidimensional. Seeking only a straight financial return will narrow the opportunity to create real-world value (what we call Active Value). Meanwhile, all financial holdings, commercial opportunities, and local economies, depend on whether these other non-financial areas of concern see improvement or degradation. These non-financial concerns are macrocritical, meaning they affect the overall size and shape of the macroeconomy.
If the macroeconomy is conditioned to undermine local value creation and resilience, then the total amount of wealth in that economy will decline over time. The International Monetary Fund has begun to identify ways in which underperformance on non-financial macrocritical metrics reveals degraded prospects for long-term fiscal stability. An easy example of this are the cases of small island countries that have seen more than 100% of annual economic output wiped out in storms lasting just a few hours. The threat to fiscal resilience is so serious that central banks have banded together to form the Network for Greening the Financial System (NGFS), to reduce that threat.
While that one country may not be able to stop global climate change on its own, and so cannot prevent the storm from striking, it can build adaptive capacity and resilience, and it can design and deploy systems that make it a leader in mitigation of climate risk for others. These are high-value investable activities that from a one-dimensional perspective might carry risk but from a multidimensional perspective reduce it—creating new financial opportunity for others.
So, reducing risk and enhancing investability require a multidimensional approach. To achieve this, it is important that financial calculations not only consider non-financial performance indicators but that they account for the distributional effects of specific choices and maximize ecological benefits—both in terms of restoring and protecting natural systems and in terms of creating sustainable ecosystems of human actors (investors, stakeholders, and beneficiaries) whose agency adds value to the endeavor.
While technology and finance are driving industrial structures to get bigger and more concentrated, we are moving toward a threshold moment, beyond which the most successful corporate endeavors will be those that leverage distributed wealth and agency, ecological health and adaptive capacity, and multidimensional performance, to reduce risk and expand opportunity for all.
