Management insights for tackling grand challenges: the case of climate-related financial risks in the financial investment industry

Climate change has been referred to by leading economists as the greatest market failure in human history, with disastrous impacts on human well-being and economic wealth. After years of neglect, the finance sector, at the heart of the economy, has woken up to this challenge, realizing that not integrating considerations of climate change into financial decision-making produces significant risks for financial investments and the stability of financial markets. Now there is a growing consensus, especially amongst financial leaders, that climate change is a material risk and that it needs to be effectively identified, measured, monitored and integrated into financial decision-making.

A large ecosystem of organizations is implicated in effecting the necessary changes: (1) investors need to change the way they assess, monitor and respond to risks, (2) companies need to report new climate-related financial information, (3) data providers and consultancies need to develop new tools for forward-looking climate scenario analysis, (4) regulators need to change their regulatory and supervisory practices, and (5) NGOs are changing their advocacy practices to support these developments. Given the high interconnectedness of the financial system, the major challenge of these organizations is to change what they do in a way that cannot be coordinated on this scale and that is complicated by the inherent complexity and uncertainty of climate change.

Against this background, this project investigates how organizations can tackle large-scale problems when they are caught in a complex web of interactions with other organizations. It examines in detail the practical challenges that emerge in the interactions with other organizations and how the local experiments in multiple organizations interact and contribute to emerging collective approaches to the large-scale problem (i.e., to climate risk).

The project draws on a longitudinal, qualitative research approach in which a team of four researchers uses ethnographic methods to document in real-time the actions of multiple organizations to address climate risks. Over the course of four years, the team will collect detailed data on and analyse the actions of (1) financial investors (e.g., pension funds, insurance companies, asset managers etc.), (2) financial data providers and consultancies, (3) investor networks, and (4) NGOs. Data collection will unfold in three waves of one year each. The first wave will focus on an initial set of four leading organizations in the area of climate risks. In the two subsequent waves, the data collection will gradually be extended to cover a total of approx. 12 organizations. The focus will be on organizations headquartered or located in the UK with some limited data collection in other European countries. Ethnographic methods for data collection accomplish deep immersion in the work of others through participant observation (e.g., observing meetings, social interactions and work at the desk), open-ended interviews and the collection of documents.

Theoretically, this research contributes to developing new theory in the area of management studies on how organizations can tackle large-scale, complex, social problems, known as 'grand challenges.' Methodologically, it develops new social science research methods that are better suited to capture the increasingly mobile and complex issues facing organizations today. Practically, it seeks to inform the actions of (1) policy-makers and regulators to make financial markets resilient and sustainable; (2) financial investors to minimize risks and safeguard returns; (3) consultancies and data providers to develop appropriate tools and data; and (4) NGOs to develop effective advocacy.

My research will provide actionable findings for a range of different audiences in the public, private and third sector in the UK and beyond. First, financial policy makers and regulators, such as the Bank of England who has spearheaded policy changes with regards to climate change for a long-time, the Financial Conduct Authority, the Financial Reporting Council and the Department of Business, Energy, and Industrial Strategy who is currently working on a Green Finance Strategy for the UK, are likely to be interested in the results of this study. My research can inform their actions to develop effective policies and regulations to make financial markets safe, reliable and transparent for all participants by uncovering the challenges and barriers that financial firms face in implementing solutions to address climate-related risks. By helping to develop more effective policies and regulations, the findings from this study contribute to the resilience and sustainability of the financial sector, which in turn will benefit the UK's economy in the long-run.

Second, the research findings will also be useful to private firms, including a variety of different financial investment companies (e.g., pension funds, insurance companies, asset managers etc.) and financial data providers and consultancies. In particular, the study will uncover what enables the effective assessment, management and response to climate-related financial risks. This will inform the actions of investment companies to minimize the risks and safeguard the returns of their investments. Moreover, financial data providers and consultancies will be able to improve their products and services so as to facilitate the integration of climate-related risks into investment and decision-making processes. The impact on the private sector is particularly important given that in the UK many investors are still lagging behind in terms of addressing and integrating climate-related financial risks in their governance, risk management and decision-making processes.

Third, non-profit organizations, such as the World Wide Fund for Nature (WWF), ShareAction in the UK and Greenpeace who have all worked with the financial sector to address climate change will equally benefit from the study. In particular, the findings of this study can enable them to develop more effective advocacy and improve their collaborations with financial firms through better understanding the perspectives and needs of financial firms, policy makers and regulators.

Fourth, my project will be of benefit to current and future managers in other industries as well. The most pressing issues facing contemporary organizations are those that extend beyond the reach and power of any single organization (e.g., climate change, water scarcity, migrant crises etc.). Current and future managers need to gain skills and knowledge in how they can tackle these large-scale, complex issues. I will use my position at a leading business school in the UK to educate the current and future generations of managers.

Finally, the wider public, in particular everybody with private investments, a pension scheme and a bank account, will benefit from the study. There is still limited awareness amongst the general public about how climate change impacts financial investments and the impact financial investments have on the climate. Through various outreach activities (e.g., Tedx talk etc.), my research will increase awareness of the dangers, significance and reach of climate-related financial risks and provide recommendation for how private investors and pensioners can secure their financial future.