A discussion on Systemic Sociopathic Arbitrage

Mr Scott Williams (Twitter: @scott42195), Adviser at PwC Switzerland, addressed the course on Sustainable Corporate Finance at BSL on 14th January about systemic sociopathic arbitrage (Twitter: #systemicsociopathicarbitrage) and the need for full pricing of risk in the global financial system. Scott’s goal is to connect global catastrophic systemic risk information to investment evaluation. This is based on research on the rise of catastrophic global risks, the need to build resilience and invest in adaptation, and most particularly trigger a shift away from prevailing thinking that financial systems are disconnected from nature. Scott asked the audience to consider the question “what constitutes success?” as a way of framing his presentation.

Scott opened open the discussion by sharing his experience in driving sustainable change in PwC and the shock of personally experiencing the Great East Japan Earthquake. This brought clarity in his mind about the reality of unpriced catastrophic risk, the need to accelerate systemic change at the highest level, and the imperative to shift the global financial markets which underlie the economic fabric of society.

The primary measures of success remain short-term financial indicators, and a disconnect remains for the wider use of so-called non-financial information. This gap is rapidly closing as the number, and severity, of dramatic events rise and as the quantification and measurement of uncertainty of non-financial information improves. In particular, the adoption by all of the world’s governments of the three universal agreements (the Sendai Framework for Disaster Risk Reduction in March 2015, the Sustainable Development Goals in September 2015, and the Paris Agreement at COP 21 in December 2015) should see momentum continue to build to change the way financing and investment decisions are made.

As a certified accountant, Scott put the spotlight on the reliability of figures being generated by banks and corporations alike using generally accepted accounting principles such as IFRS. He argues that the interpretation by preparers and users of financial information currently fails to adequately incorporate the value of social and environmental externalities. So what then is the basis of valuation models? Looking at a chart from the Global Footprint Network and the UN Human Development Index made it clear that most of humanity is living below the line of basic human dignity and that the high-income countries are living beyond the Earth’s capacity. Scott suggested that it was time to abandon the notion of developed and developing nations as, effectively, no country on the planet has developed sustainably.

Change needs to happen – massive, not incremental, change. The time to focus on mitigation only has now passed. The days of believing that CSR is enough are over. Humanity is adapting to the changes in the world, but the UN Global Assessment Report on global risks concludes that the worst earthquakes, tornadoes, climate shifts – and the associated financial and economic shocks – experienced to date are but a taste of what is expected. Our decisions, particularly those of the Davos elite who are either incentivised not to consider, or are intentionally ignorant of, the impact of their (in)actions, will decide the degree of suffering that the majority of humanity will experience as we respond to global scale change.

Scott defies the gloom with unrelenting optimism. Through various initiatives and at the highest levels, he interacts with financial and industrial leaders to share the message of growing disasters, coupled with major global initiatives which are creating frameworks to enable a safer transition to a new financial, social and environmental reality.

As an example of the shift occurring among global leaders, he cited Mark Carney, the head of the Financial Stability Board, (which has oversight across the global financial system)– who in a contentious speech at Lloyd’s in London in September 2015 recognized the systemic risk to the global financial system – financial, social and ecological alike. Scott pointed to the following initiatives and developments as positive examples of change:

  1. The Taskforce on Climate Related Financial Disclosures, sponsored by Carney and Mike Bloomberg, to develop a common global standard for disclosure of the implications of climate change
  2. The Climate Summit commitments by a broad consortium from the global financial ecosystem on Integrating Disaster Risk and Resilience into Financial System and the development of the Smart Risk Investment Framework by the global insurance industry
  3. S&P quantitative Sovereign disaster risk ratings
  4. Development of Green Bond and Natural Catastrophe Bond markets
  5. Integrated systems models such as Resilience IO
  6. Sophisticated multi-stakeholder scenario analysis such as the Food System Shock work supported by Lloyds

The COP 21 Paris conference made it explicit that no investor can now neglect or deny their broader fiduciary duty to consider the environment or society. Changes are coming from the investor side, from rating agencies, companies and other actors in the financial world.

The information that until recently was thought of as immaterial or impractical is becoming increasingly relevant and its inclusion in the accounting procedures and world of finance will only increase.

Towards the end of the talk we had a look at the overall scheme of things and the wider patterns of change already under way:

  1. Signals are here: the quantitative revolution is happening, we are moving towards multi-dimensional data sets and open source science with silos between different disciplines rapidly breaking down
  2. Smiles: change in the business and political landscape following suit – it is happening now. It may take a big shock, a tragedy of huge proportions to act, but preventive measures are starting to emerge even now with new never-before-seen binding accords agreed to by world leaders and supported by investors and CEOs in 2015
  3. (More) Smiles: investors’ rationale is changing as well – from ‘risk-blind’ to ‘risk-informed’. The alignment between the financial and natural systems is now being recognized because this link is reality, it’s just not yet quantified properly by finance.

The final message was that of choice. The world is changing, it changes from the fact that real effects of our actions on the planet’s life-giving systems catch up with us, which triggers the feedback change in the government policies and investor perspectives. The choice is now whether to embrace the change and help shape it, to find a new link between money and how it relates to real issues, the real measures of success and a sustainable quality of life. Or do we resist and stick to our financial world of numbers and making even more money (and persisting with centuries old thinking that we can control the environment)? Can our current financial systems be aligned with reality through our existing lens of accounting, reporting and regulation? If so, for how long? We were left with the open question…what constitutes success?

Twitter: #systemicsociopathicarbitrage

Written by Scott Williams, contributor Sergey Skotnikov

One thought on “A discussion on Systemic Sociopathic Arbitrage

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s