Systems thinking is a finance professional’s most useful tool. Here’s why...

Transforming the global financial system to deliver net zero emissions was always going to be a hard job. In the last six months, with a ratcheting up of uncertainty around the politics of climate change, the job appears to have gotten harder.

But we shouldn’t be surprised that climate change involves complexity, uncertainty and constant change. That is after all what climate scientists have been warning us would happen if global temperatures were to rise by 1.5°C, or 2.0°C, or 4.01°C. Whether it be change in temperatures, change in industries, or change in politics, one thing with climate is certain: change is inevitable.

Sometimes it can seem that the mountain we must climb is simply beyond us. But if we look back just 10 years to 2015, we can see how much progress has been made. Ten years ago, the world was debating what may happen at the UN Climate Change Conference (COP21) in Paris that ultimately led to the Paris Agreement. In May 2015, Pope Francis delivered a papal encyclical letter^[i] which called climate change a global problem with environmental, social, economic and political implications.^[ii] Prior to the start of COP21 hundreds of thousands of people marched around the world in support of climate action.^[iii]

There have been many areas where we have seen change over the last 10 years. Investment in renewable energy has matured and new technologies have been developed that are now transforming energy grids. Ten years ago, battery storage at scale was still a concept in development. Today we are seeing industrial-scale investments that are answering the question of how to provide energy when the sun goes down and solar farms take a break for the evening.

We have also seen significant momentum over the last 10 years on initiatives to support the financial system to transition to net zero emissions. Four developments are worth noting:

1. In June 2022, the Basel Committee on Banking Supervision, which oversees the regulation of banks globally, published a series of principles for the effective management and supervision of climate-related financial risks.^[iv] The 18 Basel climate risk principles cover a breadth of risk management practices including corporate governance, internal controls, risk assessment, management and reporting.
2. After years of disagreement between different groups on the disclosure of climate risks, on 3 November 2021 at COP26 in Glasgow the Trustees of the IFRS Foundation, which are responsible for delivery of global accounting standards, announced the formation of the International Sustainability Standards Board (ISSB)^[v]. On 26 June 2023, ISSB issued IFRS S2 (Climate-related Disclosures) as a common standard.^[vi] Following the establishment of IFRS S2, Australia has implemented its own climate-related disclosure regime.
3. Many financial institutions globally have set their own net zero targets. To support institutions to transition activities to net zero, there has been a focus on establishing transition plans with the UK’s Transition Plan Taskforce establishing a Disclosure Framework.^[vii] ISF’s own contribution has been through the work of Associate Professor Sven Teske whose team has developed the One Earth Climate Model that provides pathways to transition sectors of the economy consistent with keeping global warming to 1.5°C.
4. Key to transitioning to net zero emissions is to understand how each aspect of the economy can contribute to reducing emissions. The EU developed a taxonomy for sustainable activities which came into effect on 12 July 2020 through the EU Taxonomy Regulation (EU 2020/852). Other countries have followed with their own taxonomies. The first part of Australia’s own sustainable finance taxonomy has been finalised and is currently with the Australian Government for review.

Cumulatively the establishment of climate risk principles, climate-related disclosures, transition plans and sustainable finance taxonomies provide the tools that finance professionals can use in their roles to drive climate action. While these tools are critical, they don’t address the uncertainty, complexity and change that typifies working on climate risk as a finance professional.

UTS Institute for Sustainable Futures “Systems Thinking for Climate Risk Masterclass” aims to fill a gap in skill development for finance professionals grappling with climate risk. By building personal capabilities to understand the interconnectedness, relationships and leverage points within a system and to apply systems thinking tools, we aim to support finance professionals to be better equipped to manage the uncertainty and complexity of change, whether it be to temperatures, industries, or politics.

[i]https://www.vatican.va/content/francesco/en/encyclicals/documents/papa-francesco_20150524_enciclica-laudato-si.html

[ii]https://unfccc.int/news/pope-francis-releases-encyclical-on-climate-and-environment#

[iii]https://www.theguardian.com/environment/live/2015/nov/29/global-peoples-climate-change-march-2015-day-of-action-live

[iv]https://www.bis.org/bcbs/publ/d532.htm

[v]https://www.ifrs.org/groups/international-sustainability-standards-board/

[vi]https://www.ifrs.org/supporting-implementation/supporting-materials-for-ifrs-sustainability-disclosure-standards/ifrs-s2/

[vii]https://itpn.global/tpt-legacy/