Article

Systems Change Is Harder Than It Looks: Systems Shift May Be the Answer

Posted April 26, 2022 | Sustainability | Leadership | Amplify
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ABSTRACT

The authors argue that systems are designed to produce their results, even when their results are far from perfect. Systems also have internal “negative feedback processes” that maintain system stability by canceling out disruptions. Overcoming these stabilizing systems can be challenging, and pushing a system far enough to initiate change can result in sudden, highly disruptive shifts to a new system. Rather than cause such disruptive change, the authors advocate for incremental shifts to avoid the kind of wholesale disruption that could leave financial, social, and political systems in shambles.

 

All systems are perfectly designed to produce their results — even when their results are far from perfect. W. Edwards Deming observed that decades ago. Don’t like the results? Change the system.

Potential systems change exists on a continuum, from wholesale system destruction and reconstruction to incremental system shifts. The former is often due to human (i.e., war, insurrection) or natural (i.e., floods, earthquakes, storms, flooding, drought, pandemic) events in which a system comes crashing down and requires rebuilding.

The latter shifts a system steadily over time — not comfortable, but not devastating to the system. When we live in a system that requires change, this approach is more likely to advance the improvements we wish to see and less likely to leave human, capital, and natural havoc in its wake.

It is important to understand that a long-standing system operates at a point of equilibrium: the status quo. In biology, this is known as homeostasis; in statistics, regression to the mean. Physical and biolog­ical systems revert to equilibrium unless pushed to a new set point — so do social and economic systems. (In 1997, Clayton Christensen popularized the notion of organizational “antibodies” in his classic work The Innovator’s Dilemma.1)  

Driving a system to a new set point requires great energy and planning; overcoming the feedback ­proc­esses that preserve the existing system integrity; and identifying, strengthening, and accelerating posi­tive processes that drive the system out of equilibrium — and then establishing these as positive feedback proc­esses that maintain the new set point. This is especially true for the complex systems involved with sustainable development.

It is also important to note that systems change on a societal scale is not a one-way game where only internal forces need to be overcome. Rather, it’s a competitive game with others trying to drive the system — in the opposite direction — to other set points at the same time (see Figure 1). We need to encourage and applaud efforts to drive “systems shift” for achieving sustainable development, even as we may long for complete systems change.

Figure 1. Sustainability systems
Figure 1. Sustainability systems
 

Systems shift doesn’t have the sensational call to arms that “blowing up” a system has, but that’s the point. It requires long vision, quiet courage, and the willingness to collaborate with anyone (friend or foe) to positively shift the system so it produces the results closer to what we want and can be sustained as a new normal on the journey to sustainability.

We advocate for the concept of systems shift for sus­tainable development for two simple reasons. First, a wholesale disruption is no guarantee that our financial, social, and political systems will be rebuilt or rebuilt better — the current state of global institutions and governments is not likely up to the task. More probably, such disruption could lead to shambles that disrupt further progress toward the goal. How sustainable is business in a war zone or in a war involving current supplies of energy that underpin major economies?

Second, incremental shifts are more likely to be ingrained, and there is evidence that courageous leadership and collaboration across sectors, including business, can lead to more reliable, accepted, and sustainable results.

A shift also sounds easy. It’s not. Moving a system still requires a break in the gravitational forces that reinforce the system, and such movement is likely to activate the system’s natural antibodies to prevent such movement. It requires both a collective force to move positively and a willingness to address countervailing forces that seek to prevent the shift.

“Real change, enduring change, happens one step at a time,” said the late US Supreme Court Justice Ruth Bader Ginsberg.2 She was referring to equal rights. The same is true for sustainable development. Collective, strategic, and collaborative incremental adjustments are transformative change.

The focus of this article is how financial systems can shift toward more sustainable development through sustainable companies, driven at least in part by the demands of their investors. Although the same approach could be applied to any system, we chose to focus on finance for two reasons: (1) to demonstrate the step-by-step approach required to effectively shift the system, and (2) because the financial system is a high point of leverage, driving change in other systems.

Making the Shift

Systems shift requires insight into the existing system, courage to speak the truth, persuasion to attract collab­orators, intervention at key points, innovation to redefine and reframe problems as opportunities, and the collec­tive backing to solidify changes and build new system reinforcements to secure and consolidate the gain.

We highlight three cases of such shifts, two that have delivered significant change over time and one that holds great promise: (1) Ceres/Global Reporting Initiative (GRI), (2) Financial Stability Board (FSB)/Taskforce on Climate-Related Financial Disclosures (TCFD), and (3) World Benchmarking Alliance (WBA).

In each case, leaders from inside the system, who benefitted from the system, were able to stand apart from it and identify the key point of intervention, which in each case turned out to be bringing greater transparency to the systems and players within it.

Ceres/GRI

Ceres was founded in 1989 when pioneering impact investor Joan Bavaria (then president of Trillium Asset Management) formed the Coalition for Environmentally Responsible Economies (then known as CERES) in collaboration with leading environmentalists, with the goal of changing corporate environmental practices.3

The defining event that galvanized Ceres was the Exxon Valdez environmental disaster. Until that time, relationships between environmentalists and businesses had been almost entirely adversarial. One of the orga­nization’s first accomplishments was to establish a core set of principles (the CERES Principles) and persuade key multinationals to adopt them. Ceres also started GRI out of the need for greater transparency with regard to sustainability and to establish the first guidelines.4

As demand and uptake for the reporting guidelines grew, GRI spun off as an independent nonprofit in 2002 and transitioned to setting the first global standards for sustainability reporting. In 2021, GRI partnered with the Sustainable Accounting Standards Board (SASB)5 to produce “A Practical Guide for Sustainability Report­ing Using GRI and SASB Standards.”6 GRI supports comprehensive disclosures on organizational impacts (socially, environmentally), and SASB focuses on a subset of financially material issues. The elements for the triple bottom line are now in place.

In 1989, few people could even imagine such an approach. Today, mainstream investors use GRI data to identify companies with strong performance on environmental, social, and governance (ESG) factors because positive performance on those factors most material to a firm have been directly correlated with superior financial performance. Not every company adheres to these reporting standards, but it is becoming increasingly commonplace, and the continued positive reinforcement and recognition of companies entering this group helps to push these positions toward “normal business.”

Ceres and GRI set into motion a true systems shift of high and lasting impact. They could only have achieved that through a strong commitment to collaboration with a wide variety of stakeholders. This shift did not fix all problems and challenges, but it changed the game by developing common sustainability reporting guide­lines and standards.

FSB/TCFD

The Financial Stability Board established the Taskforce on Climate-Related Financial Disclosures under the leadership of Mark Carney (Bank of England) and Michael Bloomberg (Bloomberg LP) in recognition of climate change being a nondiversifiable financial risk that will have a negative financial impact on companies’ revenues, expenditures, assets and liabilities, and financing.7

The objective was to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions. Investors need data. TCFD created the first disclosure guidelines to better illuminate the risks and opportunities caused by the effects of climate change (i.e., flooding, drought, fire, severe storms) and climate policy, previously obfus­cated through more traditional (required) reporting.

The disclosure, however, did not drive change until leading investors started to use the data and increas­ingly demand that companies make such disclosures. By normalizing the expectation of climate-related disclosures within business, determined by the stake­holders of the system, TCFD helped create a virtuous reinforcing loop that provides the necessary political cover for policy makers to codify the recommendations, thereby consolidating and securing the positive move­ment and requiring more businesses to disclose.

The FSB/TCFD guidelines started with the GRI and SASB guidelines but went deep and specific into climate strategy, climate risks and opportunities, and corporate climate assumptions. The core group defin­ing the guidelines were financial institutions, insurers, investors, and leading companies already managing climate risks on a corporate level.

This group created a very powerful and informative set of guidelines that have now been adopted broadly and are being used by hundreds of companies. It took the reporting of climate risks to a whole new level, and while it didn’t solve everything, it did provide a powerful systems shift that promises to be long lasting.

On 21 March 2022, the US Securities and Exchange Commission (SEC) released a proposed rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors, for which they will accept public comment until 20 May 2022.8 The proposed enhanced disclosure requirements draw directly from groups dedicated to developing effective climate-related disclosures, including the TCFD.9

WBA

The World Benchmarking Alliance takes systems change to the next level by aggregating the aggregators, includ­ing organizations like Ceres. It acknowledges that we cannot understand or change a system by simply addressing its individual parts and thus operates “as an alliance of users, shapers, amplifiers, and influencers through a set of Collective Impact Coalitions.”10

WBA sets benchmarks for companies in key industries to strengthen accountability and performance on the most material issues in those industries. Once again, these benchmarks provide greater insight for investors. Using the data and insights generated by these types of courageous collaborations, financiers will reward those moving toward more sustainable investments and businesses. Sustainability leader and former Unilever CEO Paul Polman wrote: “The financial community really is in pole position to help us live within our planetary boundaries — a key enabler here being the move to more open and transparent reporting and the building in of externalities. If you ‘measure what you treasure,’ you automatically drive greater accountability for the system changes needed to shift, for example, to a zero-carbon economy.”11

Conclusion

We live in a system that requires change. These three cases (first Ceres and GRI, then FSB/TCFD, now WBA) demonstrate how a step-by-step approach can lead to positive shifts over time, with appropriate collaboration and deliberate action. In each case, the work was built on the foundation of earlier efforts and their leaders.

Without the courage of the first leaders of Ceres, there would have been no Global Reporting Initiative, but with GRI, insight into risks caused by climate change was possible. That insight provided the foundation for the next phase of leadership at the FSB to set the scene for codification of climate risk through the TCFD, which has now resulted in the development of rules and guidelines in both the EU12 and the US.

With support from multiple industries (and the reinforcing mechanisms of expected disclosure), the scene is now set for deeper dives into industry-specific guidelines and benchmarks, the work of the WBA.

That is just the kind of shift we need — that the system needs.

It starts with vision, courageous leadership, and a willing­ness to collaborate. We need to embrace, recognize, and reinforce these system shifts. Alone, each step is insufficient, but together they represent the transformative change that is essential to achieve sustainable development. Such collective, strategic, and collaborative incremental adjustments are transformative change.

References

1Christensen, Clayton M. The Innovator’s Dilemma. HarperBusiness, 1997.

2Economy, Peter. “17 Powerfully Inspiring Quotes from Ruth Bader Ginsburg.” Inc., updated 21 September 2020.

3Ceres website, 2022.

4Global Reporting Initiative (GRI) website, 2022.

5GRI and SASB Announce Collaboration.” The Portal for Sustainability Reporting, 13 July 2020.

6A Practical Guide to Sustainability Reporting Using GRI and SASB Standards.” GRI/SASB, 2021.

7Taskforce on Climate-Related Financial Disclosures (TCFD) website, 2022.

8Note: the We Mean Business Coalition comprises seven nonprofits, including Ceres. It has encapsulated the power of business to create an “ambition loop,” noting that the more that busi­nesses work toward climate action, the more policy makers gain the confidence to set bolder climate policies. The orga­nization’s goal is to halve emissions by 2030 and create an “inclusive net-zero economy in line with the 1.5°C pathway.” This sets a standard to which more companies must respond with greater action.

9Comments for the Enhancement and Standardization of Climate-Related Disclosures for Investors.” US Securities and Exchange Commission (SEC), accessed April 2022.

10It Takes a System to Change the System: Seven Systems Transformations for Benchmarking Companies on the SDGs.” World Benchmarking Alliance, July 2021.

11Paul Polman: Courage and Collaboration Will Help Business Accomplish Mission Possible.” edie, 21 May 2019.

12Corporate Disclosure of Climate-Related Information.” European Commission, accessed April 2022.

About The Author
Laura Asiala
Laura E. Asiala is Chief Sustainability Officer at WholeWorks, LLC. She is also Lead Facilitator for the “Leading Sustainability Transformation” professional certificate program offered through GreenBiz; the University of Victoria, Canada; INCAE University Center for Competitiveness & Sustainability; and the Plant Technology Alliance in affiliation with WholeWorks. In this program, experienced professionals learn to transform a traditional… Read More
Neil Hawkins
Dr. Neil C. Hawkins is President of the Fred A. and Barbara M. Erb Family Foundation, a innovative and collaborative foundation dedicated to nurturing environmentally healthy and culturally vibrant communities in metro Detroit and supporting the Great Lakes. Hawkins is also a Board trustee of the Foundation. He is a recognized thought leader in sustainable development and public policy and their interface to business. Hawkins was a 31-year… Read More