Prof. Yehuda Kahane, Chairman, YK Center

Speech at the Sustainable Brands “New Metrics15” Conference

Boston – October 2015

The industrial economy is geared towards maximization of wealth. This target has led to substantial, even amazing, economic growth during the last two centuries. Yet, at the same time this growth has introduced new risks and has caused severe threats and actual damage to the environment and to the social framework. Such risks endanger the survival of the human species on Planet Earth.

Some risks are environmental: Global climate change, loss of diversity that decreases resilience, damages to delicate food chains, and land, air & water pollution. Others are societal, like employment insecurity, growing inequality in income and wealth, pressures related to rapid urbanization, and demographic changes that threaten the retirement system.

The focus of our conversation will be to show how we can mitigate these threats and turn them into opportunities. As an insurance expert, I think that retirement funds hold the key to the solution. I believe this will make them, eventually, more important than the banks.

Think about the insurance companies – they write the checks when natural and environmental disasters occur. Therefore, mitigation of those risks is a must for the insurers. The retirement and insurance funds are responsible for huge amounts of money globally. They manage the largest asset most individuals accumulate during their lifetime.

These monies are the major source of long term investments in the world. Managing these monies involves a great responsibility: When we save for retirement, the money is invested in projects that reshape our future, and at the same time are supposed to create the revenue stream needed to finance our retirement.

It is important to remember that the insurers and pension funds are managing ourmoney, and therefore we have to demand they serve our values. Since the survival of the human race is becoming the most pressing and urgent challenge of our time, we must encourage the insurers to use these funds directly to mitigate some of the major threats, such as climate change and the insecure employment and retirement arrangements. What is the sense of making other conventional investments, given the level of threat to our future?

We have the needed funds 

Does the insurance and pension industry have sufficient funds that can be the source needed to save humanity? Yes it does! The industry manages a portfolio in the magnitude of 80 trillion dollars (This is an amount greater than the annual global GDP). And every year some 7 to 10 trillion dollars has to be reinvested. These enormous amounts are more than enough to mitigate the threats we are facing.

Let us focus on the example of climate change alone: The Stern Report on the impact of climate change, published in 2005, estimated that an annual investment of 2% of global GDP was needed to prevent the adverse consequences of climate change. At that time this was equivalent to “only” $1.5 trillion. This huge amount is only 15 – 20% of what insurers have to invest annually. Similar projects serving other environmental, social and ethical goals can be treated in a similar way. So the only question is: how can we assure that those funds will be invested on behalf of our future rather than in projects that will eventually destroy us?

At present the investments of pension and retirement funds are managed towards the goal of the current paradigm – maximizing wealth – thereby serving mainly (almost entirely) economic goals. In other words, they are geared toward maximization of the return on investment. Most of the investments are currently made in traded (short term) financial instruments that have daily market valuation rather than in long term real assets. Moreover, some of the financial instruments create much volatility and crises in our financial systems.

A paradigm shift toward 4D system 

We have to replace this short-term economic objective with a multi-dimensional target. There is a broad agreement that we have to serve the “triple bottom” concept that considers at least three dimensions: Economic, Social, and Environmental.

The recent introduction of very sophisticated communication and computer systems has made a tremendous change in the world. These devices enable each person to gain access to virtually all available knowledge, and at the same time they enable people to be connected. This has transferred much power from the hands of governments and big businesses to the hands of individuals, and created the era of the Global Person. We, therefore, suggest adding a fourth dimension for a new dashboard – Consumer (& Citizen) Consciousness. So we are recommending a 4-D system, ESEC= Economical- Social- Environmental – Consumer (& Citizen) Consciousness, rather than just the triple bottom line approach. Moving from a system where we serve the economy, to a system that serves our 4-D ESEC dashboard will generate a game change, a transformation, a paradigm shift!

Peter Drucker famously said “you don’t measure what you get, you get what you measure”. This new dashboard is designed to serve as a compass so that all governments, businesses, organizations and individuals can be aligned in reaching the complex goal. This new goal will enable us to serve all the diverse values alongside the old economic objective. We shall see that serving environmental and societal values doesn’t contradict economic targets.

Adoption of the 4-D dashboard will create an enhanced and expanded form of capitalism. Capitalism assumes that each player strives for wealth maximization. This leads to creation of supply and demand curves that automatically determine a set of equilibrium prices, which leads towards an automatic allocation of all resources as well as all goods and services that we produce. The beauty of the capitalistic system is that the allocation is not only automatic (“the invisible hand”), but also optimal. Changing the definition of wealth and including additional forms of capital – economic capital, social capital, human capital, natural capital, etc. – will lead to a new optimum. This will enable us to explain and manage what seems to be a huge problem of our antiquated accounting system that explains only a small part of the “market value” of firms. The main issue, of course, is the definition of the new metrics.

For example, the investments of the retirement funds would include anti climate change projects such as renewable energies plants, energy storage systems, better transportation systems, greenhouse gases emission, etc. It may include new educational systems for engineers, designers, executives, accountants. It may encourage new production technologies like cradle to cradle and may have impact on job markets.

How can we make it happen? 

As a professor I am a dreamer, but I am also very practical. When the Stern report was published I discussed with some of my friends, leaders of the international insurance industry, the challenge of climate change and the needs for directing investments towards new directions. The industry leaders decided to create a committee to deal with the issue. They were aided by the UN Environmental Protection Agency (UNEP). It took several years to work out a draft of a voluntary treaty – the Principles for Sustainable Insurance (PSI). This followed the PRI convention that took place for the