For many years, Preventable Surprises has been addressing financial disasters that investors could–and should–have seen coming. Concerns about BP’s safety record, the accounting practices of Tesco, sloppy mortgage lending–these were in the public domain for years before disaster struck. Preventable Surprises, a community interest company, is a ‘think-do’ tank that seeks to prevent, or at least mitigate, corporate and market implosions.

We work with a group of positive mavericks within the investment industry to persuade and cajole the financial sector to better address systemic risks. Using climate change as an example, we define systemic risks using three features:

  • They are pervasive and not confined to a sector or territory. The Sustainability Accounting Standards Board found that 72 of the 79 industries in the SASB classification system are affected by climate change.
  • They are non-linear with unpredictable tipping points. The long-term climate transition will almost certainly be volatile and messy. Global temperatures and rainfall may rise incrementally on average but extreme changes will be localised and deadly.
  • They are inter-related, making it impossible to predict the likelihood of Black Swan events.

While regulators, the media, NGOs and consumers each have a role to play in building a more transparent and sustainable market system, most of the power lies with corporations and their investors. Preventable Surprises focuses on institutional investors because, through the trillions of dollars in assets under their management, they have enabled corporate and market dysfunction. While this may be unintentional, the continuing damage caused to investors and to ecosystems in untenable.

Long-term investors cannot use stock-picking or hedging strategies to avoid systemic risk. In the case of climate change, institutional investors’ end beneficiaries will pay the price as the extent of portfolio risk is revealed. That is why investors must mitigate systemic risk through forceful stewardship. As fiduciaries, they must go beyond private engagement to publicly vote for resolutions at AGMs that force companies to align with the 2°C scenario envisaged in Paris.