We should operate to higher standards than the law

Our society, economy and financial markets are all (highly interconnected) complex adaptive systems. Complex adaptive systems are always changing – that’s what they do – but sometimes the change appears inconsequential, while at other times the change is profound. The latter periods are referred to as ‘phase transitions’, as the system moves from one relatively stable state to a new relatively stable state. It is my (our) belief that we are, or shortly will be, going through a phase transition which can be thought of as a re-writing of the “rules of the game” (this will be driven by the transition to a de-carbonised economy, and by the possibility or likelihood of passing tipping points in the climate system, biodiversity and/or social inequality). This thought piece makes the case that, during phase transitions, the law will be an inadequate guide for behaviour. It could be argued more generally that acting within the law is a necessary but not sufficient condition for a flourishing society.

A phase transition occurs when a system crosses a critical threshold, or tipping point. If we raise the temperature, solid ice transitions to liquid water above 0C, and again from liquid to gas above 100C. The properties of water are fundamentally different in the three distinct states (the analogy works), but the transitions are predictable and reversible (the analogy fails for complex adaptive systems). As noted above, in our context of society, economy and financial markets, the transition is essentially a change in the “rules of the game” – such as the primacy of profit, the ranking of shareholders relative to other stakeholders, the extent of redistribution in the tax system, the level of tax applied to externalities, and so on. While, theoretically, we could try to reverse the transition and revert to the old rules, the changes tend to be irreversible. Momentum is against us and, typically, too many things have already changed. In the current UK context, we could ask if the Brexit decision is reversible or not. A clearer historical example, would be the abolition of slavery – would anyone now argue for a return to the “old rules”?

However, I want to shift from the transition to behaviours. I have written about the abolition of slavery in a previous thought piece (see If you want to see change, you can stop counting at ‘3’). Of note was the length of time it took – around 50 years. If people are making money under the old rules, they will actively resist a change to the rules. That should give us pause for thought as we consider our current need to transition to a de-carbonised economy. In the previous piece I argued that public policy tended to lag, rather than lead public opinion. Here I will argue that the law shows the same tendency, and will do so with a modern link back to slavery.

As the anti-racism protests following the death of George Floyd spread around the world, four protestors were arrested for criminal damage in Bristol, England after they toppled a statue of a rich slave owner into the river. They were acquitted by the judge who, effectively, found them on the wrong side of the law, but the right side of history[1]. The point is that the law is dynamic, but tends to lag behind public opinion. This will be especially true during phase transitions, where the change is likely to be faster and the destination uncertain.

A less extreme and more helpful consideration of the topic can be revealed by considering pollution (or externalities more generally). If there is no law against the dumping of waste, then it is legal. It tends also to be profitable – not paying to clean up waste is less costly (in the short term, for the individual entity – not necessarily over the long term, or for the portfolio). Again, our history is full of examples of new anti-pollution laws being introduced to correct previous abuses which, again, suggests the law operates with a lag. The idea here is that just because something is legal, it doesn’t mean it is the right thing to do. I now need to make the case for why we would choose to hold ourselves to higher standards than the law.

Those who serve a higher power have an advantage here – the higher power holds them to account. I intend to use the recent decision by the Church of England to divest from fossil fuel holdings as a case study[2]. But I also want to bring back a strand from above where we talked about those making money under the old rules resisting new rules. We have witnessed major fossil fuel companies walking back from previous public commitments about their speed of decarbonisation. This has largely been attributed to the war in Ukraine raising energy prices, and yielding supernormal profits for the fossil fuel companies. They are making money under the old rules, and would now like to expand production.

In 2018 the Church of England set out a five-year engagement plan, with decarbonisation targets. In 2023, no fossil fuel company passed the hurdles set (despite some making significant progress), hence the decision to divest. The Archbishop of Canterbury notes that it is their “duty to protect God’s creation,” and the Church “will follow not just the science, but our faith – both of which call us to work for climate justice.”

So we have company managements seeking to make more money (and remain within the law), and we have one example of a shareholder who answers to a higher power – and who will no longer benefit if the fossil fuel companies do have a profitable future ahead of them. What about the other shareholders? And who holds the power to determine strategic direction here – the shareholders or company management?

The other shareholders (or almost all of them) hold diversified portfolios. So the debate is not just about the value of fossil fuel companies in isolation, but about the impact the continued burning of fossil fuels will have on the other portfolio holdings. The shareholders will increasingly need to consider their own licence to operate – is society changing its position regarding climate change and climate justice, as it did regarding slavery? This will open up a path of enlightened self-interest, on which it becomes reasonable to hold ourselves to higher standards of behaviour than merely complying with the law. The law, and public policy, will change but likely with a lag. There could even be a competitive advantage of being ahead the shift.

For the avoidance of doubt, holding ourselves to higher standards is an ethical position and decision. This is about adding heart knowledge to head knowledge to better navigate the phase transition ahead. I do not believe that amoral systems leadership exists – and who wants to be a systems laggard?

[1] This case went to the appeal court. The four remain acquitted, but the case law became more nuanced

[2] See their press release dated 22/06/2023 here: https://www.churchofengland.org/media-and-news/press-releases/church-commissioners-and-church-england-pensions-board-announce