Understanding the finance system: an historical project to help shape the future of investing

The Deep Transitions Lab combines an historical analysis of how fundamental changes unfolded in the past with a focus on the future to help redirect those crucial drivers of change into a sustainable direction. Only by understanding how change happened can we have an effect on how change happens.  

We now want to apply our research to the finance sector through an historical analysis of the investment system from the 1700’s to present day – understanding how the current system was formed to help direct it towards a sustainable future. 

Why is an historical perspective important? To understand the present and create change for the future, we need to look at the past. 

1. Where we are now has a history, and we cannot just undo that history – it provides a view of barriers and drivers. We want to know why we have our current financial system and understand where it came from and why it developed in this way. This helps us understand path dependency (how past events or decisions constrain us now). 
2. By looking into the past, we often find alternatives that didn't make it but were relevant. For example, the electric car was first produced 100 years ago, but it didn’t catch on, and it’s only now that it has gained momentum. There will be financial equivalents of the electric car hidden in the archives. People often don’t remember or don't have access to this variety of alternatives. But these are the seed beds for the future.
3. We need to develop more theory around the role of finance in transitions. To test ideas and propositions. History can’t predict the future as things happen in new ways, but there are underlying patterns in change that you can learn from. 

“Our current finance system looks very entrenched and hard to change. However, our work can show it was once different, and it can, in fact, be changed. The question is how. This project is not just about the past; it’s about the future.”

– Johan Schot, director of the DT Lab.

Why we focus on how change happens

A Deep Transition is a series of interconnected system changes that transforms society in a fundamental way. The Industrial Revolution led to unprecedented economic growth, prosperity and innovation. However, its principles (or rules) also caused some of the major challenges we are facing today, such as climate change, biodiversity loss and social inequality. The First Deep Transition started with the Industrial Revolution, and it is still ongoing today. The underlying practices of the First Deep Transition are deeply ingrained in all aspects of everyday life. Therefore, incremental change is not enough. A fundamental shift is necessary to bring about a Second DeepTransition: a sustainability revolution that will anchor the economy in principles aiming for circularity, renewables, sufficiency, decentralisation and localisation (e.g. of food production) and is organised following just transition principles (which consider past and future injustices). 

Currently, 99% of investment is devoted to optimising the First Deep Transition. Many of these are deepening and strengthening the commitment to these unsustainable paths. For example, the effects of extensive investment in gas infrastructure as an energy alternative last for over 50 years. And on top of that, current blended finance initiatives are focused on de-risking instead of fostering transformation. We need to change this, urgently. 

A keystone DT paper found that over time the financial system emerged dominated by a set of investment rules. “Transformative Investment: New Rules for Investing in Sustainability Transitions” Penna et al. (2023) have identified four rules that need changing as they are blocking a Second Deep Transition:

• Maximise financial returns

• Abide by fiduciary duty towards shareholders

• Manage quantifiable risks only

• Focus on short term returns and ignore long term ecological and social impact

What we aim to achieve   

The History of Finance project seeks to trace the role of investment and financial innovation in the unfolding of surges during the First Deep Transition and suggest possible options for enabling a Second Deep Transition. The project will cover 250 years and adopt a global perspective. For the first part of the project, we will conduct historical literature research on the role of the finance industry, explore relevant archival resources for the study of the role of the finance industry, organise a workshop in Utrecht with historians and social scientists who have studied the finance industry and develop a brief keynote paper. 

During the project we will explore the following questions:

• What roles did public vs private finance play in the First Deep Transition? What type of developments or niches were funded and how did they scale? How did they relate to the roles of other actors in the economy?
• What historical examples exist of financial rules (or you can think of them as principles) and practices being fundamentally reshaped, and how did this happen?
• How is the history of the financial industry shaping future choices and what type of financial innovation or reshaping of the finance industry is necessary for enabling a Second Deep Transition?

 Questions raised about the project after it was introduced at Systemic Investing Summit: 

Can we create shocks to accelerate the transition? 

Shocks cause many unintended consequences and ripple effects; they create chaos. Therefore, it is not advisable to create them. It is also difficult, because they are produced by many variables not controlled by a specific set of actors.

Are the alternatives or niches for the finance systems only coming from the past? 

No, the History of Finance project looks into the alternatives that did not become dominant and studies what their current state is. But there are also many emerging ones that also need to be nurtured.

Are there lessons to build desirable futures from history? 

Yes, history tells the story of the winners, but looking into the counter current, the alternatives and their visions, there are many elements that were already explored and are relevant today. In this regard also indigenous communities and other knowledge systems that are not dominant have already stated visions of a different world that are very relevant.

Do transitions need to be contextualised? Does the current model apply everywhere? 

The generic Theory of Change provides us with the framework. But the specific configuration of niches and real-world effects on investments are always contextual and place-based.

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