How to decide for future generations?

Climate change calls for intergenerational decision-making. The negative consequences of not acting on grand challenges fall disproportionately on future generations, while the benefits largely accrue to the current generation, such as the benefit of avoiding significant financial and psychological costs of change. This discrepancy leads individuals to perceive a desired outcome for future generations as less valuable than an equivalent outcome for the present generation. This is known as intergenerational discounting.

An example of an intergenerational decision in the financial sector would be how pension fund trustees integrate sustainability criteria in their investment strategy. Some companies introduced shadow boards. For instance, the “Future Generations Board” at the Dutch bank ABN AMRO is tasked with designing a ‘generation test’, an instrument to map out the impact of decisions on the living conditions of future generations. Another way to engage more proactively with the future generations is to use tools of strategic foresight such as scenario development.

Why does it matter more today than in the past?

The velocity of change is accelerating and as a result, the impact of todays’ decisions is felt much sooner than before, as seen by the rate of adoption of different technologies over time (e.g. printing press vs. TV vs. internet vs. smart phones vs. AI). Second, everything is more connected due to globalisation (social systems and environmental systems) and feedback loops / tipping points have more profound consequences.

As we grapple with climate change and decide what response is adequate, it appears that our level of inter-generational responsibility is not yet optimal, as evidenced by the climate ruling by the European Court of Human Rights against the Swiss government (April 2024).

Why is deciding with future generations in mind difficult?

Although the human brain can compute probabilities and make decisions under ambiguity (Chater et al., 2020), we tend to overrepresent extreme events in our expectations which may lead to exaggerated focus on extremely pessimistic or extremely optimistic scenarios about the distant future (Lieder et al., 2018). Not many people are educated in the skill of future anticipation or foresight and it is easy to believe in common future mythology, such as the irreversibility of climate change or that technology will save us from it. In addition, most decision-makers have a short-term bias and rarely imagine the consequences of their decisions for the next generation(s) (Langenbach et al., 2022). Especially when it comes to sustainable decisions, not everybody can resist the temptation and wait until the hypothetical reward arrives decades later (Guizar Rosales et al., 2022). Finally, organizations tend to prefer certainty and short-term gain rather than uncertain rewards in the future in managerial decisions (Slawinski et al., 2017).

For example, for pension funds, fiduciary duty includes a “duty of impartiality” – in other words balancing the divergent interests of beneficiaries: current retirees vs. future retirees. But in recent years trustees have primarily focused on another aspect of fiduciary duty, namely the “duty of prudence” which leads them to place more emphasis on diversifying investment risks than on considering systemic risks (Hawley et al., 2011).

However, there are reasons to be hopeful. Notably, in August 2023, Swiss Federal Council confirmed that integrating sustainability considerations in investment decisions is part of fiduciary duty, and the rise of interest surrounding strategic foresight suggests that the business scene in Switzerland may be ready to learn how to decide pro-future generations.

What are the potential solutions?

First, changing the rules of the game and/or the incentive systems to reward the consideration of long-term impacts. An analysis performed by Inrate in 2023 revealed that a mere 11 % of companies in the MSCI All Country World Index (MSCI ACWI) include ESG criteria in their remuneration systems, compared to 35% of companies in the Swiss Market Index (SMI), suggesting that there is still a long way to go before this becomes a standard.

Second, educate in long-term decision-making using scenario analysis. Here, the Creating Future Memories project can be useful. In this project, Ewa will design a questionnaire to measure how pro-future (vs. pro-current) generations are the decisions of business and finance professionals. This research project will also test the questionnaire in an experiment with a “future thinking nudge” to train the executives on how to put themselves in the shoes of future generations. Later on, the task of intergenerational decision-making will be integrated into scenario development workshops including viewing of VR (virtual reality) films about the plausible Earth in the year 2050.

It is hard to learn how to decide other than through making actual decisions and experiencing their outcomes, but foresight-based solutions propose to pre-test ideas and experience the outcomes through games and simulations. Even if business decisions are sometimes seen as gambles (praised as «visionary» if things work out…), executives should learn from professional gamblers to weigh acceptable upside vs. acceptable downside potentials.

Third, we need to break the generation silos, and create an inter-generational feedback loop. For example, a «Next Generation Barometer» could help assess young people’s views on the role of Swiss pension funds in advancing sustainable development and communicate these views to pension fund trustees (current decision-makers), thereby providing direct input for intergenerational decision-making.

Ultimately, integrating long-term sustainability in decision-making is like taking out an insurance against future potential risks. It can be costly, but it is likely to cost less than ignoring the long-term impacts of our decisions.