10 years ago, just as Lehman had collapsed and the global financial industry was in the throes of a crisis that would cost people their livelihoods and bankers their bonuses, I hosted a panel discussion on alternative financial practices including Sustainable Finance. I deeply resonated with the idea that finance should be deployed to achieve a double return on investment: Social and/or environmental benefit on top of financial return. In 2018 Sustainable Finance no longer is a niche practice. According to the Global Sustainable Investment Alliance, almost 26% of global assets under management are labeled as responsible, ethical or sustainable investing. And there’s more to become: In May I had the honour of leading the first Sustainable Finance Forum in Luxembourg. Speakers and participants agreed: Sustainable Finance is the way forward.
Here are my favourite three reasons why:
Opportunity: The 2 degree Celsius target set by the Paris Agreement has kicked off the transition to a low-carbon economy. This transition creates new sectors, jobs and investment opportunities. To achieve the EU’s 2030 targets agreed in Paris, including a 40% cut in greenhouse gas emissions, around €180 billion of additional investments are needed per year. The Climate Policy Initiative shows the shift is underway with solar and wind as clear success stories. But electricity, industrial energy efficiency, transport, agriculture, water, buildings, curbing forestation and adaption remain underfunded. According to the recommendations of the EU High Level Expert Group on sustainable finance a common language is necessary to increase Sustainable Finance flows. This is why in May this year, the EU Commission presented its action plan towards an EU-wide sustainability taxonomy applicable for all types of assets and capital allocation.
Changing demographics: As Baby Boomers are retiring, Millennials and Generation-X are taking over. More and more positions of influence are filled with a younger generation with a strong awareness for climate change, social responsibility, diversity, gender balance and scandals around pollution and bad governance. This is changing the landscape of business, finance and politics. According to a survey by YouGov, millennial savers are twice as likely as older generations to want their pension to be invested responsibly. Meanwhile voters disillusioned with mainstream politics gravitate towards parties with eco-socialist credentials where their concerns about clean air and water, affordable housing, healthcare, good education and sustainable infrastructure are being heard. The success of Groenlinks in the Dutch elections last year and the Green Party in the recent Swedish elections are 2 examples. In Germany, where disruptive weather patterns and environmental pollution are placing increasing burdens on farmers and households, the Green party also enjoys rising support. This is likely to translate into pro-ESG policies further down the road as growth at any cost is becoming increasingly unacceptable to society.
Reputational risk: At the same time, actions and decisions by businesses and investors have become transparent thanks to technology and social media. The ongoing battle for the preservation of the ancient Hambacher woodland (in German know as “Hambacher Forst”) is a good example: A tone deaf management with bad crisis communication insists that cutting down CO2 storing woodland to dig for more coal to be burned is necessary to save Germany’s energy supply. Since images of activists being forcibly removed from trees and the tragic death of a journalist have started to go round the world, RWE’s market valuation has dropped about €500 million. Twitter and Facebook users are committing to switching to a different energy provider. RWE’s reliance on coal is being investigated on multiple platforms and declared counterproductive for Germany’s climate protection commitments. Unless RWE changes tack, its reputation will continue to suffer. A case study by Aberdeen Standards Investment sums it up: “Companies must adapt to client change and the rise of renewables – companies like RWE have for too long ignored the structural changes in the global energy markets”.
If my three reasons are not enough to convince you, please consider Christine Lagarde’s rousing call for finance to through its weight behind the UN’s Sustainable Development Goals (SDG).
And finally, as an eye-witness to Lehman’s downfall and its destructive aftermath allow me to say that Sustainable Finance is also a way for the financial industry to redeem itself and put money back to serve the real economy – moving from finance as a goal to finance as a means.
Judith Bogner, 25. September 2018