US$750 billion – that's the amount that Goldman Sachs has committed to deploy across sustainable investing, financing and advisory activities within the next decade. And they are not alone.
Mainstream banks, asset managers and heavyweights such as BlackRock have made large, high profile financial commitments to grow sustainable finance and sustainable investing by integrating ESG considerations into their financial products and services.
But what is needed to genuinely mainstream sustainable finance, to move from the talk to the walk?
ESG and Sustainable Finance - a rapidly changing landscape
Financial sector executives across the globe are recognising climate-related risks and opportunities as key to their continued success.
Inside many financial sector organisations, sustainable finance is shifting from a largely corporate social responsibility and philanthropic-led activity to an area more closely integrated with overall corporate strategy and business activities. In addition to reducing risk by, for example, moving away from companies who are likely to do poorly in a warmer world, many have spotted an investment opportunity in actively looking for businesses that will benefit from – or directly help – the transition to a net zero economy. Recent findings show that investors favoring ESG do not have to compromise returns, quite the opposite in fact.
Initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) have been instrumental in putting climate change on the agenda of board meetings, at least once per year. The 450 members of Climate Action 100+, one of the world's leading investor groups who collectively manage over US$40 trillion in assets, are successfully engaging with high emitting companies globally, driving them to take climate action – and support the TCFD recommendations, among others.
However, the number of different sustainability initiatives geared towards the financial sector can be an overwhelming alphabet soup with no standardization. At the same time, new regulatory requirements, such as climate-related stress tests and EU taxonomy, are increasing.
Coordination between initiatives is not always obvious, although the Better Alignment Project is welcome. But to effectively integrate such considerations into long-term financial decisions and to achieve ambitious climate claims, the financial industry urgently requires a new set of skills and reliable data.
Walking the talk requires a new set of skills & tools
Signing up to new sustainable finance commitments is the easy part.
Implementation often falls to small teams or individuals who coordinate across multiple departments within a financial institution. Organizational structures can also vary considerably. New types of scientific data, such as carbon emissions and natural capital, are needed to understand lending and investments and new skills are required to analyse scientific data alongside financial information. An additional layer of complexity is growing and integrating sustainable finance all while managing potential macroeconomic pressure and budget constraints.
A good place to start is by adopting a long-term, strategic mindset over hopes for short-term gains – this is a (climate) marathon, not a sprint – and by understanding what factors are material to business models, and where are the future risks and opportunities. These insights will lay the ground for setting long term targets and ambitions.
Once a financial institution embarks on a Climate Journey with public commitments, environmental data and skills in place, how can real progress be tracked in a credible and transparent way?
In general, no mainstream financial institution does this perfectly – yet. Stellar sustainability disclosures should answer three key questions:
- Where is there room for improvement – and how is this addressed? Balanced ESG and sustainable finance disclosures must go beyond successes and good news: they must also disclose the business areas that still require improvement and, ideally, how these are being addressed.
- What has been changed as a result of ESG considerations? The areas which a financial institution no longer finances is where the rubber hits the road. No longer financing coal is often cited as an ESG decision, but what other new decisions has the integration of ESG and sustainable finance brought about? The nonprofit World Resources Institute has an interesting comparison between fossil fuel lending and sustainable finance. Shareaction and Banktrack also report rankings of banks and asset managers.
- Are claims backed by science? Combining financial and scientific information is challenging with judgement, estimates and assumptions employed. Third party opinions and verification can be helpful to understand the extent to which an organization takes sustainable finance and ESG seriously. Voluntary collaboration across businesses can also help to set verification frameworks.
Bridging the gap between ambition and action
Perspectives of ESG and sustainable finance have changed over the past few years but much more remains to be done . Incremental changes will only bring society so far and may not be enough to help the planet meet the goals of the Paris Agreement. Filling skills gaps and effective collaboration is key to move forward.
The good news? Today, we have access to simple, cost-effective and actionable solutions that can be tailored for different organizations working in the financial industry. The transition to a zero emissions future comes with great opportunities – and with the right tools and advice, companies and investors can successfully prepare for this transition and mitigate risks.
Find out more about how to effectively navigate the ever-changing landscape of sustainable finance here – or join Rebecca as she speaks to financial industry practitioners on Wednesday 23rd September at 7pm (CET) on moving from 'talk to the walk' on sustainable finance.