After the 2008/9 global financial crisis, the 2012 Kay Report recommended a much-needed shift in the culture of UK stock market participants, including a more long-term focus with aligned incentives. Despite this report, short-termism remains prevalent in financial markets around the world. For example, high-frequency trading ensures that huge financial values are attached to nanoseconds.
The persistence of short term thinking runs the risk of driving us once again into crisis. If short-term profits are prioritised above all else, our planet's resources will be over-consumed without the time to regenerate. Sustainable finance offers an approach that may help us avoid future calamities, not to mention long-term topics like climate change. Negative environmental impacts, such as carbon emissions, are starting to be measured and considered as part of lending and investment decisions. The financial markets and the people who work in them are in larger numbers grappling with long-term topics like climate change and the Paris Agreement.
“Moving to a full-time role focusing on ESG (Environmental, Social, Governance) is a career limiting choice". This is the reaction I had from some of many of my fellow finance professionals in 2017 when I became the first CFO of sustainable finance at a large global bank. Many simply could not understand my decision to pursue this area and move away from “mainstream" finance. Furthermore, I encountered similar attitudes when I resigned from my position at the bank and moved to the climate solutions company and project developer South Pole, a company whose purpose and values are entirely aligned towards building a climate positive future.
Times have changed, noticeably since the start of the covid-19 pandemic. I have seen a remarkable shift in attitudes and an increase in queries both from finance professionals looking to pivot their own career, as well as from new finance graduates. Many are seeking greater purpose in their work, beyond personal financial gain.
The skills you need to succeed
In my experience there are three key skills which give sustainable finance professionals a foundation to be successful:
- Comfort with quantitative and qualitative information is a must. This includes the skill of triangulating financial information and scientific metrics across an organisation. Oftentimes, trends, such as in financed emissions, rather than a single point in time is the most meaningful information. Spotting indirect relationships and the potential of unintended consequences of using new metrics is important, such as the intersection between 'environmental' and 'social'. E.g. The concept of a just transition which seeks to balance climate action such as closing coal-fired power plants, with the social consequences related to workers losing jobs. Balanced narrative reporting, which avoids overhyping environmental claims, is also key.
- The ability to deal with ambiguity and a lack of standardization is a second key skill. Looking at scientific data alongside financial information is relatively new for most mainstream financial institutions. The use of judgement, estimates and assumptions is no different than some accounting standards, such as IFRS9. However, due to the effects of climate change, the planet does not have decades to harmonize sustainability accounting standards internationally. Starting with a best efforts stakeholder materiality-based approach to internal and external reporting, alongside a clear basis of preparation is a good starting point. Also, recognising that reporting will expand and evolve along the sustainable finance journey is important.
- The final key skill is collaboration and passion to enable positive change for our environment. Some people in the finance sector are interested in sustainable finance and others not. It takes a lot of energy and enthusiasm to make change happen. Bringing people along can feel like dancing at a party - one person has to start. Collaboration between different disciplines, such as business, finance, risk, legal and audit, can be challenging but it brings in different perspectives, which are all necessary for the financial sector to make a successful transition toward the low-carbon economy.
The three skills above represent a foundation to be successful in sustainable finance. It's necessary but not sufficient, however. In fact, many times you need further further guidance. Consultants can help support finance professionals and organisations, from providing training on climate change, to sourcing environmental data, and verifying the scientific basis for sustainable finance claims.
For example, the sustainable finance practice at South Pole provides environmental data and bespoke consultancy to banks, asset managers, private equity, insurance and pension funds. A physical risk tool provides a snapshot of the acute and chronic risks a financial institution faces. In addition the South Pole service related to Paris alignment provides financial institutions with analysis which reveals how aligned their lending and investment portfolios are (or are not) to a 1.5 or 2 degree warming goal.
These tools and others of this type provide deep analysis which is the starting point for climate action, such as setting net zero commitments. Reporting is not an end in itself. Skills and tools help, but the biggest shift is mindset.
Dealing with complexity requires diversity of thought - the more varied the frames of reference in the discussion, the greater the thinking power in the room. This, in turn, means a wide range of individuals contributing from many different backgrounds, using different perspectives. The benefit this can bring to something like economic forecasting is described brilliantly by Matthew Syed. But this approach can feel uncomfortable. Most organisations only look at strategic complexity with a very small group of senior individuals (which therefore has a very narrow focus). Bringing in external players to discussions, which help to reveal blindspots, requires a real shift towards a growth mindset; what can we learn - not what do we know.
The Oil and Gas sector is one with significant experience in the sustainability agenda. For many years, factors such as renewable energy sources, cleaner fuel and environmental pressures have been part of their strategic analysis and planning. Getting it right has resulted in reputational enhancement, better business outcomes and environmental improvements. But this requires managing a complex array of stakeholders, some with competing aims. Gaming, such as the examples from Quirk Solutions, has been a way to navigate these challenges; drawing out the various perspectives in a safe space.
In 2019 one of the Major Producers wanted to encourage consumers to use cleaner fuels, but whilst this made sense from an environmental perspective, they recognised a risk of being perceived to 'monetise the green agenda'. They therefore ran a game to which environmentalists were invited, to test the plan. The different lens this gave, and the challenge it presented, allowed the Company to gain deeper insights which, ultimately, helped them to roll out their new approach in a successful manner. It was their willingness to be vulnerable and involve wider stakeholders during the planning phase which underpinned positive outcomes for all.
If you are a finance professional or graduate reading this and are interested in pursuing work in this area, here are some suggestions.
Internally, why not offer support to your in-house sustainability teams and networks? If they don't exist, why not set up an informal employee group yourself to discuss the challenges with like minded colleagues? Externally, scanning existing recruitment channels, such as Acre and Responsible Investor can also be useful.
Education and training play a key role. There are many great courses, such as the ones offered by the University of Rotterdam MOOC or the University of Cambridge online course. Professional associations representing risk and accounting, such as GARP, CIMA and IFAC, offer online courses.
Finally, volunteering during spare time at non-profits can also be eye opening. For example, I am the deputy chair of a charity trustee board, and this has given me a new perspective on sustainability. In addition I am an ambassador for the Transparency Task Force which focuses on creating a fairer financial system. This is a great way to increase your positive impact, offer your personal time, and valued experience. Plus, it puts your sustainability skills, tools and mindset to use.
By each of us making our own contributions, together we can make the changes necessary to create a happier and healthier planet for us, our loved ones and generations to come.
Find out more about Sustainable Finance and the skills required, listen to Rebecca Self and Roderic Yapp (founder of Leadership Forces) in a podcast published in mid-November. Further information on the sustainable finance practice at South Pole can be found here.