The definition of sustainable finance is incredibly broad. For the sake of argument, let’s go with The European Commission which defines it as “the provision of finance to investments taking into account environmental, social and governance (ESG) considerations”. Perhaps it’s this breadth which is part of the problem and why it often remains a niche offering in the market. It certainly seemed so at an event I attended recently where different speakers covered everything from ESG and socially responsible investment (SRI) through to impact investing and micro-finance. This resulted in a wide-ranging, often confused and ultimately disappointing discussion.
There is a world of difference between certain ESG approaches to investment which might only screen out some of the most damaging or controversial sectors and companies, and impact investing which proactively directs investment towards industry and businesses tackling key social and environmental issues such as climate change and poverty. The former is very much consistent with an incremental, ‘doing less bad’ approach to business whereas the latter can lead to demonstrable and transformational change, for example in the transition to a low carbon economy.
In the flows of capital, therefore, financial services companies have a unique and powerful role to play in promoting sustainable growth across the global economy. And this should now be viewed as a big business opportunity because there is growing evidence of the demand for sustainable finance.
According to the Institute for Sustainable Investing’s 2017 “Sustainable Signals” report, Millennial investors are twice as likely as the overall investor population to invest in companies targeting social or environmental goals. This is despite 59% believing sustainable investing involves a financial trade-off. Yet, from a performance perspective, the evidence increasingly shows that funds, such as the WHEB Sustainable Fund or Impax Environmental Markets that are focused on impact investment related to sustainability issues, now demonstrate growth on a par or better than so-called mainstream funds. It’s little wonder when the latest figures from the Office of National Statistics show for example that low carbon and renewable energy sectors are growing at almost treble the rate of the wider economy.
Despite all this, there remains a sense that many across the sector still see sustainable finance as a niche offering. So here are some key considerations for financial services companies to increase the reach and success of sustainable finance.
Be absolutely clear what sustainable finance means to the company (ESG, SRI, impact investing etc.) and the strategy, including forward-looking ambitions for the role that it will play in the business over the long-term. Companies should be wary of contradictions that will erode trust and damage reputation. For example, publicly backing the goals of the Paris Climate Agreement while increasing total investments in carbon-intensive industries and businesses. Companies which are serious in this space should consider and be transparent about the role that divestment will play in the overall strategy.
Be prepared to communicate the details and benefits of sustainable finance initiatives and offerings far and wide. It’s one thing having some products and a portfolio but unless they’re positioned in the market alongside comparable products, giving customers the choice, they’re far less likely to become truly mainstream. This doesn’t just come down to marketing and communications functions, commercial and sales teams will need to be up-skilled to talk confidently about sustainable finance offerings and relative performance.
Depending on where it sits in the value chain, consider how the business can influence others and affect meaningful change. As providers of capital, asset owners for example are at the top of the investment chain and their decisions ultimately affect the global economy. Firms such as Blackrock have started to use their influence to drive progress on issues such as climate change, executive pay, transparency, equality and diversity. A word of warning is always to ensure that the business is walking the talk itself. If not, this influence and the resulting impact could be significantly diluted.
We need to ensure there is constant innovation in financial instruments, products and services to increase interest in and flows of capital towards sustainable finance. A good recent example was HSBC which issued a new type of sustainable development bond based on the United Nations Sustainable Development Goals, financing projects that benefit communities and the environment. It’s also worth noting that it was three times oversubscribed, demonstrating the growing demand and business opportunity for those companies proactively addressing and innovating in sustainable finance.
Incorporating these considerations into a strategic approach will help to ensure companies in the sector are playing an important role in bringing sustainable finance into the mainstream and influencing much-needed sustainable growth in the global economy.
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