Sustainable Finance - The critical factor

We have an event tomorrow at Bloomberg exploring sustainable finance. This in preparing my week, brought into sharp focus the ever-increasing opportunity for the financial sector to drive more sustainable outcomes. This starts with examining how financial institutions and investment managers integrate sustainability considerations/issues into their investment decision-making and stewardship.

For starters, the IMF can offer support by working with the Network of Central Banks and other regulators, adapting frameworks and practices to ensure genuinely sustainable outcomes across all aspects of ESG, and doing so in a way that drives true transparency and disclosure. In my mind, 11 trends will shape this conversation in the financial sector, but many of them will apply to all sectors:

1.    Increasing environmental and climate pressures on operations and supply chains. Not addressing these pressures could affect organizations as they report and seek new sources of investment.

2.   Requirement to manage environmental, social and climate risks (including through accounting/financial reporting).

3.    The increasing expectation of organizations to be transparent on sustainability, including in supply chains.

4.    Shifting resource availability and affordability due to increased demand and evolving global market conditions.

5.    Emerging sustainability-oriented market opportunities.

6.   The growing influence of the international sustainability agenda/goals and targets – for example, we may see different regional blocks or countries trading based on political growth targets and their environmental expectations.

7.   Policy and fiscal changes that facilitate the transition towards sustainability – for example, the introduction of CBAM (Carbon Border Adjustment Mechanism).

8.    New legislation requiring organizations to consider sustainability throughout their operations.

9.    The increasing likelihood of liability for social and environmental impacts from operations in supply chains.

10.  Continued shift to new forms of sustainability governance and new actors ensuring that ESG efforts translate into concrete action and systemic change.

11.  Changing values and consumption patterns toward more sustainable products and services and business models.

Clearly, the private sector will play an important role in redefining business as usual, helping to support the transition from exploiting to restoring across all aspects of ESG.

Something that is often forgotten as we look forward to a low-carbon future is that targets such as net zero are not the endpoints, but part of the journey. The finance sector is in a unique position to incentivize the transition by only agreeing to lend to, invest in and insure organizations that manage their ESG risks and impacts.

Financing sustainable business has strong financial and broader societal benefits, which is why it continues to gain traction. Long-term institutional investors can help rebalance and redistribute climate-related risks and maintain financial stability. Hedging instruments (e.g., catastrophe bonds, indexed insurance) help insure against increasing natural disaster risk, while other financial instruments (e.g., green stock indices, green bonds, voluntary de-carbonization initiatives) can help re-allocate investment. 

What is clear is that if we are to drive systemic change with sustainable outcomes in mind, we solve problems faster and more effectively if we collaborate. If we don’t, we risk providing a conflicting views, slowing down any real progress, and creating inertia.

BSI can play a central role bringing together the various parties and ensuring we have a common narrative and maintain industry and stakeholder confidence through an audit.

One thing becomes more apparent daily. Every sector has different requirements. Cross-cutting issues add further complexity and act as a barrier to creating better decision-making. Ultimately, the direct or indirect relationships between legislation, regulation, and industry practices will dictate how the market functions, whether it is open to innovation, growth, and trade, or protectionism. None of us want the latter. In the extreme, a poorly designed market framework will seriously drag on the economy and create opportunities for criminal activity. This can happen either through over-regulation or under-regulation. Meanwhile a well-designed framework can offer immense possibilities. The UK ambition to drive this agenda then saw BSI establishing the first ISO technical committee on sustainable finance, involving several G20 countries, and the development of an international standard, ISO 32210:2022.

We are at the start of a new macroeconomic age; a 40-year cycle of Government being light on regulation and light on tax is coming to an end. It will be interesting to see what will take its place.

Martin Townsend & Daan van der Wekken