Reflections on sustainable finance: Into the mainstream
After three years running the Centre for Sustainable Finance at CISL, I am moving on to seek new adventures. I have been privileged to work with an extremely talented and passionate team who continue to develop thought leadership on the future of finance and society, and to have been supported by the wonderful people across the organisation. Before looking to the future, I wanted to reflect on the journey I have observed in sustainable finance over the past few years.
Prior to joining CISL, I spent nearly 20 years working in banking, focused on mainstream capital markets. During that time, although I saw the development of vaccine bonds and momentum building in green bond markets, sustainability was far removed from the day job for most of us. It was seen as a compliance function or reputational risk to be managed rather than an idea that should permeate all of our activity in line with the UN Sustainable Development Goals (SDGs).
That said, there have been pioneering individuals, and even a few financial institutions, that for over 20 years have been raising the profile of sustainability in the financial system, but this was far from mainstream. Their work is finally paying off. Last year, for example, saw the creation of the Glasgow Financial Alliance for Net Zero (GFANZ) at COP26, with 450 of the world’s largest financial institutions with balance sheets of over $130tn making net zero commitments, whilst financial disclosure of climate exposures is becoming increasingly mandated by regulators, and hopefully disclosure of nature loss is not too far behind. Sustainability has literally burst onto the finance scene.
Before we celebrate, it is important to recognise that we are only at the start of a journey that will shape how financial institutions make decisions for years to come. Wholesale change in the way finance operates will require a critical mass of people working in the industry to understand what a sustainable economy is and what their role is in delivering it.
I welcome the round of net zero commitments we have seen so far, even if I suspect many CEOs have not fully grasped the extent of the transformation required of their businesses. The hard work of delivery now needs to be prioritised. Credible transition plans that can be tracked and compared across peer groups, industries and regions will be key, though merely a starting point.
Such measures are necessary to understand whether institutions are playing their full part in delivering on global aims such as the Paris ambition, and to avoid greenwashing (more of which later). But the risk is they take on a purely technocratic form (‘ESG’), where reporting and risk management are prioritised above more fundamental re-examination of finance in the economy. A technocratic approach may be a necessary element, but alone it will not deliver what the world requires - to respect and operate within its planetary and social boundaries. It misses the existence of huge opportunities for new business lines available to forward-thinking institutions to facilitate the multiple industrial revolutions currently underway.
Climate change may be a monumental challenge, but the industry needs to look beyond net zero. Addressing decarbonisation without thinking about the impact on nature and society will lead to harmful unintended consequences, potentially creating problems as serious as climate change, through biodiversity loss for example. Arguably these problems are even more complicated than climate change, with no easy 1.5C or net zero equivalent for nature and inequalities. I am proud that CISL has led the way, working with the Banking Environment Initiative (BEI) and the Investment Leaders Group (ILG), in thinking through how the destruction of nature creates tangible financial risks that can be measured and addressed today, and am delighted that the question of how this impacts insurance is now being addressed by ClimateWise. We have also explored how investors can support the creation of decent work in investee companies, how SMEs can be encouraged to decarbonise by their financial partners, and how insurance can develop new products and collaborative approaches to both mitigate climate change and drive greater levels of adaptation and resilience.
Now that this thinking exists, and has been embedded in practical tools and frameworks, we encourage all financial institutions to adopt it.. Implementation is key if we are to see exemplars of sustainable finance emerge consistently across the industry. However, to change the all-important enabling conditions for sustainable finance, the industry must also work hand-in-hand with policymakers and business leaders. I am excited about the role that CISL can play in this area going forward, given its historic engagement across each of these actors, and its ambition to work at the nexus of these groups.
We now need every financier to understand the impacts their decisions have on the world and to grasp the financing opportunities presented by transition. Many individuals and some firms and boards are educating themselves and this is to be applauded, but we urgently need this activity to be scaled up so that the risks and opportunities of transition are considered as a core factor in business decisions, rather than an afterthought or add-on.
It would be naive to think of this transition as a smooth process. Inevitably, there will be accusations of greenwashing directed at either well-meaning new activity that in hindsight is ineffective, or towards cynical marketing of ‘business as usual’. Transparent and robust industry approaches, such as the transition pathways under development by GFANZ or many of the frameworks CISL itself has originated, will help financiers and their clients navigate this, whilst a focus from regulators on ensuring claims can be justified is to be warmly welcomed. I would like to think that institutions will not be judged solely by their greenwash scandals, but by how quickly and materially they learn from their mistakes.
Despite the challenges, I am optimistic that financiers will rise to the challenge. Having had the opportunity to work with so many passionate and knowledgeable individuals over the past few years, I believe the scale of the opportunity to develop new markets and financing solutions is becoming more apparent to many in the industry. I see a bright future for CISL and the Centre for Sustainable Finance to drive this much needed change and will watch with pride at the brilliant work that I know will follow in years to come