S U S TA I N A B L E F I N A N C E THE FINTECH TIMES
Shaping the future of sustainable investment Fintechs with promising technology can lead the charge towards sustainability-driven financing
By Danielle Bistacchi, Sustainability Consultant, designportfolio
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hen Larry Fink, BlackRock’s CEO and the world’s largest fund manager, says that ‘we are on the edge of a fundamental reshaping of finance’ due to climate change risks, investors listen. The evidence surrounding the long-term impacts of climate change is increasing and investors are beginning to recognise that climate risks are investment risks. For instance, if lenders can’t model economic growth of food production, because productivity is declining due to extreme heat and other climate impacts, what happens to inflation and interest rates? So, what does sustainable investment really mean for investors, businesses, consumers, or even global financial institutions as we know them? The 2020s are fast becoming known as the ‘decade of change’ or the ‘decade of delivery’ and the demand for sustainable investments is poised to accelerate, with a number of large banks launching their green finance solutions. HSBC, for example, has introduced a range of new loans and a green revolving credit facility (RCF) that are available for small to medium enterprises (SME) through to large corporates. There are, however, a number of unknown challenges to overcome first before any dramatic shifts in investment and lending are seen. Sound confusing? It does to me too. To help, I’ve answered three key questions to simplify the perplexing sustainable investment landscape.
What is sustainable investment? Sustainable investment is a broad term for
investment that considers environmental, social and governance (ESG) factors and their impact on society. Traditionally, sustainable investment was viewed as a trade-off between financial returns and ‘doing the right thing’. Yet in today’s modern world, where consumers have a more sophisticated understanding of the risks posed by a changing climate, they are demanding investments are made in sustainable portfolios and strategies that do not compromise financial returns. Investors have had to quickly reassess the way they approach investments and how ESG factors can be tied into reducing risk and enhancing long-term growth.
Why are investments not already sustainable?
Asset managers, pension schemes and even universities have all traditionally invested in companies that provide healthy financial returns, with no thought as to how these companies operate or to their impact on society and the environment. This includes huge investments in the oil and gas,
manufacturing and transport industries, which are all carbon intensive and large contributors to climate change. However, the winds of change have begun to blow, with more than half of UK universities committing to divest all of their investments away from fossil fuels in 2020, which campaigners say is a significant blow to the ‘social licence’ of big oil and gas firms. In addition, so-called shareholder activism is also being used to pressure big energy firms to adopt greener policies and to increase their own investment in a low carbon future. One of the most successful activist groups is Climate Action 100+, a group of 370 asset owners and managers, including BlackRock and Aberdeen Standard, that advocates for environmentally friendly shareholder proposals and pushes companies to align their business with the Paris climate agreement. In March 2019, for example, the group forced the oil giant Shell to make a legally binding commitment to use a broader definition of greenhouse gas emissions in its carbon reduction targets.
What does the future of sustainable investment look like?
Sustainable investing has experienced phenomenal growth in recent years and sustainable investing assets stood at $30.7trillion at the start of 2018, a 34 per cent increase in two years according to the Global Sustainable Investment Review. While the push from private sustainable investments is set to outperform traditional investments in the future, there are still a number of challenges to overcome in the market. This is where fintech has a part to play; to be able to solve a modern-day problem, requires a modern-day solution. Digitisation changes the way financial institutions do business and fintechs need to seize the opportunity and provide new innovative and flexible sustainable finance solutions.
Time to act
The spotlight on sustainability and sustainable investment was recently highlighted at the World Economic Forum in Davos, and the message is clear – the time to act is now!
In the UK, there are a number of recent key policy changes by the government that are setting the direction of travel. The Green Finance Strategy, launched in July 2019, for example, sets out what action is needed to accelerate the growth of green finance, from greening the financial system and catalysing the investment needed for green projects, to driving innovation in financial products and building skills across the financial sector.
To help build a sustainable finance system in the UK, Boris Johnson has recently appointed Mark Carney, the ex-governor for the Bank of England as finance advisor for the United Nations Climate Change Conference (COP26) – taking place in Glasgow in November 2020. Mark Carney has been championing sustainable investments for many years, and he is one of the co-authors of the Task Force on Climate-related Financial Disclosures (TCFD), a valuable tool for evaluating and reporting climate-related risks and for companies to thoroughly understand the potential financial implications of a changing climate. More recently, the Bank of England unveiled plans to introduce a mandatory and uniform climate risk test for major banks and insurers in 2021. How we bank and how we make it sustainable is expected to cause a dramatic shift in the way we manage money moving forward: the fintech industry must seize this opportunity and capitalise on these emerging innovative business models.
About Danielle Bistacchi Danielle Bistacchi is a sustainability consultant at Design Portfolio, a specialist communications agency which advises on strategic direction, creates engaging narratives and ensures that each client’s story is told consistently. Danielle has worked with a wide range of companies over the years to help them change their mindset and realise the powerful impact they can have in creating positive societal changes and developing healthy environments. Danielle’s unique experience working directly for FTSE 100 companies and as a consultant, means
she is able to offer clients practical and helpful advice to overcome corporate hurdles experienced in developing their sustainability message. Danielle helps companies identify, break down and manage complex environmental, social and governance issues, understand what is material to them, and showcase their sustainability story in a vibrant and dynamic way.
www.thefintechtimes.com
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