The Financial System We Need

IMG_0295“Practical action needs to follow political will shown at COP21”, the rallying cry reverberated around Mansion House at the co-launch of the City of London’ Green Finance Initiative and the UNEP Inquiry’s report, The Financial System We Need. Issuers, investors and regulators increasingly recognize that sustainability is a strategic and material consideration, not a moral or ethical optional extra. The UNEP report describes a “quiet revolution” of over 100 policy measures across 40 countries, to integrate sustainable development and finance. Under China’s Presidency of the G20, the People’s Bank of China and the Bank of England will co-chair a Green Finance Study Group, with UNEP acting as secretariat.

Just last month, the Financial Stability Board (FSB) set up the Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg.  The task force aims to deliver specific recommendations for voluntary disclosure principles. Speaking at the event, Andrew Bailey, Deputy Governor of the Bank of England, described the risk of future permanent impairment in value of assets and insurance liabilities. Clear, reliable and comparable disclosure from companies will enable investors to better identify and quantify stranded assets, and total ‘value at risk’.  As Elizabeth Corley, CEO, Allianz Global Investors, noted consistent disclosure requirements will reveal those companies that are best-in-class, enabling them to attract more capital, at a lower cost.

It is not just about risk, the amount of investment needed in green infrastructure is staggering, no matter whose statistics you read. The International Energy Agency estimates that meeting global energy demand by 2035 will need US$48 trillion of investment, with total spending on renewables and energy efficiency respectively of US$6 trillion and US$8 trillion by 2035.  The opportunities extend beyond bow-carbon, nature-based solutions can make our cities more resilient and liveable.  Writing from Davos, Mark Tercek, president and CEO of the Nature Conservancy, describes two pilot projects using green infrastructure to reduce the speed and pollution content of stormwater and improve air quality.  The Green Infrastructure Taskforce report, Natural Capital: Investing in a Green Infrastructure for a Future City makes the case for planning, managing and funding our own natural capital city.

There is increasing appetite for sustainable finance. The UN Principles for Responsible Investment have attracted signatories with more than US$59 trillion in assets under management. 120 investors representing $10 trillion in assets have committed to measure and publicly disclose the carbon footprint of their investment portfolios on an annual basis under the Montreal Carbon Pledge.

Opportunities extend beyond low carbon investments, Ma Jun, Chief Economist of the People’s Bank of China, described the environmental imperatives facing China of poor air quality, high levels of contaminated land and water pollution. Global Water Intelligence (GWI) estimate that US$1 trillion investment is need globally for water infrastructure and water preservation by 2022. Ma Jun says China is looking to the private sector to finance 85% of these investments in remediation.

The City of London Corporation and the Government are keen to seize this market opportunity, hence the Green Finance Initiative. Harriet Baldwin, Economic Secretary is right to champion the City of London’s track record in innovation and ingenuity, as Nick Robins, co-director of the UNEP Inquiry and co-author of the report said, “It is striking just how many key global initiatives are clustered in London – whether on responsible investment, green bonds, unburnable carbon, sustainable banking, climate disclosure or insurance risk”.

So where are the bottlenecks? As a former fund manager, Baldwin, knows investors like simplicity and returns, to that end, she highlighted the need “repeatable and scalable processes”, to unlock the flow of projects generating liquid and observable investment opportunities. Baldwin was less vocal about the need for clear, consistent policies to support low-carbon infrastructure in the UK, as her Cabinet colleague Amber Rudd continues to face criticism and tensions with the CBI escalate.

Comparable and credible accreditation standards are vital to build confidence in green or sustainable products. Overlaying environmental, social and governance data on top of existing performance metrics to understand how sustainability effects companies’ financial and commercial health is complex. While some investors such as, Allianz GI and Aviva, have been integrating environmental, social and governance into their analysis and investment decisions for several years, others have dragged their heels. Now, fiduciary duty, long-term returns and ESG are converging. Research, such as the meta-study by Arabesque Partners, shows good quality stewardship is a source of added value. This week, MEPs voted in favour of mandating consideration of environmental risks in pension schemes’ investment processes.

Steve Waygood, Chief Responsible Investment Officer, Aviva Investors, called for integration of ESG considerations across the financial supply chain, including credit rating agencies.  He suggested using benchmarks linked to the Sustainable Development Goals, with a consumer-friendly dashboard accessible for all. Such a democratization of information would raise awareness and engagement of the ultimate beneficiaries, pension savers.  Savers and investors would be able to see the impact of their portfolio on issues they care about, from deforestation to child labour. Responsible investment has in the past been bound by a limited choice of what to avoid, rather than a positive selection. If consumer choice is to be a driver of change in the savings market, new communication approaches are needed that make climate information easily accessible, comparable and relevant, particularly to young savers, Green Alliance.  Attending the event as a guest of ShareAction, I could not agree more.  So it is exciting to learn that Morningstar will release ESG ratings for a large proportion of the 200,000 funds it tracks in the coming weeks.

Georg Kell, vice chairman of Arabesque Partners, has said “the consumer is the sleeping giant”. Awaken the giant, show them the impact of their choices, and you might just find a client pool confident to invest for the long term.

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