"If sustainable finance really is a reality, why on earth is the planet and society not improving faster?"
11 min Read Time | November 27th 2021
Ahead of the Building Bridges Conference, held in Geneva from the 29th of November to the 2nd of December, CEO and Impaakt co-founder Bertrand Gacon took part in the 'sustainable finance debate' series that Le Temps curated.
He carefully explores the growth of sustainable finance, what impact on the climate and social factors this movement has had and advises what moves the industry must make in the future.
You can read the article (in French) via the link, or read the full piece in English below.
"As sustainable finance gathers billions, what is the actual impact on the planet?"
After a rather slow start, sustainable finance has seen a spectacular boom since 2015, the year that saw the birth of both the Paris Climate Agreement and the United Nations Sustainable Development Goals. In five years, sustainable fund assets have jumped by a third and now stand at a whopping $35 trillion, according to the Bank for International Settlements (BIS).
That is a lot of money. So the least we can expect is that these investments will produce visible results on the climate, ecological and social crises we face. But what is the reality?
On the stock markets, we are beginning to see the first effects of this push for sustainable finance. Although the decarbonisation of the real economy is still timid, it is already a reality in the equity markets, where the race towards "net zero" has begun and is reflected in a gradual shift in portfolios towards companies that emit the least greenhouse gases. This movement is particularly noticeable in the energy sector, where the oil giants, which still dominated the stock markets fifteen years ago, have seen their capitalisation melt like snow in the sun. In the same period, renewable energy players have emerged as new champions. NextEra's market capitalisation exceeded that of Exxon in October 2020, an event that is both anecdotal and symbolic.
The recomposition of capital flows is therefore well and truly underway and shows that the most established business models can be questioned and eventually replaced. And investors have understood this, now on the lookout for new champions of sustainability. We understand them: sustainable investment pays off! Over the past decade, investing in the renewable energy sector has proven to be three times more profitable than investing in fossil fuels.
“if the financial industry does not green its portfolios more today, it is probably more because it does not know how to do so than because it does not want to.”
This is also the reason why the current "greenwashing" lawsuit - which remains well-founded for a certain number of banking institutions that communicate a lot but do not do much - is partly mistaken: if the financial industry does not green its portfolios more today, it is probably more because it does not know how to do so than because it does not want to. Bankers have every interest in converting to sustainable finance: firstly, because their clients are demanding it, especially the younger generation, who will change banks tomorrow if they are not convinced. Secondly, because the regulators are demanding it, and they are putting in place more and more obligations in this area. Finally, and above all, because performance is affected, which is still the alpha and omega of the asset management profession.
But then, if sustainable finance really is a reality, and change is as broad as it seems, why on earth is the planet and society not improving faster?
Because if you look at the world from above, the picture is still pretty depressing. On the climate front, concentrations of key greenhouse gases have been steadily increasing over the past five years, despite the relative lull provided by COVID. On biodiversity - the other major existential issue we will have to deal with along with climate - the news is even worse. According to the WWF, the number of mammals, birds, fish, plants and insects declined by an average of 68% between 1970 and 2016. The speed of this mass extinction is unprecedented in the history of the planet. Finally, on the social front, not only is inequality between rich and poor countries continuing to grow, but the same trend is also occurring within each nation. In OECD countries, despite having more effective redistribution and social protection systems, the average income of the richest 10% of people is about nine times that of the poorest 10%, compared to seven times 25 years ago.
This is the paradox of sustainable finance today, and its greatest challenge. However strong the growth of this industry may be, it will only make sense if it succeeds in dragging the entire real economy into a rapid transition, the concrete effects of which can be measured in terms of reducing CO2, preserving biodiversity, regenerating natural capital and reducing social inequalities.
Two crucial issues will need to be addressed to achieve this. The first is the disconnect between the stock market and the real economy. The vast majority of the $35 trillion in sustainable finance is invested in equities and bonds traded on secondary markets, which provide no additional financing resources for businesses. To have a more direct impact on the real economy, more of this capital needs to be channeled directly into financing transition projects or developing green businesses, through innovative instruments such as green bonds, for example. At the same time, investors need to make full use of their influence over their portfolio companies by increasing their engagement activities and by making their reasons for investing in - or divesting from - a company more transparent.
When company executives learn that institutional investors are selling their shares because of a poor impact rating, sustainability issues quickly rise to the top of the strategic and operational priority pile. However, investors need to base their decisions on robust impact assessments and share them with the companies concerned. This role of influence is, without doubt, the most powerful lever for the transformation of the real economy by the sustainable finance sector.
The second central issue that needs to be addressed is that of impact measurement. As long as we do not have reliable data to assess the real impacts of the companies in which we invest, we will be condemned at best to trial and error, at worst to be wrong. Of course, some choices seem obvious: favouring renewable energy over fossil fuels. Investing in health rather than tobacco. But the complexity of the world around us cannot be summed up in a few sectors of activity or investment themes. Nor can it be satisfied with shortcuts or sweeping judgements, far removed from the realities on the ground. We need to move away from a binary logic and calculate impact scores that reflect the net contribution of each company to the planet and society, and then ensure that this impact measure becomes as essential to the investment decision as the issues of return and risk are today. To achieve truly systemic change, we need to make impact the third dimension of investment.
Reliable, universal and objective measurement of impact is the key to future transformation. The complexity of this exercise will require a great deal of innovation and collaboration, and will undoubtedly require new models that break away from traditional 'expert' approaches. This is the path we have chosen with Impaakt, a collaborative platform which already brings together nearly 400,000 impact assessments and 15,000 research notes. A powerful, controlled and transparent approach to provide a universal answer to THE question that the financial industry must now take on board.
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