Interest in sustainable finance is not only growing, it’s sustaining.
So what is it?
“Sustainable finance refers to any form of financial service integrating environmental, social and governance [ESG] criteria into business or investment decisions,” says Stephen Nolan, CEO of Sustainable Nation Ireland, a national platform for the promotion of Ireland as a world-leading hub for sustainable finance.
“In the past, investors evaluated their performance based on financial measures alone. However, investing to environmental or social issues, not just financial returns, has become increasingly mainstream.”
According to the Global Sustainable Investment Alliance (GSIA), $23 trillion – or 26 per cent of all assets under management in 2016 – were in investments that take account of ESG issues.
Interest is growing in Ireland too. In November 2018, Sustainable & Responsible Investment Forum (SIF) Ireland published Ireland’s first ESG State of Play report.
Of the 16 Irish-located asset management firms which responded to the survey – representing €77 billion in assets under management – 80 per cent had a formal ESG policy in place.
Renewable energy
Half operated a sustainability-themed investment strategy. The most dominant themes identified related to renewable energy, energy efficiency, the building sector, land use, fossil fuels, sustainable transport and finally water management.
It’s not the economy driving it either, stupid, it’s the environment.
“If global, regional and national commitments to limit global warming to 2 degrees C are to be realised, then the coming decades will see a worldwide macroeconomic transition with vast financial implications,” says Nolan.
Between now and 2030, the G20 estimates that $90 trillion is required in order to keep global warming below 2 degrees.
"As such, across the world, the growing momentum towards sustainable finance is clear. The green bond market continues to expand. The European Commission has developed an Action Plan for Financing Sustainable Growth. Sustainable finance is now identified as a key focus within the G20 and the G7, and financial regulators are incorporating environmental risks into market supervision. Indeed, sustainability factors are becoming material for the competitiveness of financial centres."
It’s also informing the regulatory environment. In March, the European Commission released an action plan for financing sustainable growth, with 10 areas of reform. The plan was broadly grouped under three headings: reorienting capital flows towards sustainable investing; mainstreaming sustainability into risk management; and fostering transparency and long-termism into financial activity.
Following on from the action plan, the European Commission announced the first four actions to be taken. These included the establishment of a sustainability taxonomy, regulations around investment disclosures, new carbon-impact investment benchmarks and measures to better advise clients on sustainability.
By mid-2019, the European Commission hopes to integrate sustainability into credit ratings within the EU, as well as harmonising the approach taken by member states towards disclosures.
Skills and talent
Developments are gathering pace at home too. Skillnet Ireland, the national agency responsible for workforce learning, has a dedicated Sustainability Skillnet. In November it announced a €400,000 public-private funded sustainable finance skills and talent investment programme for 2019, to help to upskill workers across the insurance, banking, funds industry and asset management sectors in sustainable finance.
Dave Flynn, executive director of Skillnet Ireland, says: “Skillnet Ireland supports national policy priorities relating to sustainable finance, by developing the specialised knowledge and expertise of professionals employed within the financial services, legal and other related sectors throughout Ireland.”
In short, sustainability is no longer the sole domain of environmentalists.
“Institutional investors and pension funds definitely want it, while on the retail side, a new generation is coming through which also wants sustainable finance,” says Andreas Hoepner, professor of operational risk, banking & finance at UCD and the only academic on the EU’s Technical Expert Group on sustainable finance.
A major driver is the availability of better data. “We know much more now about corporate irresponsibility and climate change, so it’s being driven by having more knowledge.”
While no strategy ever outperforms all others over the longer term, if you measure return for risk, as opposed to return on investment, sustainable investing does very well.
“Sustainability means thinking longer-term, it is the antithesis to short-term greed finance. A lot of shareholders today see themselves as shareowners, as in, just as when you buy a flat you want to retain it, they consider themselves owners of shares, not holders simply waiting to trade them.”
Sustainable funds are becoming more common as a result. “Even diehard asset managers issue them because they sell. This is not a tree-hugging initiative – a lot is coming from financial data science that is gradually replacing economic dogma,” says Hoepner.
‘White males’
The key to further growth will be education, specifically of “white males aged 45-plus, who are either not hearing or not willing to learn”.
It’s an attitudinal problem that time alone would of course help erase. “But from a climate perspective, will it be quick enough?” he wonders.
Meanwhile, the market has seen sustainability in investing shift from a "box-ticking approach", into moving into the mainstream "in terms of being a critical component of how investors look at investment decisions", says Michael Watson, group head finance and projects at law firm Pinsent Masons.
“Everybody buys into the fact that if we don’t do something in the short term, we will see a significant negative impact on the planet’s ability to support its population in this century.”
There is wider consciousness too about the ability for investments to have a positive impact at societal or community level area.
Moreover, if businesses aren’t making themselves more sustainable, they are exposing themselves to material risks over the coming years. Increased regulation will make it more expensive to do business unsustainably, thanks to the imposition of penalties and, conversely, the encouragement of good behaviour.
A key component will be regulatory intervention across all major countries which will make sustainable businesses cheaper to run than unsustainable ones.
“Investment will follow,” says Watson. “It’s enlightened self interest, but it can’t happen without regulatory intervention.”
