Money goes green

Tags: Finance

The finance industry embraces sustainability

This blog post is part of my personal challenge for the course ‘Sustainability and Impact Club’. In my challenge I try to understand how capitalism in general and the finance sector in particular can be more sustainable, and how we, the individuals, can invest our money more sustainably.

With climate change, there will “a fundamental reshaping of finance”, announced the CEO of BlackRock, the world’s largest asset manager. Hair-raising long-term risks of inaction combined with handsome rewards for first movers will prompt the big institutional investors to create more stringent sustainable investment strategies. This will have considerable ripple-effect for companies and the society at large - even non-financial experts should take note.

Beside the Paris climate summit in 2015, climate change has not been forefront in the minds of financiers or investors. This changed in year 2019, when the news articles that mentioned climate change or global warming doubled in Wall Street Journal and nearly tripled in Financial Times - the two most prestigious financial newspapers.

The interest is warranted: for the financial sector, the climate change offers both hair-raising long-term risks with extreme weather events, rising ocean levels and potential social upheavals, but also a chance to get ahead and beat the market. Mark Carney, the Governor of Bank of England said, “firms that align their business models to the transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease the exist”.

ESG funds do good and make money
Luckily even in the short-term, the investors do not have to choose between sustainable investing and profits: research done by International Monetary Fund shows that returns of ESG (Environmental, Social and Governance) funds are wholly comparable with mutual funds, with best ESG funds clearly outpacing the market.
Also, companies with strong sustainability-focus will provide additional benefits like resource-efficiency, capitalisation of new revenue streams, synergies with circular economy thinking and stronger sense of corporate purpose that helps to attract and retain talented workers. These profitable, sustainable companies can provide risk-adjusted long-term return.
When Goldman Sachs, not know for its altruistic tendencies, recently added ‘sustainability’ into its mission statement, the rest is assured: sustainability can be profitable.

Improved ESG metrics
Even as growing segment of the investment community is willing to adopt sustainability into their investment criteria, few companies offer reliable, standardised systems measuring the company’s ESG performance. Current ESG and sustainability reports the companies produce have only attracted niche interest with little valuable information for the investors.
The investors have voiced some ESG concerns over the years but now are ready to spring into action. In January 2020 letter to other CEOs, BlackRock’s CEO Larry Fink wrote on the need for company compliance with the standardised guidelines outlined by Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures. Standardisation of sustainability and climate risk reporting would provide investors quantifiable metrics to make better, more sustainable and risk adjusted investment decisions.
When companies such as BlackRock throw their weight behind new initiatives, it does matter. The investment industry is highly concentrated; the top 5 asset managers hold 22.7% of externally managed assets (€15 trillion worth of assets under management), and the top 10 hold 34% (€22 trillion worth of assets under management). This gives large institutional investors heavy say for the investment criteria compliance.

Behavioral barriers exist
Advancements in creating more sustainable finance offers hope of meaningful climate action against the backdrop of political gridlock. The main obstacles for the advancement are not financial or technical, but behavioral - how financial institutions, forgoing short-term profit maximization as their sole purpose, can integrate triple bottom line (people, planet and profit) thinking and sound sustainable investment methodology to provide risk-adjusted returns.
These companies would see its fiduciary duty to expand from shareholders to wider stakeholders and see its main purpose in creation of value, not just returns. These behavioral changes would not only redefine companies, but our societies.

Niilo Montonen (Feb. 2020)