Sustainable Finance – The Why & The What (Part 1)

Accounting/Finance, Feature, Green

September 16, 2019, 8:08 am

by Jaison John, Partner, Avia Management

Although financial products have existed since the 1970s, socially responsible investing is evolving and has witnessed some landmark changes in the last 3 – 5 years. Many firms have been using terms such as SRI, ESG, and Impact investing interchangeably, but in practice, they are quite different. Having a clear definition of the differences between each will enable the financial industry to more effectively communicate with investors and, thereby, attract more assets and investments.

But before we proceed into definitions and technicalities that precede various terminologies in Sustainable Finance, it is worthwhile to understand the reason why this theme has gathered a lot of momentum in recent years?

So, this is Part 1 of my 2-part series on Introduction to Sustainable Finance, In Part 1, I wish to explore the various voices rising across diverse strata of our society, that is causing people to avidly pursue knowledge in this topic:

Answering: Why Sustainable Finance has gained a lot of popularity in the recent past?

1. MILLENNIALS & GENERATION Z: According to Neal Hartman, a senior lecturer at MIT Sloan School of Management, who says “Many [millennials] really believe in this idea that it is important for companies to give back and to be involved in local community efforts. For millennials, if you have the option of working for a company that is well-known for giving back and creating opportunities for employees to contribute in some way versus a company that doesn’t do that at all, the millennial might well choose the company where there is some of that charitable giving and that philanthropic support.” As both the cohorts of Millennial and Generation Z employees enter and advance in the global talent pool, both groups have a proclivity for job-hopping and want to work for companies that translate their personal values and that can provide them with a sense of purpose. This, in turn, is driving company leaders to reimagine the way they approach their corporate fund allocation strategy – be it for company growth or hiring and retaining top talent.
2. GOVERNMENT LEADERS: Agreeably Trump administration may have slowed the pace of advancement in the global efforts against climate change, but we see a unified and focused efforts from national leaders such as with French President Emmanuel Macron, who was seen leading key global leaders, during the second-year anniversary of the 2015 Paris Agreement, to reiterate their earlier pledged commitments. At the end of 2016, the European Commission appointed the High-Level Expert Group (HLEG) on Sustainable Finance. The group was directed to draft a comprehensive blueprint for reforms along the entire investment value chain, on which to build a sustainable finance strategy for the EU. Since then, the European Fund for Strategic Investments (EFSI) has already produced over €250 billion in investment. In 2017, almost one-third of funds were guided into energy, environment and resource efficiency, as well as social infrastructure. Now the revised version of EFSI (2.0) extends the lifetime of the Fund until 2020 and has set an ambitious investment target at €500 billion, with at least 40% of new investments helping to reach the Paris agreement objectives.
3. INVESTMENT LEADERS: Industry heavyweights such as BlackRock chief, Larry Fink’s annual letter informed business leaders of the world’s largest corporations at the start of 2018, that they need to contribute to society if they want to receive the company’s support. BlackRock, a passive fund investment house manages more than $6 trillion in investments, making it the world’s largest investor. This could be easily considered as a phenomenal transformation in the thinking of active and passive fund houses in the right direction. In addition, green lobbying and pro environmentalist campaigners such as Michael Bloomberg, who chairs Financial Stability Board’s special task force to monitor corporates on Climate Related Financial Disclosures have played an instrumental role in rallying global corporates in the stand against climate change.
4. INDUSTRY LEADERS: Microsoft, for example, has a department devoted to philanthropy. For fiscal year (2017), the company is reported to have donated over $1.2 billion in software and services to nonprofits. Google has announced that the company will be awarding $1 billion in grants over a 5-year period. The money will go toward tackling global issues like education, economic opportunities, and inclusion. The company has also started an initiative, called Grow with Google, to help American workers with the skills they need to secure a job or launch their own business. IBM, the multinational tech company, has implemented a yearly travel program in which high performing staff is sent to developing nations on pro-bono assignments. The value of the team’s work while members are away is approximated at $400,000 per deployment and has exceeded $70 million, as per their statement to CNBC.
5. SCIENTIFIC COMMUNITY: An academic research involving a total of 132 papers from top-tier selected journals, showed that 78% of publications report a positive relationship between corporate sustainability and financial performance. Corporate sustainability is about expanding the financial bottom line into a triple bottom line, which includes environmental and social aspects of corporate performance. As companies scramble to stay relevant in evolving markets, they have come to realize that it is no longer enough to focus on the economics of their businesses alone. Only 4% of the total of 132 articles in the review occurred before 2002. Starting in the period 2002–2003, research gained momentum and continued to grow steadily until the period 2010–2011. A significant increase in research occurs starting in the period 2012–2013, more than doubling from the previous period. Starting in the period 2012–2013 onward, the number of publications continued to increase uniformly. In the last three periods (2-Year periods from 2012 – 2017), 75% of the 132 articles were published. These percentiles denote a clear message and a priority shift in academic researchers to add to the intellectual capital in the field of Sustainability, especially Sustainable Finance. The US has dominated the literature on the subject from the topic’s infancy in the period pre–2002 Taiwan, and China, among others. It is worth noting that the growth in research is highest in China in the last two periods. Taiwan, China, and Malaysia are leading countries of developing economies who are leading in the number of articles.

It goes without saying that the banking institutions (such as ING, HSBC to name a few) have played a pivotal role in facilitating (and shaping) a progressive dialogue between the above 5 segments in the field of sustainable finance. So plainly put, we have members from all walks of the society in one way or the other demand that money be spent on causes and projects that promote life and vitality on this planet.

Sustainable Finance then could be described as industry efforts to:

• improve the influence of finance towards sustainable and inclusive growth as well as the mitigation of climate change.
• and to fortify financial stability by combining environmental, social and governance (ESG) factors into investment decision-making.