A finance sector fit for generation S

Never before has the finance sector been under so much pressure to help deliver a climate-resilient, greener, and more equitable society. 

 

There is so much happening in this space that it’s hard to keep up with the news: green finance is an integral part of the G20 agenda for the first time this year; France became the first country to introduce mandatory climate change-related reporting for institutional investors; the U.S. state of California has required insurance companies to report on holdings in high-risk carbon assets; the revised text of the EU Directive on occupational pension funds (IORP2) now states that environmental, social and governance (ESG) factors need to be taken into account. The list goes on. 

 

These are very positive signs. We need the finance sector onboard if we are to deliver on ambitious global deals such as the Sustainable Development Goals (SDGs) and the Paris Climate agreement. Vast sums of capital beyond the reach of public finance are needed in areas such as energy efficiency and low carbon technologies. China alone aims to raise US$1.5 trillion for green projects through to 2020, 85% of this coming from private finance

 

Sustainability represents a significant growth opportunity for those countries, companies and investors that successfully anticipate the products, strategies, and services that the future will demand.  

 

On the other side of the opportunity coin, there is always risk. The biggest of all, in terms of financial value at stake and potential social impacts, is climate change. 

 

Climate change will have major impacts on the availability of resources, the price of energy, the vulnerability of infrastructure and the valuation of companies. Assets can be directly damaged by floods, droughts and severe storms, but investment portfolios can also be harmed indirectly, through weaker growth and lower returns.

 

Changes in policy, technology, and consumer preferences, for instance, can prompt a reassessment of the value of a large range of assets. Some assets can be left ‘stranded’ or worthless in this transition. These can include oil, gas and coal reserve assets that may never be burned, high-carbon industrial installations that may cease to operate prior to the end of their economic cycle, or real estate that will require significant energy efficiency refurbishment. The expected permanent value loss to global assets from climate change has been estimated as EUR3.8 trillion in present value terms – equivalent to the GDP of Japan!

 

It is not altruism. Prudent risk management and capital reallocation are the main forces working together to make the finance sector more sustainable. Worldwide policy actions to green the financial system have more than doubled over the last five years according to a brand new report by the UNEP Inquiry

 

Despite the current momentum, these are still largely localised initiatives and a lot more effort is needed to turn this momentum into a genuine global transformation. 

 

To put things in perspective, just one-fifth of the world’s largest 500 investors are taking tangible action to mitigate their exposure to climate-related risks according to the Asset Owners Disclosure Project. As for green bonds, despite their rapid growth - to US$41.8 billion in 2015 from US$11 billion in 2013 – they still constitute less than 1% of the overall global bond market

 

There is also inconsistent behaviour among investors. Blackrock, the world’s largest asset manager, issued a report stating that “all investors should incorporate climate change awareness into their investment processes”. This happened less than six months after they voted against a shareholder resolution which sought greater climate change disclosure at ExxonMobil's annual general meeting in May.

 

One force that I believe may tip the scale in favour of a truly sustainable finance sector is the growing influence of the so-called ‘Generation S’. 

 

Last year, Georg Kell, Founder of the United Nations Global Compact, introduced the term to define a set of people, from all age groups and backgrounds, who understand the power of sustainability to create positive change. They are conscious that the decisions they make today affect the quality of life for our children, grandchildren, and all future generations. When making career, investment and consumer choices, these individuals are purpose-driven: they choose companies and investors which combine economic value creation with environmental stewardship, social inclusion and sound ethics.

 

Generation S is not yet a majority, but is a rapidly growing movement that stands a fair chance of bringing about real change. 

 

In the UK, the NGO ShareAction is doing a great job mobilising members of Generation S. Their Pension Power campaign helps people discover how their savings are being invested – whether it’s funding agriculture or arms, renewables or fossil fuels – and gives them the means to engage their pension fund. Another positive example comes from the Netherlands. Dutch pension fund ABP surveyed its beneficiaries and found that they wanted their money to be invested more sustainably. This led the fund to significantly boost their responsible investment activities. 

 

Increasing the level of engagement that asset owners have with their beneficiaries is the first step in rebuilding consumers’ trust in financial services and improving accountability in the investment system as a whole.

 

Policy changes and risk considerations are important drivers of a more sustainable finance sector. However, I believe that a real shift will only fully happen with a big push from society. People like you and I who make decisions every day on what to consume, how to invest, and where to work. 

 

We can all be part of Generation S and help make the finance system a truly sustainable one. There is only one real growth story: a sustainable growth story. So I repeat Georg Kell’s question in his seminal article: are you in?

 

Andrea Marandino is sustainable finance and corporate risk specialist at WWF-UK.

 

Photograph: Flickr/ Moby.

 

 

 
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Seven things you can do to drive the shareholder revolution

Whilst there are a lot of discussions emerging around the changes we’re seeing in the investment community, both through the growth of Environmental Social Governance (ESG) teams and the use of artificial intelligence and big data, we are convinced that corporate sustainability experts have an important role to play in championing investments’ transparency.

 

In a conversation between some of the leading experts in sustainable finance in the UK – Emma Howard Boyd, Chair of the Environmental Agency, Steve Waygood, Chief Responsible Investment Officers at Aviva, Catherine Howarth, CEO, ShareAction, we drew up 7 actions that internal teams should be considering, which we think are brilliant.

 

1. Ask if your company's pension fund or pension provider has a sustainability performance that aligns with your company's sustainability credentials. If not, find out who can put that right.

 

2. As a sustainability professional, consider putting yourself forward to be a trustee of your company's pension fund or to join a pensions committee for your firm. The pensions sector needs your expertise.

 

3.  Find out if there is an employee-led team in your workplace or firm focusing on what happens to your pension savings? If not, consider starting one. The results can be impressive.

 

4. If you work for a public company, ask how well equipped your company's investor relations team is to present the company's sustainability credentials to financial analysts, brokers and investment managers. 

 

5. If your company is listed, ask your Investor Relations team if you can meet your House Broker (for example, the investment bank whose job is to sell your corporate story to the market), and explain how your team adds value to the company in the long term. Then work with them to refine the story, and then make sure your CEO and FD can also tell the full sustainability story. With passion.

 

6. Attend your Annual General Meeting (AGM) and listen carefully to the questions asked by shareholders to see where you can help. These are key meetings for the board and senior executive.

 

7. Find out who your top twenty shareholders are. Establish who covers Environmental, Social and Corporate Governance (ESG) issues within those institutions, and suggest your investor relations team offer them 1:1 sustainability meetings. You will likely get only a few meetings, but each one of them will contain useful information that you can use to tell your team’s story internally.

 

How many of these are you doing at the moment?

 

None?

 

Then you have your check-list ready.

 

If you need further advice for any of the above, the panel members would be pleased to help or advise, especially Catherine Howarth of ShareAction (catherine.howarth@shareaction.org).

 

With thanks to Steve Waygood, Catherine Howarth and Emma Howard Boyd. 

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