In the past two decades, sustainability talks have been a rare topic in the finance world. But that does not mean socially-responsible investors were non-existent; some had backgrounds in religious societies, and others emerged from philanthropic trusts. Some of these investors have been doing their thing since the 1960s, even as the US mutual fund industry experienced exponential growth. While we acknowledge their existence, they still were a minute component in the overall investment community. Such investors were barely existent in places like Asia at the time.
The corporate sector faced the same situation. In the 1980s through to the 1990s, capital market growth was linked with improved governance across the different companies. Social and environmental concerns did not have a front seat in many countries. At the same time, China was experiencing an economic boom two decades ago – growth that drove businesses to focus on development and wealth creation. The same ambitions were seen in much of Asia.
Jump to 2019, and the scene is different. The financial crisis has impacted the political and economic environment significantly. Companies have developed a different attitude and awareness toward the ESG (Environmental, Social, and Governance) challenges. For example, some countries have called for stiffer actions/penalties to help curb plastic pollution in the oceans, which has seen some governments ban or increase taxes on single-use plastics.
The finance sector responded in kind to the changed attitudes among the public and policymakers. The situation has led corporates, banks, and investors worldwide to focus on sustainable finance. The new direction makes things more sophisticated as new financial products, frameworks, and initiatives emerge. It also has brought about a growing distinction between the need to avoid or not to do any harm (the risk filters) and actively doing good (the impact investing/financing).
Why Sustainable Finance Gains Popularity
Corporates and investment managers globally agree that ESG factors need not impede investment returns, and they have the potential to deliver risk and performance benefits. According to a Boston Consulting Group report, data from the ESG metrics show non-financial performance is essential in determining the valuation of different companies in various industries.
Furthermore, analysis of 656 businesses in the IFC portfolio suggests that companies with sound environmental and social performance outdid others by 110bp on asset return and 210bp on equity return. According to the IFC, the businesses that thrive in sound environments have a community and labor force that also thrives financially.
Businesses focusing on ESG factors have capital costs because of their superior risk profile and thus are highly valued. An MSCI report suggests that such companies are more profitable and can rise above to meet different unexpected challenges. Overall, financial rewards associated with adopting ESG as the best workplace practice are somewhat achievable even if a company ignores ethical imperatives that push companies to commit to ESG or the investors to consider ESG matters.
What’s The Banks’ Role?
Public opinion continues to influence sustainability growth. Moreover, new sustainability rules and regulations are implemented in business and finance. The EU (European Union) seeks to develop a Climate Mitigation Classification System, low-carbon investment benchmarks, green loans, and corporate disclosure guidance for climate-related information. Listed bond issues and companies in China are expected to disclose their ESG risks by 2020.
Banks are financial institutions that have significantly influenced economic growth and sustainability for decades. They are crucial intermediaries in the global financial system, having a chief role in backing and advancing sustainable finance. Banks worldwide should commit to delivering long-term value to their economic environment, society, and shareholders. And in doing this, they can make a significant difference while also benefiting from the opportunity they create. According to the IFC, climate-related sustainable finance prospects in budding markets will account for nearly US$23 trillion by the year 2030.
It all shows how banks are central to promoting economic change globally. The institutions are a powerful force that can blacklist industries that do little to curb their carbon footprint or do not contribute to climate change. And these can be companies linked with human rights violations, agro-industries supporting deforestation, or coal-fire power-dependent industries. Conversely, banks can increase support to blended finance that seeks to leverage private sector funds or renewable power, microfinance, and other financing institutions championing sustainability.
Nevertheless, banks might need to invest resources towards delivering better data transparency crucial to sustainability. Frontline workers also may benefit significantly from routine training to help them understand and support sustainability, which means they can assist clients in navigating the challenges occasioned by the new opportunities that pop up in this rapidly changing world. For instance, they can understand the growing demand for ESG-focused investment solutions or the dynamics in the sustainability-themed bond market. However, banks can ensure sustainable finance delivers long-term benefits by working with their communities to provide programs that promote social-economic growth.