The Road To Sustainable Finance Will Be Long And Thorny
Tariq Fancy — BlackRock’s former chief investment officer of sustainable investing — caused an uproar recently when he denounced sustainable investing as just “marketing hype” and “PR spin.” Well, the spin is clearly working, with Morningstar announcing record inflows into sustainable funds in Q4 2020.
Financial services firms have a large role to play in the transition toward a more sustainable economy, not just as capital allocators, but also as facilitators of transactions and employers and members of their community. But it will be difficult to enact real change until financial services players have a concrete understanding of sustainability and the required transition, as there is still significant reluctance for a complete business model change.
Financial Services Firms Face Strong Internal Resistance Due To Loss Of Revenue
Despite the pressure to act on climate change, the world’s largest investment banks have directed more than $2.66 trillion into fossil fuels since the Paris agreement. Emission-intensive industries represent a big part of banks’ business portfolios, and executives will need to show that the physical and transition risks of climate change outweigh the loss of business from these sectors to convince their colleagues to act.
Real change will happen but will require work across three areas:
- New products and services. Financial firms are developing, testing, and commercializing new products and business models with the aim to influence customer behavior and have a wider impact on society. Asset and wealth managers are moving toward sustainable investing; retail banks are launching green home-improvement loans, carbon-neutral banking, and financial well-being services; and insurers are moving toward “green underwriting.” As part of this transition, companies such as BNP Paribas, DBS Bank, and Zurich Insurance are repositioning their brands around purpose, responsibility, and sustainability.
- ESG-focused policies, both internal and external. To demonstrate their own commitment and build a culture of sustainability, financial services firms are implementing a range of internal environmental, social and corporate governance (ESG) policies that include a commitment to carbon neutrality, guidelines around investment criteria, policies to drive diversity and inclusion, or community investment programs. They are also implementing external sustainability policies that focus on creating common standards and integrating partners and suppliers into their sustainability metrics. This matters particularly for environmental sustainability, with the Greenhouse Gas Protocol Corporate Standard requiring companies to report greenhouse gas emissions from both upstream and downstream emissions, not just direct emissions.
- New processes to govern, measure, and report on sustainability progress. Metrics should align with the issues companies have identified as material. While nonfinancial disclosure is a regulatory requirement in some geographies like the EU, it’s also becoming a global best practice. Frameworks offered by the Global Reporting Initiative, the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-Related Financial Disclosures (TCFD) provide a good starting point and recommend similar areas of disclosure. Firms like ING and Zurich Insurance started by calculating the impact of their activities and capturing this in materiality assessments, which they then used to prioritize their sustainability initiatives.
You can read our new report “How To Make The Shift To Sustainable Finance” here. Be on the lookout for another upcoming Forrester report which will offer guidance for financial services firms on regulation updates and the common frameworks used.