ESG Finance: Good for Planet Earth, Better for Business

In a move that’s raising eyebrows, European Central Bank Chief Christine Lagarde is proposing to explore the ECB’s role in fighting climate change in the upcoming strategic review. Meanwhile, TCI, a hedge fund and brainchild of climate activist Sir Christopher Hohn is putting its money where its mouth is – in value-based investments. Moody’s routinely factors climate risk in its ratings and analysis.

Today, the world of finance and investment is being held accountable to a new standard. And its colour is green.

Global institutions, such as the United Nations, World Bank, World Economic Forum and International Monetary Fund, and activist agencies are the driving force behind the adoption of ESG (Environmental, Social and Governance) Standards in socially responsible investing.  Worldwide sustainable investments, covering environmental, social and governance, and impact investing, have grown sharply in the last few years to exceed US$ 30 trillion as at the start of 2018. But this is only the beginning.

ESG investing needs to grow, not only for the greater good but also because it is good for business. Here are some reasons why sustainable finance and investment are the right way forward.

Climate change is not only a reality, it is an emergency in some countries. While international accords, such as the Paris Agreement, and domestic regulators battle the crisis through legislation, it is also incumbent upon private enterprises to do their bit by adopting sustainable practices, making impactful investments and improving transparency and governance.

Neglecting the last can have extremely painful consequences, as we know from the 2008 Financial Crisis. What’s more, for corporations with global operations, any lapse in compliance with human rights regulations, labour norms or ethical practices can result in investor backlash, reputation loss, and punitive damages.

Today, the world of finance and investment is being held accountable to a new standard. And its colour is green.

Business economics is slowly shifting towards green resources as natural gas becomes cheaper than coal and other renewable forms of energy become more economical, predictable and scalable. Digital technologies are also supporting the shift to environment-friendly, cost-saving options such as online channels, digitised documentation, robo-wealth advisers, chatbots, smart assistants and cloud computing.

The generations of today and tomorrow are socially conscious and expect enterprises to espouse the same values. Many teenagers are already at the forefront of environmental activism. Millennial consumers, who will inherit wealth worth US$ 16 trillion over the next few decades, are exerting their influence to push financial service companies towards ESG compliant practices. Wealth managers, banks, and other financial institutions have no option but to meet the expectations of this important customer constituency.

Last but not least, financing ESG compliant projects helps to diversify the investment portfolio into new growth sectors such as clean and efficient energy.

Some financial institutions are taking a lead in adhering to ESG principles in lending and investing. ABN Amro has a comprehensive sustainability strategy focusing on climate change, circular economy and social impact issues. The Bank’s climate change vision aims at financing only “energy label A” real estate by 2030, increasing the share of renewable energy in the energy portfolio to at least 20%  by next year, and also doubling sustainably invested assets to €16 billion by that time. It has also built the first bank office based on circular principles in Oosterhout, Netherlands.

The generations of today and tomorrow are socially conscious and expect enterprises to espouse the same values.

Another great example is Nordic Investment Bank, which takes sustainable financing very seriously. In addition to investing in the green bonds of companies in various countries, NIB issues its own environmental bonds and invests those proceeds into sustainable projects. The Bank follows corporate governance best practices to achieve several aims, including fighting corruption and money laundering, managing risk, and procuring ethically.

The 2030 Agenda for Sustainable Development adopted by UN member nations lists 17 sustainable development goals aimed at removing poverty, improving health and education, reducing inequality, and fostering growth while addressing climate change and preserving our oceans and forests. This agenda will succeed only if it has support on the ground, at the level of the enterprise. The financial services industry can make a significant contribution to this cause through sustainable lending and investing.

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