EACT Summit 2019: Sustainable Finance
by Alain Chaigneau, AFTE
Anne-Catherine Husson-Traoré – Novethic
Elisabeth Schopf – Borealis
Paul Tang – Member of the European Parliament for the Netherlands
The long road to sustainability
Creating shareholder value is not enough. As Larry Fink, Founder and CEO of investment firm BlackRock, famously wrote to the world’s largest public companies in January 2018: “To prosper over time, every company must not only deliver financial performance, but also show it makes a positive contribution to society.”
The EU has the same objective: how to integrate sustainability considerations into its financial policy framework “in order to mobilise finance for sustainable growth”. With sustainable finance defined as “the provision of finance to investments taking into account environmental, social and governance considerations (ESG)”.
All over the world, ‘business as usual’ is no longer acceptable. Companies are facing massive risks daily, among the most severe being extreme weather events, natural disasters, data fraud and cyber-attacks. In recognition of these risks, the EU supports the transition to a low-carbon, more resource-efficient and sustainable economy, thanks to a key framework that includes: the adoption of the UN 2030 Agenda for Sustainable Development in 2015, with its 17 Sustainable Development Goals (SDGs), and the Paris Climate Agreement of April 2016, which stipulates a 40% cut in greenhouse gas emissions (GHG) from its signatories.
However, it’s a long road to sustainability: fewer than 2% of reporting firms collect 100% of their GHG and only 21 firms worldwide reported 100% of their GHG in 2016. Fortunately, a sustainable finance market is gaining traction, as 23 trillion US dollars of responsible investment in 2016 showed a growth of 25% in two years. This is even though green bonds represent a small part of the international bond market and are not offering yet a lower cost of funding to companies. Financing the green transition would be easier if green-rating offerings were not so fragmented: too many labels create confusion –ESG ratings, Climetrics, EU Ecolabel, MSCI, etc.
So, one subject which is key to the future of sustainable finance is ‘taxonomy’. One of the measures adopted by the European Commission (EC) in May 2018 for its Action Plan for Financing Sustainable Growth is “a unified classification system on what can be considered an environmentally sustainable economic activity”. It’s a critical step towards redirecting private investment towards sustainable finance investments. But this is an extremely ambitious agenda because ESG considerations must include now, as the European Parliament voted for last March, the principle of disclosure of the impact on profits of investment in sustainability.
Social responsibility belongs to the European tradition. But to consider the interests of all stakeholders (shareholders, employees, customers and the communities) and make companies and finance more sustainable, this will need a great deal of fundamental discussion and, of course, time. For instance, what is the definition of “a positive contribution to society”? Without doubt,, the issue of corporate due diligence will be on the EC’s agenda for many years to come.
Business as usual is no longer acceptable. Among the top 10 risks: extreme weather events, natural disasters, data fraud, and cyber-attacks.
Less than 2% of reporting firms collect 100% of their greenhouse gas emissions (GHG) and only 21 firms worldwide reported 100% of their GHG in 2016.
Circa 23 trillion USD of responsible investment in 2016 showed a growth of 25% in two years, even if green bonds represent a small part of the international bond market.
One keyword of sustainable finance is ‘taxonomy’, a “unified classification system on what can be considered an environmentally sustainable economic activity.”
Disclosure of the impact on profits of investment in sustainability will be the next big step in EC regulation.