Sustainability in finance, and beyond—a look back at 2019, and perspectives for 2020

The end of a year—or the beginning of a new one—is generally a propitious period for the (healthy) exercise of the retrospective. So, let’s look back at 2019, and try to foresee what’s coming in 2020, in the domain of sustainable finance, and sustainability in general.

In March 2018, the EU published its “Action Plan of Sustainable Finance” — a shorter name for the officially called “Commission action plan on financing sustainable growth“.  In 2019 not only the EU process accelerated, but many events also took place, in the sustainable world:

With such a global context, the risk is greatly increasing for companies, and for the countries, to be the target of legal procedures, initiated by citizens or NGOs. No doubt that the coming years will see this kind of legal case proliferating—and both companies or countries signatory of any convention (PRI, etc.), or with any moral obligation disclosed (code of conduct, sustainable guidelines, etc.) should worry about the effective respect of their own—publicly or privately taken­—engagements…

Sustainability cannot be reduced to the sole climate change issues. A sustainable society must not only transition toward a zero emissions objective, but it must also endeavor to suppress all forms of discrimination, corruption, and provide social justice, among other ESG goals.

To achieve this broader view of a sustainable finance, beyond the short term urgency of Climate Change issue, which must be now tackled with no delay, several profound evolutions in the approach of capital investment will be required: 

  • Capital flows must be reoriented towards a more sustainable economy. Transparency and long termism must be fostered in financial economy activity–The EU made indeed an excellent work considering that the current gap between the real economy, and a sustainable economy, is still a very huge one. For instance, customers’ expectations are becoming stronger and stronger vis-à-vis sustainable issues, but little has been achieved so far to fill this gap. The financial market needs so to listen to the “voice of the customer” and adapt the economical choices in this direction. To date, this is really not the case, and the investments are still not sufficient, and with no clear objectives…
  • Financial risks, and ESG impact linked to environmental and social activities, must be (better) measured. The EU is asking to foster the integration of the ESG in the credit research, and all financial and extra-financial research activities are thus concerned. To this end, the development of a common methodology, to be widely accepted by all the market, would probably be needed. Today, many approaches for the analysis of ESG topics are existing, but not for all the different classes of assets, and they are often very difficult to understand. A lot of work will be required to harmonize, and to create the solutions… Innovation will be fundamental to achieve this goal. The EU opened the path with the taxonomy, but all the work still needs to be done. Green bonds and SRI funds are strongly growing, but a reality-check of the real impact of these investment instruments need to be created. For instance, take the Green Bonds market, where the intensity of the “Green” for each project is very questionable, and different… we will also probably need the creation of a European commission to verify the accuracy of the granting of these labels… To make the sustainable market more transparent, hence credible, is absolutely essential to win the confidence of the customers.
  • Clear and measurable ESG goals must be defined and monitored in the companies or investments project, or in the investment funds. The end objective should be to measure the sustainable impact of the investments on the society, i.e. the creation of a sustainable value. To this end, such kind of KPIs should be integrated in the boards’ goals, in the grants, etc.

2020 should be a year of very hard work for people in finance, and the challenge is very high: to transform a purely ROI-oriented finance into a sustainable finance, to minimize—as much as is still possible—the effects of the climate change, and achieve a resilient economy. True conviction, and transparency are unescapable to avoid falling in the traps of sustainability/greenwashing… And to make this possible, the top management of the Finance sector must lead the way.

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