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:
- The ESG finance achieved 30 trillions of dollars of AUM in the world—this is indeed a very exciting momentum for Sustainable finance. This sustainable finance market is now very quickly developing, and this happens at a worldwide scale;
- A worldwide mobilization of the youngest generations, captained by Greta Thunberg, which is fostering the contest wave of populations against the climate policy of their respective governments;
- Several national and international reports on Climate Change, with amongst them the report of the World Meteorological Organization that denounced last November the growth of GHG emissions, with a new record high reached;
- The global consciousness raising of the public opinion on Sustainable development matters, with people now understanding that the widely accepted economic model is not sustainable, and calling for a change, along with the coming of a new kind of consumer, and citizen, wanting to decide for their life, and also to positively and actively contribute, by their choices, to the society’s changes;
- In June, the EU agreed to develop low carbon benchmarks, a taxonomy of sustainable economy activities, and higher disclosure requirements of corporate sustainability;
- In December, the COP25 failed to reach a common agreement on the reduction of GHG, and produced merely a letter of intention… without handling the climate change urgency;
- Early December, the WEF (World Economic Forum) estimated that 257 more years will be necessary to achieve remuneration equality and equal work opportunity for women…;
- Mid-December the European Commission set its “Green Deal” goal to make Europethe first carbon-free continent by 2050;
- On December the 18th the European Commission also welcomed “political agreement between the European Parliament and the Council on the creation of the world’s first-ever “green list” – a classification system for sustainable economic activities, or taxonomy. This will allow to create a common language that investors will be able to use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. It will thus help scale up private and public investments to finance the transition to a climate-neutral and green economy, redirecting capital to economic activities and projects that are truly sustainable. This political agreement underlines the EU’s commitment to implementing the Paris Agreement and reach climate-neutrality by 2050”.
- The 19 December, France Telecom has been condemned for moral mobbing, with, for the first time, the condemnation of the top managers, for a mobbing strategy supported by the company—whose “Management by terror” caused the suicide of 19 employees;
- Eventually, some days ago, December the 20th, an NGO, Urgenda, won a legal case on emission policy against The Netherlands—the state was condemned to cut emissions by at by 25 per cent by the end of next year, compared to 1990. The decision closes a case started in 2015.
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.