Climate-related damages could top $360 billion a year, a figure equal to 55 percent of the U.S. economy’s projected growth. If we don’t bring down warming temps, fundamental industries — such as housing and food production — will be affected. For example, corn and soybean growers are projected to start losing up to $25 billion annually.
Sustainable finance, an increasingly significant field, is an important part of a global climate change challenge. Designed to accelerate sustainable changes, and deliver the investment required to meet global carbon reduction targets, experts recognize its power to deliver against long-term environmental objectives.
“Once regarded as ‘exotic,’ sustainable finance is now firmly entering the policy mainstream,” said Niall Bohan, head of unit at the European Commission in charge of the Capital Markets Union, one of the E.U.’s flagship initiatives.
But how did we reach this tipping point?
Socially responsible investing started during the intense political climate of the 1960s. Activists pressured institutions and funds to disinvest from companies with ties to planet damaging projects and unethical issues. Now there’s a growing approach to sustainable investing: environmental, social, and governance (ESG) investing — standards used by investors to gauge a company’s commitment to a “triple bottom line”: profits, people, and planet.
ESG investment criteria are a little broader in scope than funds that avoid hot-button issues like fossil fuel infrastructure entirely. As Aniket Shah, head of sustainable investing at OppenheimerFunds told Bloomberg in August, ESG investing “isn’t about totally ‘greening your portfolio,’ but are you weighting your portfolio toward companies that are proactively improving their risk profile against the issues?”
Investors use ESG investment criteria to consider a company’s readiness to evolve with climate change. They look at things like the size of the company’s carbon footprint (and any efforts to reduce it), the sustainability of its supply chain, and its commitment to renewable energy. ESG investing also examines factors like a company’s anti-corruption policies, or the benefits afforded to employees — concerns that more traditional financial analysts may not consider.
From an investor standpoint, socially and environmentally responsible companies that adhere to ESG criteria are also more likely to avoid reckless risk-taking, appreciate in value over time, and, ultimately, succeed in the long run.
More than three in five (61 percent) investors and almost half (48 percent) of issuers around the world have an ESG strategy in place, according to HSBC, one of the world’s largest banking and financial services organisations. The bank aims to dedicate $100 billion of sustainable financing investment toward renewable energy and low-carbon business ventures by 2025.
General attitudes towards sustainable finance are changing quickly, adding to mounting pressure to increase the availability of ESG investment opportunities. Encouragingly, 67 percent of issuers and 57 percent of investors see no barriers to increasing their ESG commitments, HSBC estimates.
However, of those who do see barriers, 58 percent say inconsistency of ESG definitions is the inhibitor. A material impact of this inconsistency is low disclosure levels. As sustainable finance comes of age, and moves mainstream for investors and issuers, it is clear that a next step must be for businesses to begin measuring their transition to a low-carbon future.
“Tracking and reporting carbon pollution keeps governments and businesses accountable,” said experts at a Global Climate Action Summit this year. “Governments and businesses must turn their climate goals into bold climate action by honestly and fully reporting their emissions,” said California Governor Jerry Brown.
To collectively tackle climate change, transparency, accuracy, and consistency in ESG reporting is critical. Michael Bloomberg launched a taskforce to develop a clear set of guidelines. The resulting recommendations improve consistency and clarity, yet only 10 percent of investors and issuers know that they exist.
The sustainable finance market is now looking to regulation to provide clarity and definition, especially as inconsistency of definitions is an issue for all. Helping businesses navigate disclosure guidelines is imperative.
Although disclosure recommendations are voluntary they “provide investors and the companies they invest in with the framework they need to turn good sustainability intentions into meaningful action,” says James Murray, editor of Business Green.
Let’s hope positive attitudes to ESG continues to yield sizeable returns for investors and deliver positive impact for the health of the planet. But to truly bring change, businesses must embrace transparency and improve their measurement. Implementing disclosure recommendations is now a pressing global priority.
The above is a paid partnership between HSBC and Grist and is for informational purposes only. Grist is not offering investment advice. Readers should seek a duly licensed professional for any investment advice.
HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 3,800 offices in 66 countries and territories in Europe, Asia, North and Latin America, and the Middle East and North Africa. With assets of US$2,607bn at June 30, 2018, HSBC is one of the world’s largest banking and financial services organizations.
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