Private finance: a catalyst for economic stability and climate action
2020 is set to be the warmest year on record, according to data from different sources, including NASA. Arctic sea ice extent was also at record low levels for much of this summer and more than half of Earth’s rain forests have already been lost due to the human demand for wood and arable land. These stats from The World Economic Forum and National Geographic aren’t the most promising, but they do reiterate that we need to act now if we are going to remedy any of the effects on the natural world. Although society is well aware of the environmental emergency, what are we actively doing to address it?
As the government has put legislation in place for businesses to reduce carbon emissions to net zero by 2050, we have seen progress; paper bags, recyclable and reduced-plastic packaging, more plant-based food options, and using local farming are all useful measures but, sadly, not enough. Yet, there is hope; the seismic change that needs to be integrated into the system is on the horizon if we seize the opportunity.
We have seen programs like Blue Planet, that highlight the effects we are having on the environment, but rarely are we taught potential solutions. The media can present climate change as doom and gloom which tends to cause a head in the sand effect amongst the public who, naturally, feel the solution is out of reach. But, what if one of the world’s most powerful sectors led the sustainability change and we weren’t left to our own devices, as such?
The financial sector could hold the key to the green recovery that our planet and economy need. Attending The Green Horizon Summit 2020 and, subsequently, watching One Planet Too Big To Fail proved to me that the market is waking up to the shift in investment and commercial strategy that the environmental sector has long-advocated. Finally, nature, net-zero, and finance are on the same agenda.
Our economic system is underpinned by nature and its resilience to survive, we need the natural world to flourish so that businesses can prosper, too. Freak weather and diminishing resources are destructive to commercial growth, and investing money in activities that take us deeper into the climate crisis only exacerbates this. Portfolios are at risk when the businesses they are invested in are also at risk of flooding and wildfires. Not only that, but consumers are beginning to demand businesses ‘go green’ and are willing to boycott them if they don’t. In a study by Wunderman Thompson Intelligence (a global practice for insight, trends, and innovation), 87% of consumers would prefer to buy from a brand that demonstrates a commitment to sustainability. As the world demands change to survive, climate-harming industries like oil and gas will get left behind. Conservation International reports that natural climate solutions such as restoring degraded forests and building renewable energy systems could create as many as 39 jobs per million dollars spent — that's a job-creation rate more than six times higher than the oil and gas industry. So, it is sensible to invest in sustainable activity that is focused on longevity. The key to mitigating this economic risk is to invest in low-carbon solutions that can get us out of the climate crisis. That’s where ESG (Environment, Social, and Governance) investments come in.
Ben Slater, a Chartered Financial Planner at The RU Group has seen the impact of ESG in the market and now advocates this investment approach for his clients. “It’s no secret, the financial world can be old fashioned in many ways, but when it comes to sustainability and investments, we are starting to see a huge demand, which is driving change. As Russell has referred to, more and more of my clients want to invest in companies that give something back, and screening the ESG factors helps to identify those companies. These factors focus on not just carbon emissions and pollution, but also diversity in the workforce and board composition. There is a growing argument that if a company acts responsibly to the environment and their workforce, then you can bet they are more likely to be successful and profitable for their investors. ESG investing is still relatively new to the financial world, but we are early adopters of this, and have a range of solutions available to allow clients to control which ‘green’ companies they invest in, whilst maintaining a globally diversified portfolio.”
The financial sector can be a force for good beyond investment and capital, though. Whilst the rest of the market watches a leading industry taking action to promote a sustainable economy, it is likely they will follow. As the financial world dials up the positives of investing to protect the environment, it can encourage the media and public to listen. That doesn’t mean simply turning to ESG investments, it means demonstrating and reporting on the ways the sector has reduced its impact on the natural world to set a precedent. On day one of the Green Horizons Summit, Mark Carney, the UK Prime Minister’s Finance Advisor for COP26 and UN Special Envoy for Climate Action, set out his framework designed to ensure that every financial decision takes climate change into account. Resting on four pillars – reporting, risk management, returns, and mobilisation. Improving asset transparency, reporting, and carbon disclosure will improve market confidence and accelerate liquidity. Likewise, the Chancellor of the Exchequer has instructed large UK companies in the private sector to disclose their financial exposure to climate change by 2025. It is no surprise that the government considers the financial world a catalyst for climate action since their plan to Build Back Better and rebuild the economy is largely based around a low carbon, green recovery.
This is the Decade of Delivery and, far from the ‘doom and gloom’ I spoke about at the beginning of this article, I am heartened, re-energized, and inspired by the monumental shift in thinking being demonstrated by the financial industry. The Green Horizon Summit 2020 and One Planet Too Big To Fail have shown that historic attitudes are no more; "Green = charitable" is outdated. Climate change is real and, if the financial sector leads the way, we can combat it.