The world of finance needs to go green, by Dmitry Leus

With the US withdrawing from the Paris Climate Accords, European governments have naturally stepped forward to fill the gap and try to lead on climate change, an initiative which is of course to be welcomed.  

But we should be very clear that environmental responsibility is not something that will come simply from government decrees.  The world of finance and investment has an important function to play in ensuring a commitment to protecting the environment and a sustainable economy.  Indeed, the Paris Climate Accords themselves spelled out in December 2015, for the first time, the crucial role the financial sector can play in tackling the environmental challenges we face.

Commentators at the recent World Economic Forum in Davos challenged us to go much deeper.  The World Economic Forum has just released its Global Risks Perception Survey, which cited climate change-related issues as the top problem facing the world.  Attendees at Davos responded by pointing out that far from seeing our responsibility to tackle climate change as a burden or an obligation, we should genuinely see it as an opportunity.  Certainly Anand Mahindra of the $19 billion Mahindra Group said: “Climate change is the century’s next big financial and business opportunity”.  He is eager to dispel the idea that companies face a trade-off between improving the climate change situation and profit and business growth.  

Philipp Hildebrand, Vice-Chairman of BlackRock, added his analysis at Davos, saying that there is a new generation of clients who actively care about the environment and that their demands create an opportunity.  Mr Hildebrand explains that this new generation is creating pressure on asset managers to put money into investments with a strong environmental agenda and push companies into playing a bigger role in addressing climate change.  He added:  “People are beginning to realise this problem is too big for governments alone to deal with… essentially corporations have to become part of the solution.”

This potential for a financial role in climate change is beginning to be harnessed and driven by European-wide policy.  An EU High Level Group on Sustainable Finance has been set up and its aim is to put the European Union economy on a more sustainable path.  The experts of this group have recommended to the European Commission that priority investment areas should be defined.  They would also like to see clarification of investor duties.  These experts also advise the development of “official” European Sustainability Standards for green bonds.  The Standard and Poor’s ratings agency predicts that the green bond market will increase more than 30 percent this year and reach $200 billion.  The EU High Level Group on Sustainable Finance wants this to go further.  This experts’ Report is expected to be followed up with a comprehensive Action Plan in the first half of March 2018.  

The Report of the EU High Level Group on Sustainable Finance contains a set of ground-breaking sustainable finance recommendations.  The Report is significant because it is the first policy direction and brief that has been released on this topic.  It clarifies how the EU can lead on sustainable finance and this is especially welcome as it demonstrates the strong, coordinated approach that will likely be needed going forward and across other regions.  It’s clearly the kind of direction that is needed, as meeting this finance challenge for climate action is going to need a coordinated effort.  The Report is also a strong example of how a broad consultation across the field can be effective in forming policy.  

The spectrum of those participating really was broad, as it included banks, insurers, asset managers, stock exchanges, financial industry associations and civil society groups.   Usually these diverse stakeholders can be on opposite sides of the fence when influencing and shaping an approach, yet they unified around a strong consensus on the Report.   It also highlighted the dangers of short-termism.  The most important element of it is that it highlights the symbiotic relationship between financial reforms and policy changes, essential if we are really to meet the environmental challenges ahead.

Of course, with finance, everything is interconnected and it is truly global.  Europe’s initiative after the US withdrawal from the Paris Accord is especially welcome in terms of leading an international campaign on sustainable finance. Europe can use its voice at other institutions such as G20, G7, the UN, the OECD, and IOSCO to ensure that finance really is a driver in the fight against climate change.

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Dmitry Leus

Dmitry Leus

Dmitry Leus is the founder of East-West Connect, a London based forum focused on investment risk and opportunity in Central and Eastern Europe. He is an entrepreneur and banking and financial services professional.

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