Last week at the World Economic Forum in Davos, US Treasury Secretary
and former finance executive Steve Mnuchin made what many consider the
rather sophomoric comment that Greta Thunberg needs to go to college before
she should comment on fossil fuel divestment.
Sophomoric? Hardly. It barely rates as freshman.
Perhaps his years at the White House have left Mnuchin out of touch with
economic trends. He would be wise to heed the words of his erstwhile colleague,
Larry Fink, CEO of the $7 trillion asset manager BlackRock, who
believes “We are on the edge of a fundamental reshaping of
finance”
— from a shareholder towards a stakeholder economy.
What this shift means may be unclear to Mr. Mnuchin, but for a few, it implies
nothing less than a radical recalibration of what constitutes economic value,
including a very low tolerance for investments that do not improve the
environment and contribute to greater economic equality. If we are lucky, an
entirely new sustainability risk and profit paradigm will emerge to
fundamentally disrupt finance as we know it.
This, of course, is a big “if”; and even a casual examination of corporate
finance “brands” (the most distilled essence of a company’s being) tells us, Big
Finance — retail and investment banks, asset managers, insurance companies etc.
— is hardly ready for the coming of ‘sustainable finance.’
While it is true most finance companies address some elements of sustainability,
few have a unified corporate, sustainability-based brand. There are exceptions,
such as Triodos
Bank,
RSF Social Finance or
VanCity Credit
Union;
but they are small in number, with limited assets under management.
Finance companies, rather, tend to manage three distinct sustainability brand
faces — each aimed at three distinct markets.
The first is aimed at conventional finance and sports a very narrow economic
vision — which, until recently, has precluded many if any proactive improvements
to climate,
biodiversity,
economic inequality or other pressing sustainability issues.
This view has been distilled through a profit-and-risk lens, driven for decades
by a myopic shareholder return ‘first’ and ‘only’ commitment, leading financiers
to understand labor and natural resources as not much more than fodder for
profit-making. It has simultaneously put a vice grip on the finance sector’s
enormously innovative capacity, virtually prohibiting the consideration of other
possible value-creation propositions.
“Sustainability” brand management at this level has been more about showing up
to leadership conferences (like Davos), producing omission-filled sustainability
reports, and creating the occasional ‘green’ product.
The second face focuses on the sustainable investment (SRI)
movement,
which currently claims $30 trillion in assets. The amount is impressive but is
dwarfed by the well over $350 trillion in total assets on the market today.
Moreover, the sustainability impacts of these funds are modest even by the
standards of the most optimistic
critics.
Make no mistake, there are many quantitatively provable, high-impact
investments, but they are few and manage relatively limited amounts of assets.
The final face looks on the retail level. It focuses on charitable
activities and sustainably minded funds, including the occasional housing or
enterprise development investment. All good, but few offer substantial,
systemic, or scalable sustainability impacts. Paul Sullivan’s recent New
York Times
article
highlights the typically limited reach and uneven impact of such ‘sustainable’
investments.
While financial institutions managed for many years to keep these three distinct
views largely separate; scenes of burning koalas, building-high waves pounding
homes to pieces, and protesters beaten in the streets are visceral, near-daily
reminders of worsening climate conditions and economic inequality — working to
expose corporate sustainability efforts as insufficient and ineffectual at best,
hypocritical at worst.
For the non-SRI activist, the distinct sustainability faces of Big Finance once
equaled a coherent vision. This is no longer the case. Take BlackRock: We
applaud the good words of its CEO, yet his firm has a 6.7 percent stake
in ExxonMobil, 6.9 percent in Chevron, 6 percent in Glencore Plc,
and a substantial investment in Bayer-Monsanto — what many consider the
poster companies of
unsustainability,
even evil. As egregious are the many banks, such as
Santander,
which — through ignorance, indifference or both — claim modest carbon-offsetting
efforts somehow balance out their aggressive expansion of fossil fuel
financing
since and despite the 2015 Paris Climate Agreement.
All this is, Fink suggests, is about to change. I see three primary catalysts as
to why this may be and investors of all strips might want to consider:
The first comes from Fink himself. His words give permission to his peers to
think beyond the current profit-risk framework. His words alone could release
the creativity and limitless energy of a whole lot of very smart finance
professionals with one objective: to finance sustainable investment
opportunities.
There is also mounting pressure from SRI professionals to scale proven
approaches to sustainability investment. A spate of recent sector initiatives
such as the Partnership for Carbon Accounting
Financials,
The Global Alliance for Banking on Values, the Network
for Greening the Financial System, and the Task Force
on Climate-related Financial
Disclosures
are catalyzing and supporting change. Their activities complement the
longer-standing work of the United Nations Environmental Programme Finance
Initiative,
Principles for Responsible Investment, CERES
Investment Network and
the Global Reporting
Initiative,
among many others. All this work provides financiers the platforms to act, the
tools to invest, and the means to systemically report sustainability performance
— allowing Big Finance no plausible excuse to delay action and unify their
sustainability brands.
The market is also applying pressure. Demand for SRI rose 14 percent last year
alone. More important, however, are the 73 percent of the 80 million+
millennials in the US set to inherit over $68
trillion
by 2030, who want better corporate sustainability
performance.
Finally, new types of sustainability-based profits will be made from as-of-yet
unimagined innovations in agriculture, manufacturing, resource extraction,
tourism — indeed, in every nook and cranny of the existing and yet to be
created parts of the economy.
To profit from sustainability, financiers first must be set free from the
current profit-and-risk framework; so they, too, can see the infinite
possibilities that lie beyond a carbon-based economy.
And Mnuchin? Perhaps he might want to take refresher course or two, so he too
can understand what Greta, and millions of young people the world round
instinctively understand: A sustainable economy is simply loaded with
financeable opportunities yet to be imagined.
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Living and working out of Mexico, Marc de Sousa-Shields is part of a sustainability tribe, making his contribution through writing, speaking and networking.
Published Jan 30, 2020 1pm EST / 10am PST / 6pm GMT / 7pm CET