Finance & Investment
Big Finance Is About to Unify Its 3 Distinct Sustainability Brands

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.