Sustainability has rapidly become a priority for companies and their investors over recent years, as the negative effects of issues such as climate change and extreme social inequalities become ever more evident. As companies get involved, customers and suppliers, and the banks and investors who support them, need the confidence that their environmental, social and governance (ESG) claims are reliable, meaningful and comparable. Only then will sustainable investment and business practices become ‘business as usual’ and have a real impact on averting environmental and social crisis.
Making ESG decision-making more robust
While some investors and businesses may see ESG primarily as a set of tick boxes for regulatory and reputational purposes, most are keen to target their actions and investments in areas that will have a real impact. With more and more sustainable initiatives and investment opportunities jostling for attention, this has become increasingly difficult to achieve in practice. A variety of complementary initiatives are however emerging to overcome this.
Firstly, ESG-related metrics are becoming more sophisticated to help measure ESG green and sustainable credentials and monitor impact. The Sustainable Development Goals (SDGs) set up by the UN identified specific indicators that can be used to measure progress.
Secondly, governments and regulators globally are being proactive in setting the rules and standards that will make government sustainability ambitions achievable. For example, in the UK, as part of its Green Strategy, the UK became the first G20 country to mandate the Task Force on Climate-related Financial Disclosures (TCFD) across the economy, and setting out a roadmap for broader economy-wide Sustainable Disclosure Requirements. In the EU, in addition to initiatives around corporate disclosure requirements and improved benchmarking, the Sustainable Finance Taxonomy classifies what assets and sectors can be marketed as sustainable, and the required environmental criteria.
“ We are now entering an era where sustainability talk is more than just buzzwords. “
There are also sector-specific initiatives underway. In the US, the Office of the Comptroller of the Currency (OCC) issued draft principles for banks to manage exposure to climate-related finance risks, and increase overall industry resilience in the light of these risks. This includes ensuring that boards and senior managers apply appropriate resources and rigorous processes to measuring and monitoring climate-related risks, and the intersection with other types of financial risk. These efforts have been warmly welcomed by the banking sector, such as the Institute of International Bankers, which represents internationally-headquartered financial institutions from over 35 countries around the world doing business in the United States.
Opportunities and challenges
The Organization of Economic Co-operation and Development (OECD) estimated that the annual SDG funding gap (i.e. unmet financing needs) was $2.5 trillion before the Covid-19 pandemic, which has increased by a further $1 trillion as a result of Covid 19-related spending. As the OECD comments, just 1.1% of the USD 379 trillion in global finance could fill that gap. Thus, the scale of opportunity is vast.
Given the scale of the challenge – but also the fact that the solution is within grasp - we recognize our unique ability to connect US and European investors to the businesses and institutions in our footprint markets in Asia, Middle East and Africa where the most impact can be made in achieving the UN SDGs. We also recognise that this investment needs to be long-term, targeted and financially attractive so that it meets investors’ ESG and commercial objectives. While ESG investment is growing quickly today, there are clouds on the horizon. The war in Ukraine, soaring inflation and a cost of living crisis are – understandably - diverting political attention from 2030 and 2050 carbon commitments and sustainability initiatives. But we cannot allow those concerns distract us from reaching our goals.
A new way forward
We are now entering an era where sustainability talk is more than just buzzwords. The matters surrounding environmental and social issues are metrics that businesses are tracking, and, in some instances, are tied back to growth metrics such as revenue, employee retention, and investment viability. Therefore, businesses must make ESG and sustainable business practices core to every strategic and investment decision. Developments in climate and socially-related disclosures, together with better metrics to measure impact will help build confidence in ESG and sustainable investment. But for ESG and sustainability to become part of the permanent investment lexicon, rather than a short-term trend, investors also need to do well by doing good. Investment opportunities need to be commercially attractive and financially robust, bringing together money, purpose and metrics to provide affordable, clean energy, promote industry, innovation and infrastructure, and build sustainable cities and communities around the world.