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Sustainable investment: Fad or future?
THE Cambridge dictionary defines a fad as "a style, activity, or interest that is very popular for a short period of time". In 1995, the scientist Clifford Stoll wrote Why the web won't be nirvana. He claimed that the Internet was merely a fad and among other things that "no online database will replace your daily newspaper" and the idea that "commerce and business will shift from offices and malls to networks and modems… is baloney".
To his credit, he did admit later how wrong his predictions were.
Today, we can all agree that the Internet is not short-lived nor overhyped. In fact, it is an integral part of private and business lives. The evolution of sustainable investment is at a similar point being on the cusp of moving from niche to mainstream. Sceptics who argued that sustainable investment is on the fringe, or doesn't pay off, or is not feasible, are now starting to see otherwise.
WHY DOES SUSTAINABILITY MATTER?
Sustainability is the intersection of the 3Ps: People, Planet, Profits. This interlinkage means growing the economy by also taking into account the needs of the environment and society. As a society, we are operating out of balance where economic growth has been at the expense of environmental and social costs. Increasingly, there is a realisation that we need to get back into balance. There are plenty of stories about the effects of extreme weather, plastic pollution, too many people without food or basic sanitation, to name a few. An economy cannot thrive without healthy people or planet. The current coronavirus crisis has shown this quite dramatically.
Solving environmental and social problems is no longer the purview of NGOs and governments. Businesses including banks can play an important role. The finance sector plays a very important role in economic growth. It controls the flow of money and can direct capital to companies that understand and manage their sustainability issues well or are developing business models to solve the global challenges that society faces. Banks finance the real economy and have the opportunity to contribute to a more sustainable world.
Where the money goes today determines the future we will live for years to come. The 17 global Sustainable Development Goals define the challenges to solve by 2030 and the funding gap to achieve these goals is estimated to be US$2.5 trillion.
This is a US$2.5 trillion opportunity to invest in companies that are providing solutions. There are supportive conditions to enable mainstreaming sustainable finance.
- Clients want more sustainable products and services. The Global Sustainable Investment Alliance reports that in five markets, sustainable investing has grown 34 per cent in just two years to US$31 trillion by 2018. While sustainable investing is relatively young in Asia, interest is high. A 2019 HSBC survey found that 86 per cent of investors in Asia consider ESG (environmental, social, and governance) as important.
- Investors and rating agencies are increasingly integrating sustainability into their analyses. Through the UN Principles for Responsible Investing (PRI), 19 credit rating agencies have committed to integrate ESG into their ratings.
- Regulators are implementing policies and requirements for sustainable finance. Singapore is positioning itself as a hub for sustainable finance and we can expect more programmes from the Monetary Authority of Singapore to encourage investments towards a sustainable and low carbon economy. We will also see requirements for more sustainability related disclosures.
- Employees want to work for companies that are managing their material issues well and sustainability can be a pillar of the culture and values of an enterprise.
- Society at large expects companies to reduce their impacts and is increasingly aware of the role financial institutions can play towards a sustainable future. Movements such as Fridays for Future and Extinction Rebellion are galvanising people around the world to demand action from political and business leaders.
WHAT CAN BANKS DO?
The topic of sustainability is broad, interrelated, and can be confusing. Given the role of the financial sector and expectations from stakeholders, banks should consider how sustainability adds value to their business. Where are the risks, but also where are the opportunities? This helps define what sustainability means to them.
A common framework to help companies prioritise is a materiality assessment and considers both the perspective of what are the important topics for the company and what are important topics for society at large. Engaging with internal and external stakeholders (eg, employees, shareholders, clients, regulators, experts) is a useful way to bring the different perspectives together.
Topics that are identified as high importance for the company and society then serve as the basis for developing a strategy and guiding the implementation. The materiality assessment should cover both a company's own business activities (where to further improve) as well as its products and services (integrating ESG into investment decisions, offering opportunities to invest in solutions to global sustainability challenges).
A successful sustainability plan also needs to be embedded into the overall business strategy. Without this alignment, it is difficult to realise the value and grasp the opportunities.
So is this a fad? Definitely not. Sustainability and sustainable investment is good business and will only continue to grow. The demand is there, and different stakeholder groups are creating an enabling environment to move the industry in this direction. There are challenges to mainstreaming sustainable investment such as lack of consistent data, standards, or misconceptions which need to be solved, but they are not insurmountable. Just like with the early days of Internet.
In the future, we will not talk about sustainable investing as separate from "regular" investing, but simply investing where sustainability factors are integrated into the decision making and capital flows are directed towards solutions to the global challenges. And let's not forget that investing means expecting not foregoing returns. The future is determined by how we invest today.
- The writer is head of group sustainability, VP Bank