VANTAGE POINT GLOBAL
Time for change
With a major focus in recent years on the effects we have on the planet and how our actions impact those in lower socioeconomic spheres, banks and financial service providers have adapted their practices. Most, if not all, banks and financial service providers have adopted more goals that focus on the key areas discussed within this guide, those being, Sustainable finance, Environmental, Social and Governance.
Firstly, these terms need to be understood in how they are similar, different, and how and when they overlap and interact with each other.
“The philosophical point is that our happiness and wellbeing is not based on incomes rising. This is not just the wisdom of sages but of ordinary people. Prosperity is more social and psychological: it’s about identification, affiliation, participation in society and a sense of purpose.”
Sustainability And ESG
Sustainable finance refers to taking environmental, social and governance factors into account when exploring new investments. The aim is to have more long-term investments that are not only profitable but also sustainable.
Environmental involves business practices that have a focus on the impact to the environment. These impacts can be focused broadly or more specifically on areas such as, greenhouse gas emissions, wildlife/biodiversity preservation, renewable energy, and energy efficiency.
Social demonstrates the company’s practices in relation to both internal and external stakeholders. These practices range from their charitable actions within the local community (donations or volunteering), employee rights and salaries and customer satisfaction.
Governance is how a firm is managed. Management of a firm must be accurate and transparent on the accounting side while showing integrity and diversity on selecting leadership. Other issues that arise from this area include the gender pay gap as well as eliminating discrimination on gender, age, sexual orientation, and disabilities in hiring staff.
Change has arrived…
As highlighted by the adjacent graph, ESG has made a rapid rise to the forefront of the collective mind of the business world. This is undoubtably a step forward as these issues should be in the minds of every CEO out there, not just in the financial industry.
COP 27 ran between November 6-20th 2022 in Sharm El-Sheikh and saw some historic agreements reached. The first being the compensation of developing countries which have been affected most by climate change whilst having very little carbon footprint. Secondly the conference called on financial institutes to reform policies in order to be fit for adequately combating climate change. Finally, there was a doubling down after the failure to commit $100bn to poorer countries for climate funding by 2022 (OECD analysis concluded that the figure is at around $83bn at the time of writing) as agreed in COP 26 in Glasgow. The agreement at COP 27 urged developed countries to not only meet but exceed the previous goal, something that was received well by all involved.
The difficulty arises when the term ESG becomes an umbrella term for any approach that aims to improve a social or environmental situation. It’s not a good position to be in as although the aim may broadly be the same the methods, and their drawbacks, can be vastly different.
Many observers of this space say that the increasingly catch-all inexact term that ESG is becoming allows for companies to greenwash their products. Greenwashing is misleading or even completely falsifying information about the environmental impact of a company’s business practices. Coca-Cola is a prime example. In 2019 they unveiled a bottle made from recovered plastic from the ocean. Now yes, of course this is a great step as other companies will start to follow suit, but they conveniently leave out the amount of damage their old bottles have already done. Making this less of a heroic endeavor and more of a correction to previous massive mistakes. Mistakes they aren’t learning from it seems as #breakfreefromplastic’s brand audit named Coca-Cola as the world’s biggest plastic polluter consecutively since 2019.
Extinction burst sounds much more dramatic than it is. It’s a term used in psychology referring to the short-term increase (in frequency or intensity) in an unwanted behaviour before it is eventually made extinct. Simply put, it gets a bit worse before it can get better. Below are some examples of actions by leading banks in the UK as well as external factors that on the surface seem to harm the push towards ESG but do offer hope in the long term.
In May 2022, Barclays ran an advert on their twitter page highlighting their plans to facilitate £100bn of green financing by 2030 in order to help the transition to a low carbon economy. This year’s banking on climate chaos report highlights Barclays as the top financier of fossil fuels in Europe and the 7th highest in the world with roughly $166.7bn provided to fossil fuel companies between 2016 and 2021. The measurement is taken from 2016 as that is the first year after the Paris agreement on climate change.
In October 2022, the Advertising Standards Authority (ASA) banned a series of HSBC’s advertisements that highlighted their $1tn climate-friendly investments. The ads were deemed misleading as they failed to recognise the banks own contributions through loans and financing of projects that were linked to the release of 65.3m tonnes of CO2. The ruling came mere months after HSBC suspended Stuart Kirk the then senior banker in charge of responsible investing for describing climate change warnings as “unsubstantiated” & “shrill”
The tragic ongoing war between Russia and Ukraine has only exacerbated some issues that surround the ESG sphere. Firstly, defence companies, who for years were avoided by banks and investors, now have an argument for ESG friendly. Sweden’s SEB only last year were very vocal in opposition on any company having more than 5% of their revenue come from defence companies have u-turned and as of April six SEB funds were allowed to invest in the defence sector. This is most likely due to the view that armament due to an aggressive neighbour is deemed as a socially friendly investment (to the society that is dealing with the aggressor). Secondly is the price of oil due to concerns over Russia’s supply. This has proven to be a highly lucrative investment. This can however be seen as a positive in the long run as the world now sees that we cannot rely on other countries for energy. Hopefully this pushes the development of more sustainable energy sources and the technology that goes into them.
What firms have to do?
1. Sustainable Finance Disclosure Regulation
The European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10th, 2021 and focuses on ensuring banks and financial institutes fully disclose their commitment on sustainability. SFDR is part of a wide push by the EU to commit €1 trillion into green investments by 2030 while creating more consistency in the climate-related information provided by market participants and offering help to businesses genuinely pushing toward sustainability to give them a competitive edge.
Although the UK is no longer part of the EU firms in the UK are still subject to the SFDR due to their cross-border EU business should they have any.
2. FCA’s ESG data and ratings provider code of conduct
On the 22nd of November 2022 the FCA announced the formation of a group responsible for developing code of conduct for ESG data and ratings providers. The code of conduct will consider developments in jurisdictions such as the EU and Japan in aim to encourage the development of consistent global standards. The FCA, Bank of England and other relevant financial regulators and government departments will sit as active observers of this group while M&G, Moody’s, London Stock Exchange Group, Slaughter and May as well as stakeholders, ESG data and rating providers and rated entities will co-chair the group. The group aims to convene for the first time by the end of 2022.
What can firms do?
Doing things as simple as reducing waste and materials used in processes, to switching to more efficient energy and even switching to LED lights can not only be more sustainable but can also reduce costs.
2. Green financial products
Financial products can also be used in a more sustainable way:
Sustainable investment funds – Investments that put money towards projects in line with ethical values. Investing in companies that innovate in areas of energy efficiency and social conditions.
Green and social bonds – Debt instruments issued by firms to finance their sustainable projects.
Social venture capital – Investment in firms who aim to create solutions to social and environmental issues. Balancing returns and sustainability.
Green loans – Loans for activities that help the environment, like purchasing efficient appliances, low- emissions vehicles among other eco-friendly items compared to ones already being used by the firm.
Why move towards Sustainable finance
Besides the potential to lower costs, moving towards sustainable finance has many other benefits. Using sustainable finance can improve a firm’s reputation as it shows their transparent commitment to improving the world overall. Many people looking for employment in today’s age want to make sure they work for a responsible company who don’t skimp on their sustainability in pursuit of profits, moving toward sustainable finance will show potential employees that they can trust the firm in this regard.
Customers also look for sustainably responsible companies when looking for goods and services so a move to sustainable finance can attract new customers. Finally, larger firms are looking to improve their sustainability and therefore look to invest in firms with ESG factors high on their list in their business practices. The PwC survey below shows how big of an impact ESG has on both consumers and employees.
ESG focused Career Prospects
1. ESG analyst:
Well-known associations such as the United Nations and the Bank of England are always trying to find ESG pros to assist them track the worldwide Net-Zero move. The “analyst” work may incorporate an entry-level research role. NGOs and governments are too potential managers.
2. ESG data scientist:
As an analyst or consultant, climate change and other sustainability components will require precise data in order to value investment opportunities and survey their risk. From climate specialists to social researchers, ESG-conscious quants are sought to create models that evaluate profitability and risk.
3. ESG portfolio manager:
Asset management firms are enlisting ESG-specialist PMs to assist governments and enterprises reach their Net-Zero transitions. More than blocking non-ESG backers, PMs are looking for engagement to incentivize greener or socially mindful policies. ESG PMs may also specialise in selecting the finest sustainable ventures to contribute in, or in negotiating social targets with governments.
4. Chief ESG officer:
From consultancy and accountancy firms all the way to charities, most companies will require pioneers to revolutionise their ESG endeavors – or chance losing clients or ESG opportunities. From administrative improvements to data analysis, tax benefits and climate change hazard scenario research, the ESG pioneers will set the sustainable economical strategy of a firm.