Author: Peter-Jan Roose & Jari Ingang
A recent poll and survey uncovered that about 75% of finance professionals have limited to no knowledge of the role finance has in securing the future of this planet. On the other hand, 10% said that the finance function – in their respective companies – is taking the lead towards a more sustainable planet.
Recently, the ECB acknowledged that the financial system should catalyze the journey to realize the EU's target of net-zero greenhouse gas (GHG) emissions by 2050. Policymakers play a crucial role in creating the conditions for a redirection of financial flows towards sustainable economic activities. Besides public institutions, companies and investors must take their responsibility by respectively disclosing and selecting investments on ESG (Environmental, Social, Governance) metrics.
In his 2020 letter to CEOs, BlackRock CEO Larry Fink called out to put “sustainability at the center of the investment approach”. This is a great example of both public and private institutions walking the talk while surfing on the same wave, called sustainable finance.
So, what is sustainable finance?
Sustainable finance is a shift from pure financial return seeking to a more holistic approach in which economic value is combined with social and environmental value. It is about moving beyond the shareholder view and considering the stakeholder and common good perspective when doing business.
Why limit projects to the short-term monetary value, while customers, employees, and society are starting to require more than that?
That seems legit, but there are some concerns!
Firstly, why should your organization integrate sustainable finance principles? Can it even make a material difference?
Estimates by The Economist suggest that 14 to 32% of the world's total emissions are directly controlled by publicly listed companies. However, this does not consider the indirect effect on the employees' mindset, your investors' risk appetite and your customers' behavior. Given the financial system's central role in the economy, a push for greener alternatives will have a ripple effect.
Secondly, how can you assess the difference that you can make?
This is a difficult one! Information and data asymmetry create questionable measurement and reporting, which in the end leads to greater investor risk. Currently an industry-, investor- and company-led harmonization is taking place. In July of this year, Morgan Stanley announced that it is joining the Partnership for Carbon Accounting Financials (PCAF). PCAF is a global body with 67 financial institutions which aims to create an aligned method for assessing and disclosing on GHG emissions tied to their loans and investments. Combined they manage about 5,3 trillion USD in assets, proving that harmonization is gaining traction. They aim to deliver a final methodology for financial institutions by this fall.
The Sustainability Accounting Standards Board (SASB) is currently also developing sustainable accounting standards. Just as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have established International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), which are currently used in the financial statements, SASB's stated mission “is to establish industry-specific disclosure standards across ESG topics that facilitate communication between companies and investors about financially material, decision-useful information. Such information should be relevant, reliable and comparable across companies on a global basis.”
So, even if firms and their shareholders can have an impact, provided that it can be measured & communicated properly, are you willing to make a difference?
Not trying to make a difference will mean facing significant transition and liability risks. A shift in mindset is needed to switch from risk to opportunity thinking. The opportunity translates into an improved performance, in parallel with improved sustainability ratings, for lower cost of debt by integrating ESG considerations in risk analysis and for managing the long-term.
Ørsted, the Danish-based power production company, is a great example of a company that seized the opportunity. It made a conscious shift from fossil fuel to renewable energy. This green transformation is recently being driven by green finance instruments and not only avoids stranded assets but aims to engrain society’s need for electricity in a sustainable business model. Earlier this year they were named the most sustainable company in the world and continue to focus on becoming carbon neutral by 2025.
Is your company like the whaling industry, rendered redundant when electricity was invented, or are you ready to make a difference?
How can I take the lead in my organization?
Every change starts with creating awareness. These arguments and examples do just that and indicate that finance can enable and reinforce sustainable development. Therefore, I believe, that the CFO must play a crucial role in turning the company from compliance-oriented to a true sustainable business partner.
By rethinking the CFO’s role and its impact on both the organization and the context in which it operates, the sustainable finance principles can be leveraged to make a significant, measurable, and long-term difference.
What type of finance professional do you want to be?
Let us find out together!
Contact us at Peter-Jan.Roose@brightwolves.eu