How to drive innovation in sustainable finance?
13 October 2021
Few now underestimate the environmental and social challenges facing the planet: from plastic pollution to carbon emissions, food and water scarcity, the task ahead is of unprecedented scale and urgency. The world is mobilizing to meet these challenges.
To make progress on these fronts requires additional financing and critically, projects into which to invest. Finance, therefore, has a crucial role to play in helping drive environmental and social positive impact in line with the United Nation’s Sustainable Development Goals.
The Autorité des marchés financiers (AMF)’s Climate and Sustainable Finance Commission was set up in July 2019 with the goal of bringing together a variety of stakeholders to drive forward the issue of sustainable finance.
The Commission members share best practices and information with a view to developing workable and innovative solutions to address environmental and social challenges.
Finance is the enabler of the economy. It is what makes the economy possible. Sustainable issues are becoming more important every day. The world needs this change: an unsustainable world means the economy doesn’t function properly and if the economy doesn’t function properly, the financial sector has a problem.
The sector is rising to meet the challenge. The largest investment pools across the world – pension funds, sovereign wealth funds and insurance funds - are increasingly adopting sustainable criteria as part of their fiduciary responsibility. At the same time, the world’s largest investment managers have started to integrate social and environmental considerations into their analysis of companies and their capital allocation.
This process has been made far easier by the development of new benchmarks and definitions. The UN Sustainable Development Goals have allowed measurement to become more sophisticated. Impact investing is growing fast, albeit from a small base. The European Parliament formally adopted the EU’s Sustainability Taxonomy Regulation in June last year.
Guarding against greenwashing
This is encouraging progress, but there are still barriers to mobilising international capital to meet sustainability goals. These include, but aren’t limited to, sustaining trust in an era of “greenwashing”; keeping abreast of scientific know-how; and building robust regulation that meets the needs of investors and asset managers.
In addressing these challenges the finance industry must be proactive as well as reactive. They can play a role in shaping effective regulation.
Thierry says: “The Commission was set up to help raise knowledge levels and help the AMF create adequate policy. It sought to create balanced representation between investors, issuers, experts such as academics and think-tanks alongside representatives from civil society. We knew we needed people who would be constructive. Only with each area represented could we provide meaningful advice.”
Private investment company Ardian has been a pioneer in sustainable finance and is a member of the Commission.
We are a shareholder in more than 150 companies and invest in more than 1,600 funds around the world, which in turn invest in thousands of underlying businesses. This gives us considerable reach and we believe we have a major responsibility to shape sustainable finance in order to serve society. This type of collaborative platform is very important.
As Candice sees it, there are three major issues that will shape the future of sustainable finance. The first is impact and impact measurement. There is increasing recognition of the importance of measuring the outcome of ESG efforts and ensure they are having an impact in the real world. The UN and Impact Measurement Project provide strong basis to progress towards this, but there is more work to do. Candice says: “We have heavily invested over the past two years to improve how we measure the contribution of our investments to social and environmental challenges. We have done that by incorporating the UN SDGs framework alongside our own framework. It is an important step that will help us accelerate the transformation in a wide range of companies.”
The second issue is greenwashing. “Sustainability ratings and analysis have to be reliable and trustworthy. If greenwashing takes hold, it could be a major barrier to the development of the industry,” Candice continues.
The third issue is promoting diversity and inclusion. She says: “We should promote more equality of opportunity across the finance industry, but also encourage broader thinking and bring in new ideas.”
Sustainability as the norm
She adds: “Ardian has grown as a leading player in the private investment sector, yet it is still only one part of the global finance industry. To drive the changes needed to build a sustainable and inclusive economy, we have to engage investors at a large scale. This is why it is so critical to work together. The aim of the Commission is to support and accelerate this dynamic by bringing proposals that are ambitious and at the same time pragmatic.”
“There is still a lot of confusion and a lot of questions. To our mind, it is about understanding the contribution you can make through sustainable finance, building a common language and common tools to support its development.”
How will the Commission define success? Thierry says: ”Success is to have regulation that makes a difference and is workable. We want to ensure that sustainability means something. Ultimately, we want to ensure that sustainability becomes the normal mode of operation for financial institutions.”
These are ambitious goals, but the sector has achieved a lot in a short period of time and there is now real momentum behind it.