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Evolve and Inspire

Andrea Webster, Financial Systems Lead, World Benchmarking Alliance, explains how sovereign wealth funds can pull the trigger on system level change.

We have reached an inflection point on how climate change is affecting the finance sector. It is undeniably relevant to decision-making. Different parts of the financial system will look at it through a different lens, be it existential risk if you are an insurer, default risk if you are a lender or conversely an opportunity for venture capitalists. Whichever way you cut it, finance cannot carry on business as usual, our financial system has to evolve.

Sophisticated and forward-looking financial institutions have already woken up to this fact. They understand that this is a moment of transformation. By embracing the change as an opportunity, we can create a finance system that works in harmony with society and natural ecosystems on which we all depend. Ultimately everyone needs to win.

So how does change happen? To steal from Ernest Hemingway, ‘gradually, then suddenly’! How money flows globally and to what standards is not always visible. This is explored in the World Benchmarking Alliance’s latest report, ‘Governance & Climate – Triggering a domino effect in finance’. It uses findings from our Financial System Benchmark, which ranks 400 global financial institutions which influence the flow of money against global sustainability standards. Indirectly these institutions significantly contribute to global sustainable development and climate goals.

Catalytic actors

Whilst change is complex, there are catalytic actors in the financial system, investors which can move unimpeded. Sovereign wealth funds (SWFs), whilst often out of view, fall into this category. As asset owners, they are powerful catalysts of change at the top of the financial system hierarchy. They have the size and influence to trigger a domino effect that will accelerate the greening of the finance sector. When it comes to decarbonisation and meeting the goals of the Paris Agreement, they should be trailblazing. They can also direct finance to hard-to-reach areas that are desperate for climate finance.

An assessment of 18 SWFs plus 60 of the largest pension funds – which, combined, account for approximately US$13 trillion – shows there is work to be done on setting the gold standard for others in the financial system to follow.

To lead from the front in this way, they need to evolve and inspire. There are three main ways they can do so.

First, their operations are too opaque. It’s very hard for broader stakeholders to see what they’re doing. More transparency would provide important signalling to other financial actors on product and finance. It would also re-build multi-stakeholder trust, essential to help dampen the fire in polarised opinions.

The challenge is that many SWFs are historically not used to reporting to the same level as regulated industry practitioners, so they will need to resource and upskill these teams. However, this action itself will trigger a demand for transparency across their portfolio and service providers. To be role models for the rest of the financial system, demonstrating their commitment to green investments through visibility on their decision-making and actions, especially in the harder areas to tackle, is important to help trigger widespread change.

Secondly, they need a culture change internally to allow courage and leadership within portfolio teams. We know from our engagement with CEOs and senior leaders across global companies that courage is needed to stop doing ‘business as usual’. Career risk is real in institutionalised decision making, where ‘playing it safe’ is the path of least resistance, and taking risks innovating comes with professional risk. To ensure SWFs walk the talk on their commitments, responsibility on sustainability must sit at the highest level and permeate downwards.

Around the world, positive instances of SWFs driving the momentum on sustainability do exist. Norges Bank Investment Management CEO Nicolai Tangen is a fantastic example of how senior management set the tone from the top. There are also some excellent examples amongst Australian superannuation funds who are leading on how they use their portfolios to help motivate decarbonisation.

The third main way SWFs need to evolve is by recognising their global stakeholders, not just their immediate shareholders, and working in closer collaboration with them. Domestic politics and priorities often come into play, however improving narrative, language and accessibility for all stakeholders will foster understanding and improvement alignment on how portfolios influence locally and globally.

To achieve this, we need neutral environments for institutions, organisations and companies to come together with different stakeholders to discuss issues, priorities and solutions. Ultimately to rebuild trust. This is important for notoriously difficult and complex areas like how to approach fossil fuels. That’s what the World Benchmarking Alliance is all about. We’re here to foster co-operation and constructive dialogue.

The opportunity is now

Both the need and the opportunity is now. Big political negotiations, summits and agreements are undeniably important in helping to accelerate change. French President Emmanuel Macron’s Summit for a New Global Financial Pact in France, this June, is a case in point. But we don’t have to wait for new policy before acting. SWFs need to take the initiative and get going. They must drive a cultural shift – as has famously been said ‘culture eats strategy for breakfast’.

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