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Commentary

Finance Sector Must Accelerate the Transition

As headwinds intensify, financial institutions need to move together on the path to net zero, according to Triodos Bank CEO Jeroen Rijpkema.

Recently, our efforts to create a future that is prosperous and sustainable for all have met a storm of short-sighted backlash. It is mainly fuelled by populist-motivated politicians in response to the increasing focus on environmental, social issues and good governance (ESG) in business, and the financial sector in particular.

In the US, this reaction has taken off the strongest. There, investing based on ESG factors is becoming increasingly challenging. To date, as many as 18 states have enacted anti-ESG laws, and more than a dozen are considering doing so. This has far-reaching consequences, as we recently saw. Some major US asset managers have withdrawn from Climate Action 100+, a partnership dedicated to climate protection.

Meanwhile, concerns are also growing in Europe that sustainable investors are coming under increased scrutiny as well. These concerns are understandable, given the changes in political sentiment in the recent elections and the fact that ‘green’ initiatives in Europe have come under pressure, such as the recent pesticide legislation.

Existential risk

However, two aspects are often overlooked in this discussion: firstly, Europe is fundamentally different from the United States, and secondly sustainability is not a political issue, but an existential risk, including for the financial sector and investors.

It’s because of this risk that we need decisive action to maintain the transition to a more sustainable financial sector.

The risks of climate change and biodiversity loss are obvious and real, and therefore affect the financial system. The financial sector has a great responsibility in this regard and must act accordingly in the interest of shareholders and all other stakeholders. Managing and reducing these risks and safeguarding ESG principles is therefore not a free political choice, but a prudential requirement in all our interests.

In an important step towards this, legislation has now been introduced in Europe which forms a solid basis for making business and society more sustainable. Take, for example, the Corporate Sustainability Reporting Directive, which forces companies to be transparent about their positive and, more importantly, negative impact from 2025.

Alongside legislation, we also need governing bodies in the financial sector to maintain an important steering role: such as the European Central Bank (ECB), which requires banks to better identify climate-related financial risks.

And, especially in these times of apparent headwinds, we need all providers in the financial sector to make real commitments to accelerating the transition to a more sustainable future.

Close the gap

To achieve this, we call on the financial sector to follow Triodos Bank’s example and support an important initiative to persuade governments to create a fossil fuel non-proliferation treaty. Such a treaty fulfils the commitments made at the last climate conference, COP28, to phase out fossil fuels worldwide.

Such a treaty is the globally missing legal mechanism to close the gap between the net zero ambitions of many companies and countries, and achieving the Paris climate agreements. It creates a level playing field for companies, financial institutions, governments and all other stakeholders worldwide and promotes a fair and just energy transition for all.

Phasing out fossil fuels is a mammoth task; but I believe that we can achieve this. As a global community, we have previously proven that we can indeed make binding agreements that meet environmental challenges. An example of such an agreement between countries is the Montreal Protocol. Thanks to this international treaty from 1987, we no longer use any ozone-depleting substances, and more than 35 years later we can conclude that the ozone layer has demonstrably recovered.

At this crucial moment, when ESG headwinds seem to be intensifying, we must move together on the right path and stay on track. All efforts should be focused on accelerating the phase-out of fossil fuels and the global energy transition.

The financial sector plays an important role in this transition, as set out by the Glasgow Financial Alliance for Net Zero (GFANZ) that is working to develop the tools and methodologies needed to turn financial institutions’ net-zero commitments into action. Signing the call for a fossil fuel non-proliferation treaty is the logical and necessary next step to phase out harmful emissions. We owe it to future generations to pass on a liveable planet.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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