Finance Sector Commitment to Sustainability, Climate Targets Gathers Momentum

But further innovation, action needed even as major institutions outline net zero plans.

Speakers at this week’s Sibos 2020 banking conference asserted the strength of the finance sector’s commitment to sustainability against a backdrop of announcements by major banks on net zero emissions targets.

Leading firms are already integrating ESG factors and metrics into key business decisions and product offerings. They have welcoming new regulations on disclosure and classification which will enhance transparency and allow clients to compare outcomes of ESG-based financial products.

But executives speaking at Sibos also acknowledged the need for a faster pace of change, both in terms of the influence of ESG factors on the investment decisions of large asset management groups and the availability of financing options from banks.

Adrian Whelan, Head of Global Regulatory Intelligence at investor services provider Brown Brothers, Harriman, said the “jury is still out” on whether large asset management groups such as BlackRock are now “walking the walk” by fully integrating sustainability considerations into their investment strategies. But he argued that the investment sector is being compelled to embrace sustainability-led models by a combination of forces.

“With its ‘sense of purpose’ letter, BlackRock posed a question about the role of the asset management industry in the world. Can it drive discernible change? Is our place in the world just to accumulate profits for ourselves and our investors, or do we have a broader remit? The answer is obvious. It is not any more a choice or a commercial decision; it is becoming mandatory,” he said speaking in a panel session, titled ‘The triple bottom line as a driver for sustainable business and a better world’.

“For passive investors such as BlackRock, it is harder to screen out non-ESG stocks when you’re tracking specific benchmarks. But overall asset managers do see themselves as change agents. This is underpinned by fund launches driven by investor demand and by regulation, which is driving managers from voluntary to mandatory disclosure.”

The EU’s Green Deal includes taxonomy and disclosure regulations aimed at creating greater transparency and comparability to investors on the sustainability of investment products and companies’ business models. Whelan said Europe’s planned mandatory disclosure regime and the introduction of common definitions and classifications would be “critical” to accelerating the pace of change.

“We won’t get enough of a dataset to compare, contrast and back test different products from different firms until we have a common and harmonised ruleset which drives a common and harmonised data set, so we can truly start comparing apples with apples. Some of the data we need simply doesn’t exist at this point. I’m very bullish on the legislation being a huge driver of growth and increase in trust that sustainability is good business,” said Whelan.

The evolving regulatory infrastructure will also help to counter accusations of greenwashing, said Florence Fontan, Head of Company Engagement at BNP Paribas Securities Services, the French bank’s custodian arm, who said demand for sustainable solutions is strong and growing across the investment community.

“We’re seeing it more from the investors themselves, not just the asset managers, but also the institutional investors, notably pension funds. This pressure from the investor side goes all the way through. Firms such as BNP Paribas have a duty to be credible when we offer sustainable finance,” she said.

Dr Nina Seega, Research Director at Cambridge University’s Institute for Sustainability Leadership, said the pandemic had increased the finance sector’s commitment to and support for sustainability-led business models, in part through the outperformance of ESG-focused indices and investment products.

“Some of the reasons are structural in terms of a lot more inflows to sustainable funds through the crisis, and some of it is because sustainable funds and indices are tilted toward the technology and pharmaceuticals sectors, which are two industries that have been performing very well. But most of it is to do with the criteria that go with good sustainability ratings, e.g. understanding your supply chain, having good disclosure practices and having good board governance. All of those things have contributed to pretty good performance so far through the coronavirus crisis,” she explained.

Asked whether current finance sector activity is sufficient, Seega highlighted a current project at her institute, exploring how banks can increase their support for the transitioning of the economy to net zero emissions. “We see exclusion policies and financing of renewables very much as part of banking as usual. In terms of more pioneering practices, we would like to see more financing for agriculture, which addresses climate and biodiversity, and SMEs, as well as work to transition the client portfolio. There are all sorts of actions that banks can take to move further.”

Earlier this week, Sibos featured a co-presentation by NatWest Group CEO Alison Rose and the group’s recently-appointed independent climate advisor, Lord Stern, highlighting the bank’s plans to make its direct operations climate positive by 2025 and to at least half the climate impact of its financing activity by the end of the decade. The event, held online due to the pandemic, also included a recorded contribution from Jamie Dimon, CEO of JP Morgan, which committed this week to alignment to Paris Climate Agreement targets. The bank said it would establish intermediate emission targets for 2030 for its financing portfolio and plans to begin communicating about its efforts in 2021, focusing on the oil and gas, electric power and automotive manufacturing sectors and setting targets on a sector-by-sector basis.

Today, HSBC announced it would reduce financed emissions from customers to net zero by 2050 or sooner, in line with the Paris Agreement. Europe’s largest bank by market capitalisation said it would prioritise financing and investment activities that support transition to a net zero global economy. To help customers to switch to more sustainable business models, the bank said it would aim to provide US$0.75-1 trillion of finance investment by 2030.

HSBC aims to achieve net zero in its own operations by 2030. The bank said it would use the Paris Agreement Capital Transition Assessment Tool to develop measurable pathways to net zero and make regular disclosures to communicate progress in line with the Taskforce on Climate-Related Financial Disclosures guidelines, encouraging customers to follow suit.

As well as its net zero and transition support commitment, the bank said it would finance next-generation climate solutions. This effort would include the establishment of a dedicated unit and tailored proposition to support CleanTech innovation companies, and target US$100 million of investment in CleanTech via a technology venture debt fund.

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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