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Positive Impact Investing: A New Paradigm for Future Oriented Leadership and Innovative Corporate Culture Kapitel lesen Erstes Kapitel lesen

2018 | OriginalPaper | Buchkapitel

Understanding Sustainable Finance

verfasst von : Olivier Jaeggi, Gabriel Webber Ziero, John Tobin-de la Puente, Julian Fritz Kölbel

Erschienen in: Positive Impact Investing

Verlag: Springer International Publishing

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Abstract

What is sustainable finance? Although sustainability experts can be proud of their achievements, ultimately the world is not on a sustainable development path. There are at least three reasons why this should be of concern for financial institutions: firstly, they potentially face significant risk. Secondly, and as importantly, they are still linked with many of the activities that are at the root of the challenges to sustainability. Both banks and insurers provide essential services that support and sometimes enable such activities—which then in turn lead to risks for those financial institutions. Thirdly, there is a significant revenue opportunity to address.
This paper makes the case that designing more effective sustainable finance strategies requires a better understanding of what sustainable finance actually means. The purpose of this paper is therefore to provide a comprehensive overview of the different components of sustainable finance. In particular, it aims to provide frameworks that help the reader to understand better what sustainable finance can be. It also proposes tactics to work towards more effective strategies for financial institutions, and proposes questions that aim to advance academic research in the field of sustainable finance.

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Vorheriges Kapitel Growing Social Impact Finance: Implications for the Public Sector
Nächstes Kapitel Could a 100% Portfolio Beat the Market?
Fußnoten
1
In 1991, the United Nations Environment Programme Finance Initiative (UNEP FI) was set up by the UN and a group of financial institutions. They launched the UNEP Statement by Banks on the Environment and Sustainable Development in 1992. This was last updated in 2011 as the UNEP Statement of Commitment by Financial Institutions on Sustainable Development. The UNEP FI contributed to the launch of the Principles for Responsible Investment (PRI) in 2006, and developed the Principles for Sustainable Insurance (PSI), which were introduced in 2012.
 
2
The International Finance Corporation (IFC) developed a set of Environmental and Social Performance Standards, which eventually led to the launch of the Equator Principles, a voluntary environmental and social risk management framework for project-related transactions. The Equator Principles have been adopted by many financial institutions.
 
3
See footnote 16.
 
4
In 2010, a group of banks created the Banking Environment Initiative (BEI), which is convened by the University of Cambridge Institute for Sustainability Leadership (CISL).
 
5
For example, see Haigh (2012).
 
6
See Unruh et al. (2016); the report is part of an MIT Sloan Management Review research initiative in collaboration with and sponsored by The Boston Consulting Group.
 
7
See McKinsey (2016).
 
8
For example, see KPMG (2015).
 
9
For example, see WWF (2015).
 
10
For example, see WWF and BankTrack (2006), which also discusses the Collevecchio Declaration of 2003, which “remains the benchmark by which civil society will measure the banking sector’s commitment to sustainable development.”
 
11
To support students in exploring sustainable finance, the footnotes contain suggestions for further reading.
 
12
This paragraph is derived from the editorial of the fourth issue of the ECOFACT Quarterly (ECOFACT 2013).
 
13
For example, see Busch et al. (2015): when discussing sustainable investment, the authors ask “to what extent do financial markets foster and facilitate more sustainable business practices?” They conclude that “their current role is rather modest,” and that sustainable investment “does not actually spur sustainable development.”
 
14
See CISL and UNEP FI (2014).
 
15
The Basel III framework is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision, and risk management of the banking sector. The Basel Committee is the leading standard-setter for the banking sector. See http://​www.​bis.​org/​bcbs/​
 
16
The PRA report was a factor in the initiation of the Green Finance Study Group (GFSG) by the G20, and the Task Force on Climate-Related Financial Disclosures (TCFD) by the Financial Stability Board (FSB). Both the GFSG and the TCFD are now gaining significant attention within the financial sector. For more information on how financial market regulators have started to address sustainability challenges see Alexander (2016).
 
17
Speech by Mark Carney given on 29 September 2015: “Breaking the Tragedy of the Horizon—Climate Change and Financial Stability”. Emphasis added by the authors. See http://​www.​bankofengland.​co.​uk/​publications/​Pages/​speeches/​2015/​844.​aspx
 
18
For insights into what happens in the early phases of the development of a new market, see Geroski (2003).
 
19
A notable exception in the world of practitioners is the UNEP Inquiry into the Design of a Sustainable Financial System (UNEP Inquiry), which has researched best practices, financial market policy, and regulatory innovations that would support the development of a “green financial system”. One of the recent reports, The Financial System We Need, “describes a ‘quiet revolution’ as sustainability factors are incorporated into the rules that govern the financial system. (…) In moving from design to delivery, the Inquiry will support the scale-up, broadening, and exchange of policy options, advance new critical research areas, and continue its national, regional, and international engagements to embed sustainability into financial architecture.” See http://​web.​unep.​org/​inquiry
 
20
[Forthcoming publication].
 
21
For example, see McNeely (1997), who discusses mechanisms for sustainable finance for protected areas.
 
22
There are other colloquial uses of the term “sustainable”, for example in the context of “environmentally friendly” or “ethically produced” products. We focus on the two usages primarily found in academic papers.
 
25
For example, see Costanza and Patten (1995).
 
26
See Meadows et al. (1972). The authors conclude that, “if the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next 100 years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.” The authors state that the sooner humanity begins to alter these growth trends, the more likely it will be possible “to establish a condition of ecological and economic stability that is sustainable far into the future.”
 
27
See Gómez-Baggethun and Naredo (2015) for a discussion of the evolution of sustainability policy since the publication of “Limits to Growth”, and how the Brundtland report “followed a new guiding notion for global environmental governance.” See Hopwood et al. (2005) for a classification and mapping of trends in thinking on sustainable development. The authors believe that sustainable development “provides a useful framework in which to debate the choices for humanity.”
 
28
See WCED (1987). The report uses the definition in three different ways. We have used the definition from the beginning of the second chapter.
 
29
For example, see Lant et al. (2008), who describe ecosystem services as supporting functions (e.g. soil formation), regulating functions (e.g. water purification, pest regulation), some cultural functions (e.g. aesthetic enrichment), and provisioning functions (e.g. capture fisheries, fuel wood).
 
30
For example, see Howarth (1997).
 
31
For example, the UN Conference on Environment and Development in Rio de Janeiro in 1992, the Johannesburg Summit on Sustainable Development in 2002, the UN Conference on Sustainable Development (Rio+20) in Rio de Janeiro in 2012, and the UN Sustainable Development Summit at UN headquarters in 2015, when the Sustainable Development Goals where formally adopted.
 
32
That is why this article aims to work towards strategies that allow financial institutions to address sustainability challenges more effectively. One might criticize that the focus on sustainability challenges is too narrow and depicts a negative understanding of what sustainability might mean. Nevertheless, this approach is practical and probably sufficient owing to the following assumption: if humanity manages to respond appropriately to current and future sustainability challenges, it will most likely follow a sustainable development pathway automatically.
 
33
We thank Dr. Benjamin Wilding, Managing Director Finance and Teaching at the Department of Banking and Finance, University of Zurich, for reviewing section “Understanding “Finance””.
 
34
The forthcoming publication briefly mentioned above will provide a quantitative analysis of this observation.
 
35
Sustainable investment strategies focus not only on securities issued by companies, but also on those issued by other organizations, such as municipalities and government entities. In addition, such strategies span multiple asset classes that range from sustainable real estate to microfinance.
 
36
This is the case for both banks and insurers. This statement is derived from one made in a report published by the CRO Forum, a risk management think-tank that primarily represents European multinational insurance companies (CRO Forum 2010).
 
37
This section focuses on business with corporate clients, as it is here that financial institutions are most directly linked with those companies that are at the root of sustainability challenges. Conversely, corporate clients may also have the means to address sustainability challenges.
 
38
For banking, the lines of business are derived from the example mapping of business lines that was provided by the Basel Committee on Banking Supervision in a consultative document in 2001 (BCBS 2001). For insurance, the lines of business are derived from the CRO Forum publication mentioned above (CRO Forum 2010).
 
39
An exception is the work of the Banking Environment Initiative (BEI) on a sustainable shipment letter of credit, which aims to create solutions to integrate “sustainability standards associated with individual commodities […] into Letters of Credit”; see CPSL (2014).
 
40
For an introduction to the financial products and services used in international trade see (Platt, n.d.), for example.
 
41
This paragraph is derived from Jaeggi (2013).
 
42
See section “A Second Understanding Emerges”.
 
43
For example, see Perelman (1995) or Diamond (2006).
 
44
For example, Naifar (2014) who uses “sustainable” in its traditional meaning when discussing approaches towards “a more sustainable financial system”, or Anderson (2015) who explores the role of banks in society and the economy, without addressing the sustainability challenges discussed here.
 
45
For example, see Jaeggi and Webber Ziero (2016). Although the article discusses the regulatory expectations that investors face, the same expectations are valid in any other line of business where there are direct relationships between financial institutions and clients.
 
46
Financial institutions also purchase goods from companies. Although suppliers are often covered by a financial institution’s sustainability management system, supplier relationships are normally not an element of sustainable finance because (a) financial institutions have supplier relationships that are comparable to those of other industries and, (b) the relationships are not characterized by financial products or services.
 
47
This is also true of financial institutions, but the focus of sustainable finance is on the positive and negative impacts to which financial institutions might be linked through their own investments and the financial products and services they provide to clients.
 
48
Jaeggi et al. (2015) focus on investment banks. For the purposes of this article, the concepts and wording have been adapted to include other lines of business. Some of the following paragraphs in this section are also derived from this article.
 
49
When working with corporate clients in banking and insurance, in contrast to asset management and investment advisory, governance issues have traditionally been assessed in compliance (e.g. money laundering), in risk management (e.g. corporate governance), or in political risk teams (e.g. crisis potential). Consequently, at least in banking, the term E&S is still more common (as in “environmental and social risk management”).
 
50
Although Jaeggi et al. (2015) focus on investment banking activities, the same drivers affect the risk landscape of other lines of business in the financial sector. For information on legal pressure points see, for example, Berkey (2016).
 
51
See OECD/IEA (2015).
 
52
See Credit Suisse et al. (2014).
 
53
See World Economic Forum (2016).
 
54
See UNCTAD (2014).
 
55
See International Finance Corporation (2011).
 
56
Credit Suisse, for example, has been working with several partners to shape a market that makes it easier to invest in nature conservation, see Credit Suisse et al. (2014) and Credit Suisse and McKinsey (2016). Roughly a decade ago, Credit Suisse had a similar role as market innovator when it helped to create the opportunity for investors to access microfinance markets.
 
57
Engagement is also in line with current approaches to addressing human rights risks. One change in paradigm that the UN Guiding Principles on Business and Human Rights brought along is that a company should not just walk away from a business partner when it observes that it is linked to human rights violations. Instead, the company is expected to first try to help remedy the situation and, if necessary, to increase its leverage, by joining forces with peers and regulators, for example. See Human Rights Council (2011) and Jaeggi (2014).
 
58
Internet resources: All the internet resources within this paper were accessed in September 2016.
 
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Metadaten
Titel
Understanding Sustainable Finance
verfasst von
Olivier Jaeggi
Gabriel Webber Ziero
John Tobin-de la Puente
Julian Fritz Kölbel
Copyright-Jahr
2018
Buch
Positive Impact Investing

Print ISBN: 978-3-319-10117-0

Electronic ISBN: 978-3-319-10118-7

Copyright-Jahr: 2018

DOI
https://doi.org/10.1007/978-3-319-10118-7_3

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