Pathway to COP26: Financial service organisations are vital to unlocking the green economy
The public are demanding greater governmental and industry action
As 2020 began it looked as though public opinion globally was moving towards a recognition of the urgency of action on climate change. We had record levels of concern and global agreement on the problem (if not the solution) in our 2020 Ipsos Global Trends Survey. 1 Since then the COVID-19 crisis has seen spontaneous concern about climate drop like a stone, as public attention shifts to immediate problems, but climate change remains a priority for most when people are asked to reflect on the post-pandemic world.
Ipsos research for Earth Day 2020 showed that two-thirds of citizens around the world agree that the climate emergency is as serious a crisis as Coronavirus, and the public agree that if their governments do not act now to combat climate change, they will be failing their citizens: this commitment has not been eroded by the current COVID-19 crisis. If forced to choose between the environment and the economy in a rebuild, the public are split – but 65% support governments prioritising a green rebuild as part of the solution to both the impending recession, but also climate change itself.2 3
While financial providers realise they have agency to encourage sustainable behaviour
In financial services, direct-to-customer organisations and intermediaries are recognising that they need to implement genuine environmental change policies if they are to remain competitive. The Brunel Pension Partnership, which manages many council pensions in the South West as well as the Environment Agency, has been particularly vocal and recently gave notice that it will sack investment managers who do not act on the climate crisis. The pension fund will demand that companies in which it invests take steps to ensure their emissions support achieving the targets agreed at the 2015 Paris climate summit. Companies that don’t do enough will see their board appointments challenged and stakes withdrawn.
The prospect of asset owners such as pension funds withdrawing their lucrative business has prompted some big investors to review their climate policies. BlackRock, the world’s largest investment manager with £5.3tn in assets under management, earlier this year announced it would divest from companies producing thermal coal and increasingly offer fossil fuel-free products.
Similarly, increased activism from consumer bodies such as Client Earth and NEST, the UK’s largest pension fund with 8.5 million members, has called on banks to present a ‘clear and robust plan’ to phase out financing some fossil fuel companies.4 This has already had an impact with planned coal-fired power stations’ new mines being cancelled.
This focus on sustainability has also led to some new innovative products such as ‘positive incentive loans’, whereby the margin a company pays on credit goes up or down depending on whether sustainability targets are met. Earlier this year, the carrier Jet Blue signed a $550m sustainability-linked loan with French bank BNP Paribas, giving it a financial incentive to deliver on its public commitment to reduce its carbon footprint.
Positive incentive loans have become very popular with banks, the market grew by 250% in 2019, as it allows them to reduce the amount of climate risk assets on their balance sheet.5 “We know [carbon-intensive companies] have to change business models over the next 30 years,” said Hervé Duteil, Chief Sustainability Officer at BNP Paribas. “But you have to accompany them on their transition [and] not turn off the key.”6
Going forward we can expect to see investment into sustainable funds to continue to increase, having attracted $20.6bn of new investment in 2019, four times the 2018 figure, 7 and perhaps more importantly we can also assume greater clarity around sustainable behaviour.
Transparency, strategy and action are required to avoid greenwashing associations
After focusing on oil and gas companies for many years, campaigners concerned about global warming are increasingly turning their attention to the world of finance. With the financial services industry being examined more closely, providers have responded with many agreeing to disclose the carbon emissions of their loans and investments, while 1,000 organisations have signed up to the Task Force on Climate-Related Financial Disclosures (TCFD), an initiative led by Mark Carney, UN Special Envoy for Climate Action and Finance.
This TCFD commitment is set to become mandatory for UK asset owners and public interest entities, including private equity firms. Along with greater audit scrutiny of CEOs comments in annual reports, this will be a significant step forward, as it will deliver a transparent and comparable measure of a company’s sustainability commitments.
We can expect to see similar steps being taken in other markets outside of the UK, most notably in the European Union, and for sustainability’s positioning to move from the periphery to front and centre. Increasingly, businesses are evaluated on (non-financial) Environmental, Social and Governance (ESG) metrics, alongside more traditional financial metrics. BlackRock CEO Larry Fink’s recent letter to investors claims that: “Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk.”8
In 2019, the US Business Roundtable (BRT) dropped its commitment to ‘shareholder primacy’ in favour of ‘shared value’; meaning businesses must focus on creating value for all stakeholders, including customers, employees, supply chains, governments, civil society – and the planet – as well as shareholders. Organisations are increasingly aware that consumers expect them to lead on important issues such as climate and that a good reputation has positive financial outcomes. The recent Reputation Council report from Ipsos illustrates this, with more than half of members (57%) saying that business leaders are now overtaking politicians as a force for progressive change in the world. 9 Quite a change from the ‘greed is good’ mantra that surrounded Wall Street and other financial centres in the 1980s and beyond.
Financial providers can show the public how they can influence sustainable industry action
Engaged retail investors and those working in the financial services industry talk about little else other than environmental, social and governance investing (ESG). But for a majority of the public, ESG remains an unknown acronym and yet another jargon term which deters them from investing.
Make My Money Matter, a new campaign led by Richard Curtis of Comic Relief fame, is trying to change this and demonstrate the merits of ESG investing to a broader audience. Its objective is simple but challenging – to get mainstream savers to question where their money is invested. The Ipsos Financial Research Survey shows that this is no easy task, with just over a third (35.6%) of the population not knowing who their pension provider is, let alone whether it is invested sustainably or not. 10
Furthermore, ESG funds are becoming a more attractive place in a disrupted world; representing lower levels of risk and often greater returns. According to Morningstar, twothirds of sustainable funds beat the average performer in their category in 2019. “Last year, sustainable funds performed particularly well on average relative to peers because they tend to invest in companies with a strong ESG focus, which tend to be lower-volatility and higher-quality companies that hold up better during market downturns,” said Hortense Bioy, Director of Passive Strategies and Sustainability Research for Europe at Morningstar. 11
Those who seize the opportunity will be rewarded
With climate concern at the top of both the consumer and political agenda, there appears to be little alternative but for financial services to transition from being a significant contributor to the sustainability problem to part of the solution. Regulatory changes mean that organisations’ sustainability policies will very soon be both measurable and visible to all stakeholders. With the public on the cusp of realising they have agency, through their financial holdings, to drive the sustainability changes they would like to see, financial providers must act now to be viewed as authentic in their positioning.
7 https://www.cnbc.com/2020/01/14/esg-funds-see-record-inflows-in2019.html#:~:text=Sustainable%20funds%2C%20which%20invest%20based,which%20held%2 0the%20previous%20record
10 Ipsos MORI Financial Research Survey (FRS) 6 months ending April 2020, 12,498 adults interviewed