As investments into environmental, social and governance (ESG) funds continue to grow (current estimates suggest more than $330bn in assets globally), it is still surprising to some that financial institutions are key to achieving a more equitable and sustainable future.
Daniel Flatt, who launched Capital Monitor in 2021, disagrees that they make unlikely bedfellows.
“Many wouldn’t associate finance with the environment, but the sector is a crucial player in this story.
“Estimates vary, but experts predict we will need roughly $7trn of investment a year in climate-related technology – that works out at around $1,000 per person – for another 30 years just to get close to solving the problem of climate change.
“The public sector is not able to absorb all this – it can neither afford to or be able to select the best opportunities. This is where the private sector comes in. Banks and investors are designed to take risks and facilitate the flow of capital. Many may have bad reputations (and rightly so), but we can’t achieve Net Zero without them.”
To many cynics, institutions designed to continue the endless cycle of money across the globe and ultimately make huge profits are not best placed to ensure ESG standards are maintained, but ultimately newer generations are seeking out exactly these qualities.
About one-third of millennials often or exclusively use investments taking ESG factors into account, compared with 19% of Gen Z, 16% of Gen X and 2% of baby boomers, according to a CNBC Make It in March poll last March celebrating millennials turning 40.
“Younger individuals are more receptive and open to [ESG matters]. I would say this is especially the case with elements of the E – environment – and the S – social,” continues Daniel.
“Put crudely, the older generation may feel they have more to lose by accepting we have to live differently in order to a) protect our environment and b) to acknowledge that social norms are shifting very rapidly. It may be hard to acknowledge that all the work and effort gone into getting a big house, owning two cars, taking nice holidays abroad could be a thing of the past.
“The younger generation may see themselves as having to inherit an Earth in poor health – they have more to lose from inaction. Equally, their social values may be very different to that of their parents. What does success look like to a 21-year-old university graduate, for example? Helping save the planet?”
Outside of environment concerns, ESG considerations within businesses tackle complex issues in society, from discrimination, human rights and community support to corruption, illegality and full disclosure. This is clearly a tough ask for financial institutions to get 100% right.
According to Daniel, “Each financial institution has to make a call on what values it considers important enough to prioritise. A board can’t credibly claim to want to solve all social and environmental ills – neither should they be expected to. It’s too complicated.
“To that end, I would suggest the banks and investment houses that are able to make a clear stand on what they choose to focus on and articulate how they intend to tackle it – using clear language and simple to understand metrics and targets – are on their way to being able to spot and comment on inequalities they are concerned with.
“Given the huge pressure on large companies to be seen to care about all societal problems, there’s a big risk of social washing – whereby the talk far outweighs the walk. This could prove a very big challenge for all of us.”
Of course, it is the protection of our planet where financial businesses can make a real – and necessary – difference.
Although overall UK greenhouse gas emissions are in steady decline, the money needed to drive the top five polluters (transport, energy supply, business, residential and agriculture) comes from this global finance flow.
One just needs to consider how much money has gone into building up a global economy underpinned by carbon-intensive trade and its effect on the environment to realise how much needs to change in a relatively short amount of time.
“The Earth’s temperature has risen by 0.08°C per decade since 1880, and the rate of warming over the past 40 years is more than twice that: 0.18°C per decade since 1981,” states Daniel.
“Based on this, experts believe we simply cannot continue to live the way we are. The International Energy Agency has made clear – no more investment into new oil and gas ventures should be taken up. By anybody.
“Trillions of dollars have been poured into the extraction of oil over the last 150 years. The major western economies have largely benefitted from this glut, while emerging powers such as India and China are still heavily dependent on coal to power their countries. It will take a similar amount of investment, in a far shorter period, to re-address this huge imbalance.
“Governments will be loath to do anything that will stall economic growth.”