The Difficult Shift from Commitment to Action

Capital markets can help chart the sustainable path to a sustainable future?

Historians will have a difficult time defining 2021. The world continued to grapple with COVID-19’s unpredictable path, supply chains were hit by disruptions and shortages, and inflation accelerated significantly. Despite these challenges, digital transformation continued to advance as we witnessed electric vehicle manufacturers, crypto exchanges, and more fintech companies come of age and enter the public markets. Equities markets remained strong: inflows reached $1.1 trillion over the last twelve months, surpassing combined inflows of the preceding 19 years. Market participation was equally robust and reached new heights among institutional and retail investors. ?

In 2021, markets got bigger, more digital, and more volatile.

At the same time, we continued to see ESG rise on the boardroom agenda and a significant acceleration of money flow into ESG-mandated funds. In 2021, global ESG issuance reached $1 trillion for the first time on record, up from $480 billion in 2020. ESG-related topics were discussed during nearly 30% of S&P 500 corporate earnings calls. And regulators in the U.S. and elsewhere increased their focus on standardizing ESG reporting frameworks.

In 2022, we should expect to see the approach to sustainability continue to mature, as we move from setting ambitions to demonstrating meaningful progress against those goals.

As we define the journey to a decarbonized global economy, capital markets can help chart that path by playing a unifying role in accelerating behavioral change, facilitating investment, and leveling the playing field for transparency across all market participants. But the market is only as impactful as the rules, policies, and mindset that underpin it. When it comes to tackling complex, systemic challenges such as social impact and climate change, embracing pragmatism alongside idealism will give us a greater chance of success in scaling more comprehensive solutions.

Within the financial industry, each constituent – banks, brokers, markets, and investors – has a role to play in creating a more sustainable society. In addition to the financial industry’s critical role in driving and facilitating a pathway to net zero emissions, another shared mission across the industry is preventing financial crime within our networks. Integrity is foundational to maintaining trust in the global economy. Yet, while major elements of our financial systems and markets have embarked on digital transformations, crime-fighting remains largely analog in its approach due to regulatory impediments to innovation.

Maturing ESG: From Commitments to Outcomes

Since the start of COVID-19, much of the corporate debate has rightly focused on governance and social impact. Many companies have recognized and embraced the role that they play in creating a more equal and just society. While that focus should, and will, continue in 2022, there is also a growing consensus around the very real risks associated with climate change and the need for concerted action. More than 130 countries have made net zero commitments, at least one fifth of the world’s largest companies have done the same, and climate-focused ESG funds now make up 10 percent of worldwide fund assets. As the entire ESG paradigm matures, investor scrutiny is likely to increase, putting a premium on action over advocacy.

While the ambitions are there, the technologies and the global energy infrastructure required to achieve those ambitions are not. The IEA estimates that nearly 50 percent of the technologies needed to reach net zero by 2050 are still under development. Our next frontier, therefore, is to bring together the technology, financing, and regulatory frameworks to fully deliver on these goals.

The path to net-zero will not be linear. As we transition toward a zero-carbon economy, we need to balance idealism with pragmatism. That means embracing a journey to net zero that brings everyone—including traditional energy companies—along with us. It includes bringing together public and private capital to invest in projects that will help us reduce our footprint in the near-term as well as support the breakthrough innovations that will carry us into the future. In addition to new companies and infrastructure projects that are entirely focused on carbon reduction, today’s forward-focused energy companies will also need access to capital to fund significant investments to manage their own transitions. Our energy future will be defined through the capital markets, and more specifically by the investor community’s appetite and ability to finance the energy transition successfully.?

However, investors today are navigating a growing diversity of transparency standards and financial frameworks related to climate change and other ESG factors. The business community is also challenged by the chaotic world of frameworks and ratings firms, with regulators in different countries at different stages of introducing standards. Standardization of climate- and ESG-related disclosure frameworks at a global level will be critical to driving greater alignment and unified action across the global corporate and investor community. We can manage what we can measure. So, it is incumbent upon the regulatory community, in collaboration with all market participants, to land on a common, pragmatic climate-change framework that companies can successfully measure, and investors can easily track over time.?

Fighting Financial Crime is a Sustainability Challenge

If we zoom out to the broader role of corporates in serving communities and consumers, one of the biggest challenges the financial industry faces is combatting financial crime within their networks. Financial crime challenges the sustainability of our systems and is intrinsically linked to wider social and economic issues from human trafficking to drug and terrorism networks, to elderly abuse and other nefarious behaviors that affect communities.

Advancements in technology have made investing more accessible to more people. Since the beginning of 2020, more than 25 million individual investors opened new brokerage accounts in the U.S. Daily retail trading has increased from under $20 billion prior to the pandemic to around $30 billion since early 2020. For all the benefits this brings, this shift is placing even greater importance on the need to keep the markets free of manipulation and other criminal behavior.?

As our economy has become increasingly digitized, so has financial crime. Despite the industry’s efforts to stop money laundering, fraud, and other forms of financial crime, the United Nations estimates that around $1.6 trillion—or 2.7 percent of global GDP—is laundered by criminals each year. ?

Financial crime is global and crime networks are borderless – necessitating a collaborative approach for those on the frontlines combatting this ever-evolving challenge. If the industry can work together to identify and expose the criminal networks by leveraging the most advanced technology and data science capabilities available, we can make huge strides in making our world a better and safer place.?

This starts with governments recognizing that data-sharing, coupled with advanced algorithms and machine learning, will underpin any successful crime fighting effort. The U.S. learned that lesson in the wake of the 9/11 tragedy and subsequently implemented a law allowing focused, limited data sharing across the banking system for the purpose of rooting out criminal networks and behaviors. The rest of the world needs to catch up.?

To accelerate our fight against crime, governments will need to balance protecting individuals’ privacy while still enabling limited data sharing to achieve critical goals. Here too, balancing idealism with pragmatism can help us achieve a key societal mission. In the context of financial crime, data-sharing enables advanced technology solutions to complement the experts within the banks to catch the criminals.

Criminals are always going to use the most advanced technology available to them to perpetrate their crimes. Since governments around the world have put banks on the frontline of financial-crime law enforcement, it is imperative to arm them with the latest technology and data to catch those criminals. That is a goal everyone can get behind.

Amid the uncertainty that is likely to define much of 2022, we have a unique opportunity to change the course of history as we make meaningful progress toward solving some of society’s most pressing and complex challenges. Markets can play a monumental role in charting a path to a more sustainable future. To maximize our chances of success, it will be critical to foster a mindset that is open to collaboration and free of dogmatism. By balancing idealism and pragmatism – whether it is harnessing the experience and technology of fossil fuel companies or scaling data science to catch criminals – we can create an environment that allows for, and incentivizes, more participants to deliver a wider range of innovation and solutions. If our approach is underpinned by a more expansive mindset, the markets have the potential to finance, reward, and focus on the most expansive solutions to the most pressing problems we face.