Sustainable Finance: Overcoming Challenges and Embracing Collaboration

This interview first appeared in the CeFPro Connect Magazine (Issue 1, October 2024) and reflects the author's remarks for the Sustainable Finance Forum USA. The platform aims to connect industry experts through thought leadership content and timely news content. Center for Financial Professionals (CeFPro) Connect members have unlimited access to CeFPro's unparalleled library of resources, including: research reports; filmed presentations; insights and much more.

The journey toward sustainability is a complex and evolving challenge for businesses across sectors, especially as they aim to align with global climate targets. Alessia Falsarone provides a thought-provoking exploration of the critical role financial institutions, climate tech, and collaboration play in achieving meaningful progress.

• Setting ambitious climate goals is only the beginning; the real challenge lies in implementation and developing credible, practical roadmaps.
• Collaboration between companies, startups, and governments is essential to overcoming the hurdles of transitioning to a sustainable, low-carbon future.
• The rise of climate-focused finance, such as venture capital and impact investing, plays a pivotal role in supporting innovation and sustainable transitions.
• Due diligence in climate tech, especially in AI and data privacy, is increasingly critical as companies partner with innovators to drive change.

In the rapidly evolving world of sustainable finance, the landscape presents both significant challenges and promising opportunities for organizations seeking to achieve their environmental, social, and governance (ESG) goals.

Alessia Falsarone, former Partner and Head of Sustainable Investing, Portfolio Strategy & Risk at a leading global asset manager based in New York, provides an in-depth look into the complex challenges facing companies and industries as they strive to align with a 1.5-degree global warming target and meet their near-term climate objectives.

The Complex Road to Sustainability

"Let me just start by saying that a growing number of companies are publicly acknowledging that these challenges—whether financial, organizational, sector-specific, or regulatory compliance-related—are not just roadblocks but tangible hurdles standing in the way of progress," says Falsarone.

These obstacles are not trivial; they are deeply rooted in the very fabric of industries such as energy, transportation, and heavy manufacturing, where reversing entrenched practices proves difficult.

In the energy sector, for instance, Falsarone points out that "companies are under immense pressure as they transition away from fossil fuels."

The shift requires building new infrastructure, ramping up renewable energy sources, and phasing out outdated, polluting power plants. "But it's not happening fast enough," she notes, citing macroeconomic factors, labor shortages, and steep global competition.

These issues, along with persistent policy barriers favoring fossil fuels, make the transition far more sluggish than anticipated.

For the transportation sector, the challenge is similarly daunting. "Electric vehicles (EVs) still represent a tiny fraction of cars on the road," Falsarone explains, highlighting that less than 8% of new car registrations in the U.S. in the first quarter of 2023 were EVs.

The figure is even smaller—less than 1%—for all registered vehicles across the U.S. "The shift to EVs requires a complete overhaul of manufacturing processes, not to mention persuading consumers to make the switch," says Falsarone.

The inherent complexity of transforming these sectors demonstrates the difficulty of achieving meaningful progress toward climate targets. "It's easy to create climate targets, but actually creating achievable, realistic targets is a complex process," Falsarone asserts.

The Importance of Implementation

While setting ambitious climate goals is crucial, it is only the beginning of the journey. "Setting robust climate targets is a complex process, and even early movers in the space are refining their approaches," Falsarone states.

She emphasizes the growing trend of companies moving toward science-based targets, which aim to align businesses with a 1.5-degree future. As of June 2023, the Science Based Targets initiative had validated the targets of 5,500 companies globally, demonstrating the increasing focus on credible and measurable goals.

However, Falsarone stresses that "the hard work begins with implementation." This phase, where companies must develop credible roadmaps to meet their targets, is where many organizations face the most costly and complex challenges.

"It's not just about setting ambitious targets,” warns Falsarone,”but about building practical strategies and organizational capabilities to deliver them consistently."

She adds, "No company can solve this alone. The complexity is real, and that's why collaboration is emerging as a key plan B." Companies are increasingly working together, sharing best practices, investing in joint solutions, and advocating for stronger climate policies.

Collaboration, alongside building partnerships with startups, researchers, and other key players, is vital to overcoming the multifaceted hurdles of climate action.

Climate Finance and Emerging Solutions

Finance plays a pivotal role in supporting companies through the low-carbon transition, and climate-focused funds are growing at a rapid pace.

"We're seeing a surge in private funds dedicated to climate technology, from venture capital to impact investing and private equity funds," Falsarone explains.

These funds back innovators in advanced renewables, carbon capture technologies, and more, providing the financial lifeblood for the transition to a sustainable future.

Governments are also stepping up. The UK, for example, has committed over ￡20 billion over the next 25 years to carbon capture and storage projects. Falsarone sees this as a positive step, noting that "the first two regional cluster projects could mitigate around 16% of the UK’s CO2 emissions."

However, the road is not without its challenges. "There’s ongoing concern about greenwashing in the climate finance market," Falsarone warns. "The need for clearer standards continues, especially in areas like carbon credit markets, where issues of integrity and additionality are still being addressed."

These markets have faced criticism over concerns about the actual impact of carbon offsets, emphasizing the importance of transparency and robust standards in driving true emissions reductions.

The Role of Due Diligence in Climate Tech

As companies partner with innovators in climate technology, due diligence becomes even more critical. "Climate tech does bring up unique considerations," says Falsarone.

She notes that companies must not only assess current technological capabilities but also understand the potential for scaling these technologies within their organizations and across markets.

Additionally, the complex supply chains often associated with climate tech present another layer of risk. "Given the global nature of many climate technology partnerships, understanding varying regulatory landscapes is crucial," she explains.

This is especially important in hardware-focused innovations, where dependencies on critical materials and suppliers can create vulnerabilities.

Moreover, emerging risks related to artificial intelligence (AI) are coming into play. "The growing use of AI in climate tech brings new regulatory considerations," Falsarone points out, highlighting the EU's AI Act, which emphasizes transparency, risk management, and human oversight for high-risk AI systems.

As AI becomes more prevalent in climate tech, due diligence processes must evolve to incorporate assessments of AI’s ethical and regulatory implications.

Looking ahead, Falsarone anticipates that "data privacy and security risks will emerge quickly" in climate tech, especially as it involves sensitive geospatial data such as energy usage patterns and carbon emission information.

Ensuring that partners have robust data protection measures in place is essential for managing these risks.

A Path Forward for Financial Institutions

Despite the complexities, financial institutions have a crucial role to play in advancing sustainable finance. Falsarone emphasizes the importance of collaboration, transparency, and innovation in overcoming the challenges.

"Investors and financial institutions are increasingly focused on building the practical strategies and organizational capabilities needed to deliver on climate goals," she says.

As the sustainable finance landscape continues to evolve, Falsarone underscores the need for companies to stay agile and informed: "With the right approach, AI, finance, and technology can be powerful tools in the climate tech arsenal,"

But she also warns that the journey will require ongoing learning and adaptation. "Every day is a learning day."

The road to sustainability is long and complex, but with the right tools, strategies, and collaborative efforts, companies and financial institutions can make meaningful strides toward a low-carbon future.

The financial services sector, in particular, holds the key to unlocking the potential of sustainable finance, driving innovation, and fostering a more resilient and sustainable global economy.