Are we at a tipping point for Sustainable Finance?

Banking on optimism

It doesn’t feel easy to be optimistic right now. The early signs of climate change impact have been felt through a wave of hurricanes; income and wealth inequality are still rising contributing to increasingly divided and disconnected people; and global leaders struggle to get long term issues relating to sustainable economies and societies on to their national agendas.

 Together, these are hardly the ingredients for a positive outlook, particularly for the financial sector. Especially since it’s only a decade after a highly destructive global financial crisis for which we’re all still collectively footing the bill.

But there are many good reasons to be hopeful. Despite the wider malaise, the financial sector could very well be at a crucial tipping point. Indeed, it is positioned to become a global leader in sustainability, able to play a central role in dealing with our most pressing challenges. 

International bodies from the EU and G20 to the UN have held inquiries into how to design a financial system that supports green infrastructure, social enterprise and other economic activity that serves the public good. This month in Europe, the Global Alliance for Banking on Values (GABV), together with financial and climate voluntary sector organisations Finance Watch and Mission 2020, plus a host of leading thinkers and practitioners in sustainable finance have published a White Paper with a set of proposals for financial sector change entitled.

The white paper, New Pathways: Building Blocks for a Sustainable Finance Future in Europe, sets out an ambitious but practical agenda of change. It reflects the collective will to shift the financial sector towards sustainability. That’s a sentiment which is now increasingly shared by many working within mainstream financial institutions. It’s also a feasible agenda, grounded in what’s really possible, via the experience of values-based banks, impact investors and other sustainable finance providers who have pioneered this work over the past few decades. 

The GABV now represents 43 financial institutions spanning all continents with more than 41million customers and $127 billion in assets, all sharing a mission to use finance to deliver sustainable economic, social and environmental development. Research shows that not only do these banks have far greater relevance to the real economy, they are more stable and offer comparable returns to investors. 

A pathway for change

The basic concept underpinning the transition to sustainable finance is that finance should have social purpose beyond fulfilling its functional roles (such as managing risks, facilitating payments, keeping assets safe and financial intermediation). Finance, and how it is directed, has a huge impact on the shape of the economy and society. It’s a myth that finance can be neutral - if it was neutral, it could never be useful!

Political leaders need to formally recognise this and acknowledge that finance plays a crucial role in determining the success of other policy areas: whether they can achieve sustainable economies; create sustainable employment opportunities; promote social cohesion; and deliver decent places for people and communities to live. Once they do, financial regulators can be given the mandate to use incentives and penalties to shift behaviours so that financial institutions rapidly accelerate a transition to sustainability that’s so urgently needed. The most relevant way this can be achieved in banking is to set up very clear differentials in the capital that must be held in reserve, based upon the sustainability characteristics of the underlying assets. 

Those who embrace this change will be supported; those who resist will need to learn that you can’t have financial stability if you undermine the planet and society - and there is a cost to bear when you do. We can’t afford costs to be passed on to citizens as they were after the global financial crisis.

This is a change for all

We won’t wake up one day to realise that the finance sector is sustainable without having acted. You can’t meaningfully transform a system without people being involved. That’s why one of the central proposals in the White Paper is that we need to transform regulations so that more people can choose to make sustainable financial decisions. Consider this: research shows that five out of six millennials want to invest in sustainability but many direct impact investments – like funds that invest in renewable energy, sustainable food, social enterprise – are still largely inaccessible for most people. 

Successful national models, like the Dutch Green Funds and the French Solidarity Funds, have proved that billions can be mobilised towardshttps://ec.europa.eu/info/publications/170713-sustainable-finance-report_en sustainability by hundreds of thousands of individuals – all within regulated fund frameworks. We need a European Sustainable Fund framework that enables people to invest in the world they want to see. If we mobilise individuals, this will fuel change within every financial institution and lead to innovation that benefits us all and secures a decent quality of life for future generations 

Plain business sense

Finally, we should be optimistic that we’re on a tipping point because sustainable finance simply makes good business sense. Once technology has transformed the financial sector landscape, bringing down costs and allowing us to make payments through digital wallets in nanoseconds, we might stop to consider what it is that we find really useful and what we value. 

Given the major challenges of sustainability required for any business in the future, having good financial “sustainability partners” might become the primary driver of revenue within the business models of the future. It’s the reason why banks of the future could, and should, make money.

As the role of finance broadens to include the management of impact (as well as risk and return), new skills and competencies are required for everyone working in financial services. That’s not a burden. It’s an exciting opportunity for a new generation of financial professionals who will be better able to align their personal values with their work, leading to more fulfilling and socially useful work. 

Being the change

The financial crisis brought with it a crisis of agency. Many people felt powerless in the face of a huge, complex system that appeared too difficult to change.. The six tangible ‘building block’ ideas that are brought together in this White Paper are designed to be useful input to others working on sustainable finance – in particular a High Level Expert Group convened by the European Commission to work on this topic – and to inspire all those who recognise the urgency of this agenda to do what they can to push the last few yards to the tipping point.  

As Mission2020 founder and architect of the Paris Climate Conference Christiana Figueres puts it: “the financial industry is uniquely placed to lead the way with a ‘business as urgent’ operating principle.”

If we act together, with a similar urgency, then the transformation will be inevitable. There will be no going back and that isgrounds for rational optimism indeed.