When Finance meets Science

While the positioning of decision-makers on climate-related issues and the transition towards a more responsible society took a significant step forward in 2015, it was 2018, which saw the start of a new wave of action driven by citizens.

In that time, we have seen division on the Paris Climate Agreement, the growing momentum of nationalist populism and, above all, a disconnect between major decisions and the reality of the figures. The last few years have been the hottest ever on record and the occurrence of extreme climate events such as droughts, storms and flooding are continuing to rise. Aside from the economic ramifications, it is, above all, about the people directly or indirectly affected.

The visible effects of climate change are supported by a number of reports demonstrating both the initial consequences for humankind and biodiversity, and highlighting the urgent need to take action. In the last few months, the young generation has launched a movement throughout Europe, demanding a stronger positioning from political leaders and a call for concrete plans. 

Avoiding the irreversible impacts and succeeding in our society’s transition will require each and every one of us to become aware of the issues at hand, both individually and as part of the economy.

It is also the time for the financial sector to position itself as a key player in the climate change debate and come out in support of science. Although it will mean facing a number of challenges, financial institutions will also have new investment opportunities opening up to them.

In addition to playing a part in stabilizing the financial market thanks to taking greater account of the long-term investment risks of climate change, responsible finance will allow for diversification of financial strategies and products and therefore make them more attractive to investors.

The new-generation investor may be ready to rethink their expectations concerning financial returns on investment in favor of the social and environmental impact. Thus, the industry need to be accountable to such investors to ensure their trust. It will be the responsibility of the banks and asset managers to demonstrate both financial performance and social influence.

Identifying and developing projects in which to invest will also be a challenge to overcome. It will be essential to increase dialogue between project owners and investors, and the role of investment managers will only become more significant. Part of the solution lies in creating a real dynamic between innovation, development of new technologies supported by scientific advances, and investors being bold enough to take on these new investment adventures. The development of bold policies by governments will also support growth in sustainable investment, allowing for the shift from the present niche market, to strategies dominating the markets.

The European Commission is aware of these issues and the need to facilitate and oversee the development of responsible finance. The plan of action established and proposed last May, defined the framework for developing the finance of tomorrow. The amendment to MiFID II aims to better inform and understand investors’ desire for more environmental and social considerations. The classification of sustainable investments (taxonomy) will allow for better articulation of dialogue between project owners, portfolio managers and investors. To begin with, investment will be better oriented in order to benefit reduction in CO2 emissions, and will then extend to all environmental and social impacts.

The demonstration of these impacts and how the non-financial risks may affect the financial return on investment will have to be handled by banks and asset managers.

Lastly, the European Commission wants to avoid “greenwashing” by putting in place low carbon or carbon positive impact investment standards. These standards will be added to by the development of a European label for green bonds.

Despite the present and future challenges posed, some operators have already seized upon a number of opportunities. For those wanting to take part in the adventure, it’s not too late, and there are still many paths to be explored.  

What are the investment strategies that can be developed? How do you educate investors and finance professionals? How do you factor non-financial risks into decision making? How do you collect, process and present the positive impacts? These questions and more will be discussed at our conference on Thursday 28 February. Please join us to find out more and to get a better understanding of how to make the most of the new opportunities opening up for finance operators.  

Deloitte Sustainability Conference | Sustainable Finance - shaping the future of investment strategy - 28 February 2019

Julie Castiaux | Co-author : Julie van Cleemput

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