Sustainable finance is growing, yet our planet remains in crisis. Eurosif, the European Sustainable Investment Forum, sets out some ways forward.
"Despite astronomical growth in sustainable and responsible investment (SRI) and sustainability-related initiatives in recent years, science tells us that the Earth's conditions are worsening." The 2021 Eurosif report, published by the European Sustainable Investment Forum, opens on a note of concern. The constructive case follows immediately: "Therefore, investors and policymakers must ensure the effectiveness of SRI strategies, today and in the future, and regulations aimed at achieving positive real-world outcomes." The study explains step by step what the priorities to focus on are.
Banks, asset management companies and insurance firms – in a word, investors – have a real-world impact through the companies they invest in. They can push those companies to make progress on environmental, social and governance (ESG) matters, or select the most deserving ones and help them grow. All of this by acting along three lines.
Practising engagement means entering into a dialogue with the management of the companies one invests in, including by exercising voting rights at shareholder meetings. A vote that can carry significant weight, especially when it comes from a large institutional investor. The possible topics are numerous, all relating to environmental, social and governance dimensions: from reducing CO2 emissions along the value chain to improving energy efficiency and the circularity of the production system.
Of course, things become more complicated when change appears too risky or too costly, as is often the case with decarbonisation plans. A company that commits to carbon neutrality bears costs that its competitors do not, and may therefore find itself at a disadvantage in the short term. How can this impasse be overcome? Through the intervention of institutions. Imposing a price on CO2, for example, can spur positive change and nip market distortions in the bud.
There are companies and start-ups that are born driven by a genuine sustainable ambition: this is the case for those producing low-carbon products or machinery, carrying out social housing and urban regeneration projects, or bringing healthcare to developing countries. Especially in the early stages, however, Eurosif points out that these organisations can find themselves in serious difficulty raising the capital needed to get their idea off the ground – all the more so if it involves a high degree of technological innovation – and to establish it on the market.
This is where sustainable finance can make a difference. Indeed, it already is: according to Bloomberg NEF, in 2020 investors allocated more than 500 billion dollars in companies involved in the energy transition, twice as much as ten years earlier. Here too, one must reckon with economic and financial fundamentals. Every fund and adviser has a fiduciary duty to act in the interest of their client, which also means ensuring that the company is sound and profitable.
If there is clarity on ESG criteria, and if these genuinely become decisive factors in investors' choices, then companies will have to transform themselves along sustainable lines. This is a straightforward law of the market, and it is one of the most effective arrows in the responsible investors' quiver. Hence the fundamental role of the European taxonomy on sustainable finance, which will set out in black and white the criteria that must be met in order to be called sustainable. A way to reward those who already demonstrate high ESG performance, but also to show heavily polluting companies the right path towards decarbonising their activities.
"Europe has become the home of sustainable investment," European Commission President Ursula von der Leyen declared in October, rattling off a series of figures. The European green bond market has now reached one trillion euros, twice the size of the American market and three times that of Asia-Pacific. And the Union itself has issued its first green bonds, determined to raise 250 billion euros to finance the Next Generation EU plan. The European CO2 market (Emissions Trading System) is also the largest in the world. It involves around 10,000 power stations and manufacturing industries, as well as airlines, which between 2005 and 2019 cut their emissions by 35 per cent.
It is precisely Europe that is called upon to chart the course. "Companies and investors have a strong will and extraordinary potential to build a new model of growth, carbon neutral and more inclusive," write Will Oulton and Victor van Hoorn, respectively president and executive director of Eurosif. "To rise to this challenge, they must work side by side. Sustainable and innovative solutions need financial resources to be adopted and scaled up. Investors are looking for reliable and lasting projects to finance, with the ambition of generating value for the environment and for societies, alongside financial returns."
