Integrating the environment and climate change into investor decision making will make capital less likely to flow to assets that are incompatible with sustainability and more likely to flow to assets that are. This is a necessary condition to address climate change and the other environmental challenges facing humanity. Doing so will also help financial institutions appropriately manage risk, improving the resilience of the financial system as a whole.
For these reasons mainstreaming sustainable finance is critically important and consequently policymakers have established several processes, led by finance practitioners, to accelerate progress. The Task Force on Climate-related Financial Disclosures (TCFD) created by the G20 Financial Stability Board, the High-Level Expert Group on Sustainable Finance created by the European Commission, and the Green Finance Initiative created by the City of London with backing from the UK Government, are the most important examples constituted in 2016. Their success in 2017 and beyond, together with the success of other organisations working to mainstream sustainable finance, will depend on understanding what mainstreaming actually means and what this might really entail. Too often ‘mainstreaming’ is brandished around as an objective in this context without it being appropriately defined – which makes it very hard to track progress or to see what various efforts are contributing.
In my mind mainstreaming has several elements and is not just a question of a term or idea entering the lexicon. Terms such as sustainable finance, green finance, responsible investment, ESG, and stranded assets have all achieved a degree of familiarity among specialist and many non-specialist audiences. Mainstreaming must also be about changing practice – both improving best practice and the ‘state of the art’, as well as ratcheting up the quality of what could be called ‘routine practice’.This is a dynamic process, with the state of the art constantly improving and trickling down to raise the bar for all. Mainstreaming should also mean that concepts and practices are irreversibly adopted across multiple parts of the investment chain in a wide range of different markets. It is not sufficient for adoption to be fleetingly met in one or two parts of the investment chain and in one or two parts of the world – it is permanently mainstreaming a topic across the financial system that should be the threshold for success. It should also be about outcomes, in terms of capital being more likely to flow in the direction we would expect if the environment and climate change were appropriately understood and then integrated into investor decision-making.
These possible criteria for successfully mainstreaming sustainable finance – concepts entering the lexicon; improving best practice; ratcheting the quality of routine practice; doing so across the investment chain internationally; and actually changing capital flows – is a high bar and rightly so. These could form the basis for yardsticks to properly measure and track progress towards mainstreaming. More objective measures of progress are important, not least because of the ‘echo chamber’. It is all too easy to be disorientated by the echo chamber and think that success has happened or is just around the corner, when it has not yet happened or is a long way away.
While it is very comforting to attend one of the many conferences organised on sustainable finance and meet with people you already know and hear about the progress they are making, it can provide a lopsided and entirely unrealistic impression of what is actually going on. This is exacerbated by press coverage. The quantity of references in newspapers, magazines, and other media to sustainable finance topics has increased dramatically, but a lot of this coverage is consumed by the same usual suspects and written by
correspondents who write on the environment and climate change. This can further reinforce an impression of rapid change and mainstreaming, when actual real world progress has been much slower. We will not tackle the great environmental challenges without mainstreaming sustainable finance concepts and practice across the financial system. This is a vital task, but a mission that has been poorly defined and one lacking objective measures to track progress and to see what actions really have impact.As work on this task accelerates, we need to do more to correct a potentially very acute optimism bias that exists among the growing community of people and organisations working on sustainable finance. Remedying this should be a collective priority for those working to better align capital markets with sustainability, otherwise we’ll be flying blind.
This is the first in a series of blogs on sustainable finance and investment by Ben Caldecott, a Senior Associate at E3G and Director of the Sustainable Finance Programme at the University of Oxford Smith School of Enterprise and the Environment. His next blog will look at some of the shifts towards mainstreaming taking place among financial institutions.