Why do I need to know about it?
Last month UK MPs passed a motion to declare an ‘environment and climate emergency’ in response to mass protests held by activist group Extinction Rebellion. This followed an estimated 1.4 million young people around the globe going on ‘strike’ from school to draw attention to environmental issues, while national treasure David Attenborough frequently warns that we’re fast approaching the point of no return for the planet.
“To be successful businesses need to be aware of the changing nature of the environment they operate in. They will need to demonstrate to their lenders, investors and shareholders that their business model is sustainable in the long term,” says Nina Seega, research director for sustainable finance at the University of Cambridge Institute for Sustainability Leadership.
Cue growing interest in sustainable finance, which rather than focusing on purely economic markers of performance considers environmental, social and governance (ESG) factors as well.
“There are numerous social and environmental problems and challenges that could benefit from sustainable finance. Investors are increasingly not just asking questions of business about what they are doing around ESG risks but about what impact their investments are making,” explains Rishi Madlani, sustainable finance lead at Royal Bank of Scotland.
What do I need to know?
Although most would agree that operating sustainably is a good thing, how to measure whether investments and assets are sustainable is tricky. A common example is ‘ESG integration’, where investors or shareholders will take ESG factors as well as financial ones into consideration before deciding to invest/approve a business decision. The Global Sustainable Investment Alliance defines seven distinct strategies for doing this.
There are also a growing number of sustainable financial products like green, social and sustainable bonds. “Products such as these help shine a light on the environmental problems and social impacts of assets,” says Madlani. “The green bond market, which focuses on environmental impact, has grown significantly since the first green bond issuance in 2007. The market saw more than $160 billion in issuance in 2018. The social and sustainability bonds markets were worth approximately $60 billion in issuance in 2018.”
“The Loan Markets Association recently issued new principles around sustainability-linked loan products,” he adds.
Businesses should prepare now to ensure they can answer the questions being asked of them by shareholders, and increasingly governments and consumers too.
Vanessa Havard-Williams, partner and global head of environment at Linklaters, explains that new regulation and guidance is being developed that will ask for greater disclosure from pension funds, banks, insurers and other financial services. Corporates may also need to report their sustainability efforts in greater detail if the EU passes new laws.
“The change in the level of sophistication of incoming reporting requirements and expectations is not yet appreciated. There is a significant learning curve,” she highlights.
Where can HR add value?
To stay ahead of this learning curve HR will need to focus L&D efforts here. “For many businesses sustainable finance and sustainability more broadly is new, so additional training may be required,” Seega says, adding: “With their understanding of the importance of wellbeing, HR directors can add tremendous value within the social dimension of sustainable finance.
“Motivating existing employees as well as recruiting new ones may be easier in an organisation that is aligned with sustainability.”
Havard-Williams agrees that operating sustainably can resonate with prospective employees, particularly Millennials, adding that this will hopefully go some way to mitigating the fact that “there will be a significant skills shortage in this area, particularly on the financial services side”.
She adds the importance of HR facilitating cross-department working:.“To engage in relation to these issues typically requires multi-disciplinary working and silos can pose a problem. The functions that are likely to need to work together on ESG factors include finance, sustainability, legal and risk, investor relations and HR,” she says.
Anything else?
Sustainable finance is not merely the latest greenwashing trend, and there is real appetite both outside and within the financial sector for change.
“What’s really surprised us in recent months is the number of staff who are volunteering to work on the sustainable finance agenda. A recent call to our associate and analyst pool resulted in 23 volunteers coming forward,” shares Madlani. “In the near future the majority of finance will need to be sustainable and there will be increasing demands to consider broader impacts, so this is an opportunity to be ahead of the curve.”
This piece appeared in the June 2019 issue. Subscribe today to have all our latest articles delivered right to your desk
