Ethical Finance Global 2022 | ESG in a volatile world: Profit, Purpose or Politics? Part Two
Part one of this Summit focused on ESG issues (you can read that here.) Here, the focus was on nature and financial risks, and the role of people and purpose in financial markets, among other key issues. The line-up featured speakers from the banking industry, a senior financial regulator from the Bank of England, as well as policy and subject-matter experts from UK government departments, NGOs, academia, and professional bodies.
A key consideration across these ‘Nature’ sessions was the relationship between nature-related risks and the financial sector. The Bank of England’s Director of Financial Stability, Sarah Breeden, highlighted that nature-related risks impact financial systems through [financial] firms that fund, insure, or invest in companies that depend directly on ecosystem services. Because these risks emerge from a myriad of sources for which there is no single metric of measurement, determining the scale and monetary value of the impacts is quite complex and difficult. Indeed, we see that there is no such thing as ‘net-zero’ for nature as with climate, so we are simply left with an aspiration towards a ‘nature-positive’ economy without a clear definition of what this means in practice. Although there has been some attempt to quantify the impacts of physical nature-risks - as seen in a World Bank analysis which estimates that water scarcity could impact GDP by up to 6% in 2050 in some parts of the world (such as the Middle East and Africa) - transition risks for nature which stem from changes in policies, technology or consumer sentiment are much more challenging to quantify. Beyond issues of quantifying nature-related risks, Cristof Kutscher, CEO Climate Asset Management, was concerned about the current glacial pace of financial firms in driving investments into nature. Nature-based solutions contribute significantly to the solutions required to limit climate change; however, they receive only a meagre percentage of climate capital. This may be attributed to the fact that nature, as an asset, does not fall neatly into the “buckets” that an institutionalised industry like finance creates, making it easy to ‘fall through the cracks’.
As we anticipate quality deliberations from the UN Biodiversity Conference (COP 15 *1) taking place in December2022, it is important to acknowledge ongoing work by key stakeholders, such as the Bank of England’s partnership with DEFRA and TNFD, to address the challenge of quantifying nature-related risks for the UK financial sector. The UK government has proposed making it illegal for large corporations to use commodities linked to deforestation which would likely increase input costs for those companies exposed to deforestation and have implications for supply chain operations, asset values, and the location of activities. As Ms. Breeden noted, these impacts would materially affect the financial sector as a result. However, there was a call for broader global policy action and regulatory measures to manage nature and financial-related risks.
To achieve our desired outcomes in light of all the issues raised, one must not fail to recognise the place of increased awareness and knowledge among banks and bankers. During the Summit’s afternoon ‘in-conversation with’ session on “People & Purpose”, the Chartered Banker Institute’s CEO, Simon Thompson, referred to Mark Carney’s stated objective for the private finance work ahead of last year’s COP26 that “every professional financial decision takes into account climate change.” Hence, it follows that every finance professional needs, at least, a reasonable knowledge and ability to apply climate change and sustainability more broadly. There were varied opinions among speakers as to whether bankers and other finance professionals need to become ‘sustainability experts’ to be able to deliver impact in the transition. What did emerge as pertinent was the need for widescale changes in the ways that bankers and professionals think. On what should be considered as a priority - profit, purpose, or politics. Simon noted that there should not be one way to think when it comes to tackling the climate crisis. It is crucial to bear in mind the purpose underpinning the need for a sustainable transition, i.e. to ensure our economy moves to more sustainable models of production and consumption. But we must also be open to embracing commercial aspects i.e., profits, while simultaneously cultivating a culture and value system that is anchored on sustainability.
*1) Biodiversity COP15 is the fifteenth meeting of the UN Biodiversity Conference discussing the Convention on Biological Diversity (CBD). This is numbered differently from the COP on climate ‘COP 27’ which is expected to take in November, 2022 in Egypt. Part two of COP15 is slated for December, 2022 in Montreal, Canada. For more details: https://www.cbd.int/conferences/2021-2022