Tipping Permitted: Green finance goes mainstream
By Mark Halle, December 3, 2015
In every country concerned, there must have been a moment during the anti-tobacco campaign at which the balance of advantage shifted—subtly, perhaps tentatively, but changing things fundamentally and forever.
At that point, the right to live life without being subjected to cigarette smoke became the new norm. Not long after, the notion that it was okay to smoke in trains, in cinemas and even in pubs was regarded as a retrograde curiosity. Indeed, we look back at the days of smoke-filled rooms the way we might at memories of using the telex, or booking an overseas call at the post office. Campaigners can take much solace from tipping point theory. Getting to the tipping point can be long, discouraging and full of set-backs, but once past it, the entire game changes.
Two events I attended last week on behalf of the United Nations Environment Porgramme Inquiry into the Design of a Sustainable Financial System (UNEP Inquiry) made me think that, when it comes to greening finance, we may be approaching a critical tipping point, beyond which green finance sector reform becomes the norm rather than the exception. The first was the Novethic Annual Event on Environmental, Social and Governance (ESG) Strategies for Responsible Investors in Paris, which gathered largely French institutional investors, but with solid participation from other European countries. The fact that Paris is currently hosting the 21st Conference of the Parties (COP 21) may explain the high level of interest in factoring climate considerations into investment strategy, but the movement is developing at a speed that suggests it is more than a bubble. Over 90 per cent of the 181 institutional investors surveyed for the annual Novethic report implement one of three responsible investment strategies: exclusion of certain types of investment (typically in carbon-based assets), adoption and implementation of an ESG strategy, or shareholder action. Over 40 per cent combine all three. Furthermore, 78 per cent have formalized strategies for responsible investment, and the rate of disclosure and reporting against these policies has risen by 7 per cent in the past year alone. Together, those polled account for over €7 billion in assets managed.
With such participation rates, it is hard to see how the movement can do otherwise than expand towards full coverage. Added to similar trends in North America and in other parts of the world, we could at a minimum be witnessing the start of a flight of investment capital from fossil fuels and other carbon-intensive industries and, beyond that, perhaps a generalization of institutional investment policies that give priority to socially and environmentally favourable development.
Later in the week, I attended a meeting hosted by the Netherlands' central bank with the Dutch Sustainable Finance Lab, an innovative think tank chaired by the experienced and capable Herman Wijffels. This meeting, chaired by the Netherlands Bank President Klaas Knot gathered a high-level group of bankers, investment fund managers, insurance and pension fund leaders, and government officials from around the country to hear and discuss the findings of the UNEP Inquiry and to consider their implications for the Netherlands. If it is well known that the senior managers in the financial sector are a conservative lot, then maybe those in the Netherlands are the exception. The sense of excitement around the emerging green finance agenda was palpable. The Netherlands Bank Executive Director Frank Elderson declared green finance to be highly relevant and offered to play a convening role in bringing the other finance sector players together to work out a roadmap. There were even calls to make the Netherlands into the global centre of green finance. The shift from seeing green finance as a business opportunity for the mainstream, rather than a niche for a small segment of the market, is a profound change.
This spectacle of finance sector leaders scrambling to board the green finance bandwagon is, of course, highly gratifying to UNEP and a tribute to the Inquiry team’s tour de force in producing an analysis that remains strongly rooted in the field of sustainable development, yet speaks to the financial community in their language and cleaves to their sense of what is doable. It is a source of pride for IISD that we supported and contributed to the UNEP Inquiry from the start.
Do these two examples mean that, henceforth, funding for carbon-based energy and environmentally damaging development will quickly dry up? Sadly not, but in keeping with tipping point theory, we may be approaching a stage where the link between the finance and development outcomes we want and need will be much more closely scrutinized and the less acceptable investments phased out, replaced by investments that generate economic benefits in the real economy while boosting social inclusion and respecting environmental limits. If the two meetings mentioned above are anything to go by, that tipping point may be reached sooner that we currently expect.