Nobody could have predicted the Covid-19 pandemic, nor the health crisis that ensued. The risk of infectious disease was not at the forefront of concerns for any investor, ‘sustainable’ or otherwise.
While arguably the greatest challenge of our time, it has also accelerated one of the biggest opportunity sets for investors – the pivot towards sustainability. Over the past decade, sustainable and green funds have more than demonstrated their capacity to create value. Indeed, they fared better than their counterparts against the precipitous market drop of the pandemic’s first weeks. Investors behaviour bears this out – over the first three months of 2020, sustainable investment funds saw inflows of 30 billion euros in Europe. Simply put, longer horizons make for better risk management across the board.
The data clearly shows that the crisis has strengthened demand for responsible finance – or green, or sustainable finance, if you will – for four main reasons, namely: its vision of companies’ societal role, its concern with long-term risks, its capacity for value creation and, lastly, because it is consistent with the prevailing political agenda.
However, the success of sustainability becoming embedded in everyday thinking of investors, companies and the wider investment ecosystem is dependent on finance seizing the moment, and this is very much dependent on finance working hand in glove with governments. Governments will need to be more demanding and financial services need to establish robust standards that forestall greenwashing, implement the association of aid and subsidies with genuine environmental, social and governance (ESG) commitments and leverage private investment in a sustainable economy.
In 2008, it was the financial sector that precipitated the crisis. It was roundly castigated for its opacity, its arcane complexity and its lack of connection with the real economy. Cornered and accused of any and all wrongs, it is only fair to say the financial industry was hardly well-placed to reinvent itself a decade ago. Today, there is no excuse. Circumstances have bequeathed it a mission, a 'purpose’, a public interest objective it is too far from achieving.
The transformation of the financial sector will not, however, happen on its own. A year ago, the Business Roundtable, a conservative lobby comprised of major US corporations, brought its 250 CEOs together to announce the demise of the ‘shareholder value’ theory, yet no concrete steps were taken to dismantle the effects of the 50-year old myth, according to which the head of a company must single-mindedly pursue the sole objective of maximising shareholders’ stock value.
And herein lies the promise of the moment at hand. Never before have authorities, whether political or economic, placed so much emphasis on the need to invest in a sustainable and inclusive economy. Renewables, energy efficiency, clean mobility, accessible healthcare for all, circular economy, pesticide-free agriculture: the investment theses of sustainable finance are now echoed by all. To do so, governments must inject massive amounts of capital into the economy via the financial sector, which, this time, is not cast as ‘the enemy’. Instead, exposed as it is to the entire economy, its interests are largely aligned with that of public authorities.
Voices are increasingly calling for conditions on emergency public assistance and the massive stimulus plans that economic and social circumstances will require going forward. If we wish to transform our economy and redirect it toward a low-carbon and inclusive path, then government stimulus plans and private sector lending capabilities must adopt a shared set of criteria. In other words, it is time to demand that financial institutions also fulfil a contract for transformation and contribute to financing projects that have a positive social impact, such as more resilient healthcare systems.
This transformation must be top-down. For instance, Europe needs to go beyond the ‘taxonomy’ established to ensure a common language for ‘green assets’ by creating a European environmental and social ratings agency that includes companies’ impact on climate and biodiversity. This is pressing both to structure the market and to affirm Europe’s sovereignty over financial norms, helping to ensure that individual initiatives do not operate at cross purposes.
The push for sustainability must also be bottom-up. People in general are increasingly aware of the advantages of sustainable behaviours – organic food is a prime example. While many psychological reasons are given for why the same fails to hold true for their savings, a simple explanation lies in an extreme intermediation that limits both transparency and access for individual savers. A two-fold action can galvanise ordinary people into acting on what surveys show are their intentions. First, create and implement a unified, transparent label at the national and European levels to identify green financial products, and second, legislate their availability to households.
Today is no time for half-measures. The post-Covid-19 world will need sustainable finance more than ever, and the opportunity is ripe to apply those principles and actions whose relevance and feasibility have been amply demonstrated by proponents of sustainable finance over the past decade. For opportunity to become action will take political determination and good faith on the part of the financial sector.
Philippe Zaouati is the chief executive officer of investment manager Mirova.