Bankable Insights: Sustainability Edition - July 2020
Dear clients, disruptions like the COVID-19 pandemic have made one thing very evident: if our economic recovery is to be resilient to withstand future...
*Bankable Insights*Sustainability Edition
July 2020
Dear clients, disruptions like the COVID-19 pandemic have made one thing very evident: if our economic recovery is to be resilient to withstand future disruptions, it must be sustainable.
Stimulus packages by governments for reviving economies were initially aimed at saving lives
and livelihoods in the immediate term.
But as the focus shifts from rescue to
recovery, ‘green’ efforts are gaining momentum, whether renewable energy,
energy efficiency projects, green finance
or even putting a price on carbon. The importance of sustainable green growth is emerging as an important marker for the
post-pandemic recovery.
A McKinsey survey of both developed and emerging markets found nearly two-thirds of respondents hopeful that governments' pandemic economic-recovery efforts would prioritise climate change1. Recently the European Commission announced making €750bn available in the form of grants and loans to put into green projects to help the economy after the COVID-19 crisis. The money will only be available to those projects that are green and in line with the EU Green Deal.2
Environmental, Social and Governance (ESG) investment funds also outperformed the S&P 500 during the pandemic3, just as the immediate months of the crisis saw ESG Exchange Traded Funds (ETF) funds stocks show strong inflows while other funds reported massive outflows.4 We feel that this trend is indicative of an ever-growing investor appetite for companies that take a stakeholder view of their business as opposed to a purely shareholder view.
The concept of stakeholder capitalism has
been a popular one for a while now. While the pandemic put into perspective the relevance of ESG considerations to company performance and investment returns, ESG will continue to influence corporate and investor actions, moving forward. It is encouraging to see this sentiment reflected across markets.
With the above in mind, we have dedicated
our next edition of Bankable Insights to sustainability. We hope that you will find the selection of articles insightful, as we call on Financial Institutions and investors to help
shape a more resilient future by channelling capital into sustainable assets offering
solutions to the main challenges of our future such as gender parity, climate change and financial inclusion.
We know that the world is only at the very beginning of what will hopefully become a
story of green recovery. Standard Chartered remains committed to playing an integral role
in making it happen.
We look forward to engaging you further on your sustainability journey.
Why ESG is the
new normal
Why ESG is
the new normal
During the COVID-19 market downturn, Environmental, Social and Governance (ESG) stocks have continued to outperform the S&P 500 and MSCI Europe indices. This trend, which demonstrates
an increasing investor preference for companies that take a stakeholder view of their business as opposed to a purely shareholder view, could change the nature
of corporate social responsibility.
Crisis brings people together and those companies that have been helping their employees, their customers and their communities have started appealing more to investors.
For the same reasons, as economies begin to come out of lockdown, companies that have looked beyond their traditional narrow focus of growth to take care of broader stakeholder interests are expected to emerge in a stronger position. Companies are also realising that even in the post-pandemic world, they will need to do more to fully demonstrate how they are serving the wider interests of society. These developments are making ESG the new normal in investing and more and more asset owners are demanding sustainable investing strategies from their asset managers.
“Switched-on asset owners
are aware that ESG investing can benefit risks and returns, but they also have their eye on the non-financial results. They want to know that their investments are helping to make the world a better place,” said Alexis Calla, Global Head, Investment Strategy and Advisory at Standard Chartered.
For ESG issues, “it is a watershed moment,” shared Paras Anand, chief investment officer for Asia-Pacific at Fidelity International. “What becomes extremely visible at a time like this is how companies are thinking about their broader stakeholders and issues related to sustainability. Even how companies think about their balance sheets, the way that brands resonate and connect with their customers become even more acute at a time like this.”
With regard to COVID recovery, central banks and governments have stepped in and are likely to be playing a much bigger role in the coming years. “This is an opportunity for regulators to shape the kinds of society that we want to live in once we come out of this,” suggested Jenn-Hui Tan, Fidelity’s Global Head of Stewardship and Sustainable Investing.
“There is a rethink about what are the sorts of business models that we want to be supportive of? What are the sorts of priorities we want to have as a society? You can see regulators thinking about that now with the kind of dramatic policy actions taken through this crisis that has and will embolden them.”
Anand sees a new generation of companies that are able to partner effectively with governments and support quality with scale service provision the likes of which have not been seen before. “The next generation [of companies] will need to be delivering value in a totally different way.”
Switched-on asset owners are aware that ESG investing can benefit risks and returns, but they also have their eye on the non-financial results."
Alexis Calla, Global Head, Investment Strategy and Advisory at Standard Chartered
Building on the momentum
Even after the COVID threat is over, the message is clear – it is no longer optional for companies to apply ESG criteria to their operations and governance. Asset managers and institutional investors now recognise that there is a positive relationship between ESG investing and performance.
“There is a growing momentum behind the scenes that it's not just good enough to make money. You shouldn’t have a negative impact on the communities and countries that you operate in, and should be increasingly focused on how you can do good by doing well,” said Daniel Hanna, Global Head of Sustainable Finance for Standard Chartered.
The need to be profitable as well as responsible is supported by a 2018 survey released by the Global Sustainable Investment Alliance1, which pegged socially-responsible investments in the world’s five major markets at USD30.7 trillion, up 34 per cent in two years.
Companies that have good sustainable business practices are going to outperform in the long run; they are going to generate sustainable profits by looking after their employees, the environment, and the supply chain.”
Jenn-Hui Tan, Fidelity’s Global Head of Stewardship and Sustainable Investing
Undoubtedly, offering ESG investments is not merely for PR purposes; it’s been proven to make sound business sense. Take the performance of the STOXX Global Climate Change Leaders Index2, for example, which tracks the CDP A List of companies leading the way on environmental transparency and performance. The index outperformed the STOXX global benchmark by 5.5 per cent a year over a seven-year period from December 2011 to January 2019.
ESG investments have even proven more resilient in times of market shocks. According to February 2020 data compiled by the Financial Times, ESG investments showed greater resilience when stock markets began to crash. While the full impact of COVID-19's spread has likely yet to be seen, the slower retreat from ESG compared to standard funds could indicate just how embedded such investment principles have become in this day and age.
“Companies that have good sustainable business practices are going to outperform in the long run; they are going to generate sustainable profits by looking after their employees, the environment, and the supply chain,” said Fidelity's Tan.
Hanna agrees, “This is pretty much common sense. Companies that have good environmental, social and governance awareness and tracking will tend to be companies that are very
well run.”
The risks of the
new reality
There are, of course, risks involved in all investments. Financial risks need to be taken into account along with the impact of climate change where asset values are vulnerable to both physical and transition risks.
Physical risks can hurt credit portfolios or drive down the value of assets. These risks can be incurred via direct exposure to entities and countries that experience extreme weather events, or indirectly, by the effects of climate change. A prime example is California's largest utility company, which became the first corporate to have its bankruptcy linked to climate change.
Transition risks arise from the adjustment to a low-carbon economy that may entail policy and legal changes, or market and technological shifts.
There is also the reputational risk fallout to be reckoned with from investments that are not seen as environmentally responsible. The past decade has seen widely reported examples of reputational backlash in both the automotive and oil and gas sectors.
Incorporating climate risk in investment strategies could hedge against collateral damage in portfolio holdings, especially assets in infrastructure, real estate and agriculture, which are highly sensitive to extreme weather.
Naturally, all investments carry risks but it’s not just about what’s in immediate view.
As Standard Chartered’s Calla added, “Investors are increasingly looking at the longer-term forces such as climate risk and sustainable development and their impact on future investment returns.”
Embedding ESG factors into investment
Institutional investors, such as pension funds, are also increasingly factoring in climate change as they seek to pursue investment strategies that will act in the best long-term interests of fund members. One leader in this space is Japan’s Government Investment Fund (GPIF), the world’s biggest retirement scheme, which emphasises ESG factors in its investment processes. GPIF requires asset managers to integrate ESG into both their investment analysis and decision-making, and regards buying green, social and sustainable bonds as a direct method of ESG integration in fixed-income investments.
As Fidelity’s Tan suggested, “Active management in the future is going to be judged not just on the financial performance the funds deliver but also on the non-financial contributions we’re making to the companies that we invest in.”
A compelling signal that climate change is transforming finance was sent out by BlackRock, the world’s largest asset management firm, when earlier this year it announced its conclusion that climate risk is an investment risk, and it would therefore place sustainability at the centre of its business.
In his 2020 annual letter to company executives, BlackRock CEO Larry Fink said that climate change has brought us to “the edge of a fundamental reshaping of finance” and will require “a significant reallocation of capital” in the near future.
Fink called attention to the importance of investment stewardship, commenting that BlackRock stewardship teams would continue to engage with the issue and be “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
It also committed to making sustainable investing more transparent and accessible by providing investors with more ESG product offerings and investment options, as well as encouraging companies to increase and improve relevant climate related disclosures.
As Standard Chartered’s Hanna explained, "Once you've developed a negative ESG screen, you have to start thinking about how your portfolios should have a positive impact. Not just to do no harm, but to potentially do some good.”
It has taken a spate of intense climate-related risks, and increased pressure from investors and shareholders, to rouse the financial sector at large and the world’s economic leaders from inaction on climate change.
Fidelity’s Tan urged people
to take collective action, “More needs to be done
by all participants because this is not a problem that anyone can individually solve.
The contamination of the biosphere is a global problem; it’s not a national problem. I think all of us need to do more.”
Time will tell whether investors will continue to remain wedded to a view that sustainable or ESG investing, is about ‘values’ rather than ‘value’, once the COVID-19 threat has passed.
Or whether they will seek sustainable outcomes alongside their traditional financial objectives.
But the role of ESG in
building business resilience has never been more obvious than it is now.
Fintech:
Moving the needle
on sustainability
Fintech: Moving the needle on sustainability
Technology is reshaping the financial services industry and powering a more sustainable world. In the pandemic economy, more and more people are turning to digital payment and
e-commerce platforms.
This shift has reduced carbon emissions and has opened up new opportunities for fintech disrupters to expand access to capital. We believe this could be an important catalyst for the advancement of the United Nations’ Sustainable Development Goals (SDGs).
Prior to Covid-19, the barrier holding us back from realising SDGs was not scarcity of funding. The UN notes there is more than enough available financing for these goals, given that gross world product and global gross financial assets are over USD80 trillion and USD200 trillion, respectively. The real barrier was in distributing these funds to emerging markets and communities most in need.
As Daniel Hanna, Global Head
of Sustainable Finance for
Standard Chartered, stated, “What is very clear is that capital is not flowing to where it matters most. We all have a collective challenge and opportunity to ensure that we can actually move green or sustainable finance into these areas.”
What is very clear is that capital is not flowing to where it matters most. We all have a collective challenge and opportunity to ensure that we can actually move green or sustainable finance into these areas."
Daniel Hanna, Global Head of Sustainable Finance, Standard Chartered
“Fintech has been able to leverage this phenomenon extremely well by building the right types of applications, the right types of software, as well as the right type of products that suit the needs of a vast number of unserved and under-served populations,” said Vihang Patel, Co-Founder of Finaxar, which finances small businesses through cloud accounting platforms.
Fintech has been able to leverage this phenomenon extremely well by building the right types of applications, the right types of software, as well as the right type of products that suit the needs of a vast number of unserved and under-served populations.”
Vihang Patel, Co-Founder
of Finaxar
An immense challenge –
but with high rewards
SDGs represent vast investment opportunities, offering USD10 trillion in market prospects and 380 million jobs to be created by 2030, according to the UN1.
Another recent study, Opportunity 2030: The Standard Chartered SDG Investment Map, identifies and
explores key priorities for investment
in infrastructure-focused SDGs in 15
of the world’s fastest-growing economies. Fintech is already contributing towards two of these priorities – clean energy and water and sanitation services.
For the energy sector, fintech
start-ups can provide mobile payment solutions and mobile
micro-loans. Fintech can also mobilise capital to fund energy infrastructure via mechanisms like crowdsourcing. One example is GridShare, an online platform
where renewable energy project developers and cleantech
companies from around the world post their funding needs.
In the water sector, fintech players already provide applications that streamline the payment of upfront costs such as connection fees while also ensuring easier access to microfinance loans for water and sanitation projects.
Tools like blockchain can be used to track and govern subsidy payouts to incentivise service providers that provide water and sanitation to underserved areas.
Taking the lead
One of Standard Chartered's missions is to support the UN’s SDG targets. One of the Bank’s strategies is to leverage existing platforms that have large reach, to push down costs.
“In our Asian footprint, platforms such as Ant Financial and WeChat in China, Paytm in India and Grab in Southeast Asia are reaching populations and SMEs that were previously underserviced,” said Lucy Demery, Global Head of Fintech Banking.
“The size and scale of these platforms create an opportunity to reduce the cost of payments and small-ticket credit. This makes finance more accessible for the individuals, merchants and suppliers who trade on these platforms.”
Standard Chartered’s Opportunity 2030 report notes that USD2.737 trillion of investment is needed to develop universal digital access in emerging markets – one of the UN’s key SDGs.
Oi Yee Choo, Chief Commercial Officer at blockchain-based capital markets platform iSTOX, said a new breed of investors are very keen to invest in companies involved in sustainability activities. And fintech, with its ability to lower the cost of infrastructure and improve connectivity between investors and issuers, can help them reach that goal.
"We see a lot of our younger generation who are very focused on investing in what they feel can change the world, and we are also always on the lookout for companies that have a social responsibility agenda that are looking to do fundraising," said Choo.
“There’s a lot that we all need to do. The more players there are, whether traditional or fintech, that support this initiative, the better for society. iSTOX is here to facilitate investments into such companies,” she said.
What are the risks?
Fintech solutions are not without risks. Digitalisation could widen the existing divide created by low mobile phone ownership and access to the internet, resulting from a lack of infrastructure and the prohibitive cost of handsets and data. There is also a risk that algorithms can reinforce existing biases and stereotypes. Digitalisation could also lead to fraud, increased money laundering and illicit financial flows – a serious concern already voiced by regulators about cryptocurrency.
Other concerns include predatory lending and targeting of vulnerable borrowers, privacy issues and the possibility of missed payments
and defaults.
Collaboration and governance is key
To tackle these risks, the UN recommends robust governance. Regulators in developing countries will have to boost their capabilities to identify, and proactively manage, unintended consequences.
There is also a need to regulate cross-border movements of data with the collaboration of relevant institutions such as the World Trade Organization, as well as others regulating data privacy, like the European Commission’s Competition division. However, according to the UN, policy and consumer protection will require oversight from a completely different group of public institutions.
Such collaboration needs to involve public institutions and the private sector. For instance, Standard Chartered has partnered with global trade and payment system Ripple to increase the transparency and consistency of transactions. More recently, the Bank joined the Enterprise Ethereum Alliance, where it will collaborate with other industry leaders to set best practice and standards for blockchain.
It's a long road towards achieving the SDGs, and only a large-scale collaborative effort will enable us
to succeed.
According to Demery, “Digital banking will be transformative if we combine ‘new-economy’ innovation with institutional trust, security and governance. At Standard Chartered, we are pushing digital innovation in both retail and institutional banking – to optimise our infrastructure and processes; advance our front-end products and services; and create new business models which are more naturally integrated with the consumer lifestyle and business
life cycle.”
Demery added that the Bank is keen to partner with fintechs on that journey, “That’s how we can expand our reach to under-served markets and maintain our standing with the next generation.”
At Standard Chartered, we are pushing digital innovation in both retail and institutional banking – to optimise our infrastructure and processes, advance our front-end products and services, and create new business models which are more naturally integrated with the consumer lifestyle and business life cycle."
Lucy Demery, Global Head of Fintech Banking at
Standard Chartered
Women’s bonds:
High risk or
high-growth
potential?
Women’s bonds: High risk or high-growth potential?
In emerging markets, women own between 31 to 38 per cent of all small and medium-sized enterprises (SMEs). Yet the average growth rate of a female-run SME still lags significantly behind that of an SME run by a man1.
The constrained growth of women-owned SMEs is typically due to financing barriers as these businesses tend to be smaller and more informal. This places them in a higher risk category which makes access to financing more difficult. It’s a vicious cycle, exacerbated by the generally lower education levels of female entrepreneurs in emerging markets, originating largely from historical inequalities and cultural biases. As such, this group is often seen as a high-risk investment.
However, the payback local and regional communities and investors can expect when investing in these businesses is both attractive and impactful. From an investor perspective, the early successes of women’s livelihood bonds (WLB) and impact investment highlight the opportunities that gender-equality investment presents. Investing in women certainly makes sound financial sense.
Female-led enterprises: Driving change
and profits
In India, Freyr Energy,
co-founded by entrepreneur Radhika Choudary, is delivering clean and affordable solar power to thousands of households, businesses and remote villages. As a result, these communities have experienced better health and well-being, safer living conditions, greater food security and increased economic growth.
Freyr Energy is just one of thousands of enterprises to benefit from programmes by the Impact Investment Exchange (IIX), a technology platform that assists what it terms ‘impact enterprises’ in raising capital. Through IIX’s Impact Partners platform, Freyr Energy successfully closed a USD1.5 million Series-A funding round in November 2018. It was also a graduate of IIX’s accelerator programme: Assistance for Capacity-Building & Technical Services (ACTS), which helps these enterprises prepare themselves for the capital-raising process.
The organisation’s efforts to bring women to the forefront of capital markets arose from the personal journey of IIX founder and CEO Durreen Shahnaz, who experienced first-hand many of the challenges
female entrepreneurs in this region face.
“Growing up in post-war, poverty-stricken Bangladesh opened my eyes to the realities of inequality and the need to empower under-served communities – especially women – to build a sustainable future,” she said.
Growing up in post-war, poverty-stricken Bangladesh opened my eyes to the realities of inequality and the need to empower under-served communities – especially women – to build a sustainable future."
Durreen Shahnaz, founder and CEO of
Impact Investment Exchange (IIX)
Investors also stand
to gain
While such investments create beneficial social impact, investors have every reason to expect a return on their capital. An impact enterprise with a triple bottom line, Freyr Energy’s bearing on the community is matched by significant financial gains. The company grew 16-fold in its first four years and turned a profit after just three years. Its success even won Choudary a coveted spot in the Women Entrepreneur Quest competition in India – proof that doing good can pay dividends in all senses of the word.
Supporting women entrepreneurs makes sound economic sense. Analysis by Boston Consulting Group (BCG) revealed that for every dollar of funding received, start-ups founded and
co-founded by women generated 78 cents, compared to 31 cents2 generated by male-founded start-ups. Companies with a gender balance at leadership level tend to be more profitable and innovative.
Greater diversity fosters innovation,
but it can also strengthen resilience – the capacity to survive the unexpected – which is an equally important weapon heading into the next decade."
Veronica Chau,
Partner and Director of Sustainable Investing and Social Impact at BCG
The tides are changing
With increasing investor interest in socially-linked investment products, a number of financial institutions have developed bonds with gender in mind, raising funds for programmes that impact the livelihoods of women and benefit the community as a whole.
This trend has been growing at a steady pace since 2013 when the International Finance Corporation issued the first-ever women’s bond, raising some USD165 million for enterprises owned or run by women in emerging markets. In 2017, eager investors put in orders over USD8.25 billion for Australia’s USD400m
QBE Insurance Gender Equality Bond. The funds were used to support women in leadership programmes, gender pay reporting, return-to-work programmes,
parental leave and domestic violence assistance.
Significant inroads are also being made when it comes to assessing the impact
of socially-linked investment products. For example,
IIX’s Shahnaz developed
the proprietary Impact Assessment methodology, which measures the effect and return from philanthropic, social and impact investments. It has now become the most widely used industry reference in Asia.
Building on the success of the first WLB, IIX closed the second in January 2020. Supported by the United Nations, the USD12 million bond focuses on supporting 250,000 women across the region. These bonds enable a group of entrepreneurs and businesses, which may have been excluded in the past, to thrive.
With the spread of the COVID-19 virus having devastating impacts on economies across the globe, stock markets tumbled. Yet at least initially, WLBs proved resilient. In a March op-ed, Shahnaz referred to a comment she received from an IIX investor, "The market is crashing but WLB is up by 3.8%, thank you.”
Shahnaz added that the vision of IIX to "radically transform financial markets
for social good", born following the 2008 Global Financial Crisis, gave her a glimmer of hope that the lessons of 2008 weren't all
for nothing.
A wealth of opportunity
Investing in areas that have traditionally been under-resourced offers a wealth of opportunities to investors, while allowing them to positively impact communities at the same time.
“Gender equality and sustainability can no longer be regarded as separate issues, especially in emerging markets where many women have little access to finance,”
said Simon Cooper,
Chief Executive of
Standard Chartered’s Corporate, Commercial
and Institutional
Banking division.
Our methodology allows clients to design solutions that can drive both social and financial impact where it’s needed most."
Simon Cooper, CEO Corporate, Commercial, and Institutional Banking at Standard Chartered
"A significant aspect of sustainable financing is focusing on the most vulnerable sections of society, providing them with financial support as well as ensuring that they have the infrastructure to utilise it.
Our methodology allows clients to design solutions that can drive both social and financial impact where it’s needed most."
To this end,
Standard Chartered backed the IIX, which recently closed its ASEAN and South Asia focussed WLB series, raising USD12 million. The bond was offered to high net worth Individuals and Insitutional Investors focussed on impact via a private placement route.
The bond, which offers credit protection from both the United States Agency for International Development (USAID) and the Rockefeller Foundation, was listed on the Singapore Exchange and aims to create sustainable livelihoods for women in Asia.
“This bond works by lending funds to seven microfinance institutions and developmental enterprises within India, Sri Lanka, Philippines, Indonesia and Cambodia,” explained Rahul Sheth, Executive Director, Debt Capital Markets and Head, Sustainable Bonds at Standard Chartered. These institutions, which have been diligently screened by the IIX, provide financial inclusion services to women.
“The funds will specifically target areas that increase income generation through microcredit and SME loans, financial security through microinsurance,
ownership of personal assets, productivity through life skills training, and access to essential products that improve the quality of life
for women and their families,” he added.
As United Nations Development Programme economist Anuradha Seth wrote in a 2019 report for UN Women, “A growing body of evidence shows that economic growth is a
gendered process,
and that gender inequalities can be barriers to
shared prosperity.”
Veronica Chau at BCG said the firm’s analysis shows that “if women and men participated equally as entrepreneurs, global GDP could rise by approximately 3 per cent to 6 per cent, boosting the global economy by USD2.5 trillion to USD5 trillion.”3
The links are clear. WLBs have the capacity to help women access financing so that they can build successful businesses that contribute to the economy. And that’s good for
everyone – men and
women alike.
A growing body of evidence shows that economic growth is a gendered process, and that gender inequalities can be barriers to shared prosperity."
Anuradha Seth, United Nations Development Programme economist
The EU Green Deal:
A purpose-driven
plan with global investment impact?
The EU Green Deal:
A purpose-driven plan with global investment impact?
The European Union’s Green Deal – a three-decade plan to become the world’s first ‘carbon neutral’ bloc by 2050 – has been described as Europe’s “man on the moon moment.” It is now expected to be at the heart of the EU's virus recovery plan.
European politicians, companies, lawmakers and activists are looking to restart growth after the COVID-19 pandemic with green investments because they believe that fighting climate change and promoting biodiversity will rebuild stronger and resilient economies.
In its original form. the EU’s plan of accelerating its greenhouse-gas-emissions reduction target to 50 to 55 per cent by 2030, compared with 1990 levels from the current 40 per cent1 target will entail massive funding. The deal aims to mobilise EUR1 trillion worth of public and private investment over the next
10 years.
The goals outlined in the deal’s growth strategy include clean energy; a circular economy (that has the reduction, reuse and recycling of resources as its guiding principle); energy-efficient building, plus reduced transport emissions, all of which offer investment opportunities to businesses across all sectors. It could also pave the way for new activities and job creation as industries move towards low-emission technologies and sustainable products and services.
Setting a global standard
The deal’s implications are expected to reach far beyond the EU’s borders. “If implemented successfully, it will enable Europe to play a leading role in redefining how the world achieves sustainable economic growth in the future,” Maarten Dubois, EY Belgium Climate Change and Sustainability Director has noted. It also shows world leaders that it is possible to boost opportunity, competition and regional prosperity while making the world a better place. This aligns with Standard Chartered’s view,
as outlined in Opportunity2030:
The Standard Chartered SDG Investment Map, which highlights the opportunity available in the private sector to deploy capital likely to generate strong returns while simultaneously enabling long-term sustainable development.
A wide range of industries across the globe should benefit from the clean technologies developed by
EU members under the Green Deal, to facilitate sustainable manufacturing and consumption of goods. As a result, EU consumers and businesses could use their purchasing power to sway industries in other countries to embrace more sustainable manufacturing processes.
As the world’s largest single market, the EU has the power to set standards across global value chains, and therefore put pressure on countries to adopt climate-friendly business practices if they want a share of that market.
An unprecedented international effort
While the heightened goals on climate neutrality position the Green Deal as a game changer, there are several different initiatives across the world that are also raising the bar on sustainability. This highlights that the private sector is waking up to the business opportunity this presents.
Focusing on areas that include healthcare, social policy and industry, Indonesia is following a 20-year development plan first introduced in 2005. The government has also launched an integrated platform called SDG Indonesia One, which aims to raise funding from investors and donors for projects that will help the country reach its sustainable development goals.
The scope for collaboration and opportunity for investment is immense – which is why financial institutions and the private sector are increasingly playing an active role.
Strategy strengthening
Financial institutions and the private sector are critical pillars of regional governmental and corporate sustainability initiatives.
Increasingly more companies now have a sustainability strategy in place, with goals that support green supply chains, waste minimisation, use of raw materials, and deployment of green energy manufacturing.
The financial community can support such corporate sustainability strategies by providing more sustainable finance solutions. It can also play a critical role when it comes to financing the massive investment required to fund sustainable development goal projects, which the United Nations Conference on Trade and Development (UNCTAD) has estimated at between
USD3.3 trillion and USD4.5 trillion for developing countries.
However, these opportunities also present the need for a frictionless transition to sustainability – so how can this be achieved?
Striking a balance: Collaboration versus competition
The path towards climate neutrality and sustainability will have its share of stumbling blocks. In the case of the EU Green Deal, there is a need to secure clean energy supply, especially as the power system decarbonises. It is also vital to safeguard competitiveness in light of the potential for cheaper subsidised imports from countries with less stringent emission targets.
To ensure a smooth transition, the plan’s overarching climate aim should be balanced by an industrial policy that would safeguard the global competitiveness of European industry, as well as an energy policy that ensures long-term energy security and affordability, as urged by the European Round Table for Industry’s (ERT) Energy Transition & Climate Change Committee.
To mitigate greenwashing and misleading corporate environmental claims, the EU is also adopting a taxonomy that establishes clear classifications for sustainable activities or financial products.
If the EU can uphold these criteria and standards and receives robust support from governments and financial institutions, the Green Deal could be a world-leading example of how sustainability can drive purpose and profit on a global scale.
