By Anna Brennan
‘Sustainable Finance’ refers to the alignment of the financial sector with the concept of sustainability, where environmental, social and governance considerations are included in decision-making processes. Over the last thirty years, the United Kingdom has seen an explosion of sustainable practice in its financial sector: from the implementation of Corporate Social Responsibility (CSR) in the 90s to the present day, where Environmental, Social and Governance (ESG) indicators are routinely addressed. Furthermore, with the creation of internationally binding policy initiatives like the Paris Climate Agreement of 2015, sustainable finance goes hand-in-hand in achieving various significant targets that the UK must meet. Throughout the past three decades, sustainable finance has evolved from an option and an afterthought to a core part of the business model and a competitive advantage in corporations and institutions across the UK.
The ‘birth’ of sustainable finance in the UK occurred with the large-scale implementation of Corporate Social Responsibility in the 1990s1. CSR refers to corporations’ efforts to achieve the triple bottom line concept where economic, environmental and social concerns are met, alongside the interests of shareholders and stakeholders. In the 90s, the UK was involved in several major global agreements that influenced this shift. The foundation of the European Environment Agency in 1990, the 1992 United Nations Framework Convention on Climate Change and the introduction of the Kyoto Protocol in 1997 set a high global standard for bettering corporate behaviour2. This was the first time that profit-seeking behaviour became linked with social and environmental concerns on a major scale in the UK. The 90s also saw the publishing of the first Intergovernmental Panel on Climate Change report, which aided the shift in demand towards environmentally-conscious practice. Thus, the UK market for sustainable finance came into being.
The Principles for Responsible Investment (PRI) launched in 2006, further developing the UK’s sustainable finance market in the early 2000s. The principles are founded upon the concept that ESG considerations, such as climate concerns and pollution prevention, have a direct impact on the longevity and returns of investments. Signatories of the PRI are expected to report and assess their progress at frequent intervals. Following its introduction in 2006, the number of signatories saw a drastic increase due to the financial crisis of 2007-2008 and its devastating effects across the UK and the wider world. Today, almost 16% of signatories are located in the UK and the initiative’s headquarters are based in London, making the UK home to a leading number of firms that have firmly committed themselves to sustainable practice.
Then came the first Climate Awareness Bond in 2007, which was issued by the European Investment Bank. It has links to carbon and equity and is backed by renewable energy and energy efficiency assets. Shortly after, the World Bank issued its first Green Bond in 2008, a financial product that raises capital. This capital is then used for funding initiatives that have a positive impact on the climate and environment, like renewable energy and energy efficiency projects. A colossal £15 billion of funding has been set aside for the UK government’s first green bond, the Green Gilt,which is at the brink of its debut and is part of the government’s broader aim to transition towards a green economy. The Green Gilt became available in September 2021, and its launch was met with unprecedented demand: £100bn of bids cemented the Green Gilt as the most successful UK government bond yet.
In 2015, the UK was involved in three major international initiatives launched by the United Nations to further sustainable finance on a global scale. The Addis Ababa Action Agenda consists of policy suggestions and a framework for financing sustainable development. It contributes to the alignment of financial flows and policies with the three pillars of sustainability – economy, environment and society. The Sustainable Development Goals (SDGs) are 17 different goals including ‘decent work and economic growth’ (goal 8) and ‘responsible consumption and production’ (goal 12), which both have strong links to sustainable finance. The Paris Climate Agreement relies on the transformation of economies and societies to limit the average global temperature increase to below 2 degrees Celsius in comparison to pre-industrial climate evidence. It also indicates that developed states should provide financial aid to developing countries to help achieve targets within the agreement. The initiative calls for investment in renewable energy and divestment in fossil fuels to drastically reduce emissions. These three initiatives are intertwined – they are all designed to contribute to the overarching 2030 Agenda where its goals and targets seek to “stimulate action… in areas of critical importance for humanity and the planet.”
As a result, much of the legislation passed by the UK government in recent years actively supports and furthers sustainable finance to meet these initiatives and the 2030 Agenda. For example, the 2013 revisions to the Companies Act of 2006 made it mandatory for specific companies to provide transparency on Environmental, Social and Governance (ESG) indicators in their strategic and director reports. Within ESG, environmental considerations can include minimising pollution and habitat loss and mitigating the effects of climate change, whereas social considerations may address geo-economic or attainment inequality and issues concerning human rights. Thinking about governance is also important – the way institutions are governed is of paramount importance in including social and environmental issues in financial decision-making. In theory, taking these considerations into account should lead to sustainable economic growth in the long term within the UK.
2018 saw the publishing of the Action Plan on Sustainable Finance by the European Commission. It introduced reforms for the sustainable finance market by offering different policy proposals. This still holds relevance for the UK as, in spite of its departure from the EU, the UK government intends to align itself with the EU’s sustainable finance principles by maintaining an equivalence regime in managing trans-border green finance activity.
However, with increasing importance placed on sustainable finance on national and international scales, new challenges arise. Enter ‘greenwashing’, where corporations pretend to adopt sustainable practices[HS1] in an effort to meet growing demand. A good example is when ExxonMobil announced they were decreasing their emissions when instead, they were on the rise. To tackle greenwashing in its financial sector, the UK government recently launched the Green Technical Advisory Group (GTAG) in June 2021. The independent body will consist of representatives from trade bodies, NGOs and leading experts who will provide transparency for consumers and increase understanding of how corporations truly affect the environment. In doing so, the UK hopes to create a high global standard that other countries will strive to meet.
Through its involvement in the 2030 Agenda and the associated policy initiatives, the UK has paved the way for sustainable finance on an international scale. It was the first G7 summit attendee to enact laws that directly relate to the 2050 net-zero emissions pledge, and London is now classed as a world leader in the Global Green Finance Index. Although the pandemic has slowed economic growth and pushed sustainability to the background amid COVID-19 crisis talks, all is not lost. The UK government has stated that it views the pandemic as an opportunity to regenerate its economy more responsbly and sustainably to further progress towards the SDGs and the Paris Agreement. These claims will, hopefully, be put into action especially, with the introduction of the Ten Point Plan for a Green Industrial Revolution in November 2020, which endeavours to make the UK a world leader in sustainable finance.
With the COP26 event currently occurring in Glasgow, it will be interesting to note the developments in the UK’s sustainable finance market that undoubtedly shall follow. The finance industry must be scrutinised during COP26 – on a basic level, money is the key to achieving progress in many of the event’s goals. The overarching financial aim of the event is to “mobilise finance”, and its manifesto emphasises the importance of change within each company, firm, bank, insurer and investor. To reach the target of net-zero emissions, public and private finance must be utilised, developing countries must be adequately supported and, it is imperative that each financial decision made takes climate into account. Already, developed countries are falling short of meeting this. The 2009 pledge to provide $100bn per year in climate finance by 2020 has been postponed to 2023. This is where the importance of large finance corporates come into play. By investing in the developing world, more sustainable and equitable growth will be enabled. COP26 must produce policy initiatives aimed at the continued growth of Foreign Direct Investment (FDI) and the mitigation of its risks to ensure that developing countries can meet their climate goals without total reliance on climate finance from developed states.
COP26 must also focus on implementing policies that increase divestment in fossil fuels, as thus far, this has proved to be a significant challenge. It has been proven that if international agreements and policy initiatives on climate change are achieved, investments in fossil fuels will become pointless. Furthermore, fossil fuel divestment does not harm investors as the returns of stocks in fossil fuels are not significantly higher than other stocks3. Despite this evidence, critics remain unconvinced. This underlines the necessity for the modification and application of effective policy for divestment initiatives.
Finance Day is currently unfolding at COP26, which opened with Chancellor Rishi Sunak detailing current climate finance progress. The UN special envoy and Mark Carney, COP26 finance advisor to Boris Johnson, highlighted progress in reaching net-zero in the global financial sector. Furthermore, there were discussions around the adequate support for climate finance within developing countries. We can only hope that the event delivers on its promise to “mobilise finance” and meaningful change within the global finance sector will follow.
The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.
Sources:
Image – Unsplash
[1] Soppe, A., 2009. Sustainable finance as a connection between corporate social responsibility and social responsible investing. Indian School of Business WP Indian Management Research Journal, 1(3), pp.13-23.
[2] Agudelo, M.A.L., Jóhannsdóttir, L. and Davídsdóttir, B., 2019. A literature review of the history and evolution of corporate social responsibility. International Journal of Corporate Social Responsibility, 4(1), pp.1-23.
[3] Plantinga, A. and Scholtens, B., 2021. The financial impact of fossil fuel divestment. Climate Policy, 21(1), pp.107-119.
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