Sustainable finance: the great divide

The environmental transition requires massive levels of financing and the mobilisation of all financial participants, both public and private. The financial sector must play its part and act as a facilitator for this transition. If the industry is going to be part of the solution rather than the problem, it’s time to realise that good will alone isn’t enough. It must be coupled with skill, which means investing in further training on these issues.

Financial professionals have a major role to play in the environmental transition. To do so, they must be in a position to properly understand physical constraints and the finite nature of resources, as well as the implications of these limits for their businesses. They need a certain level of expertise to understand the causes and consequences of the environmental crisis, manage the specific environmental challenges facing each business sector, and adopt the regulatory framework for sustainable finance. Defining investment policies to take account of the planet’s limits is no easy task. Is the financial sector equipped to manage balance sheet risk by including climate trajectories and biodiversity dependences, or to understand the criticality of resources and measure its impact on the environmental transition?

The upskilling challenge

To set out on the right path, the financial sector needs to upskill the workforce in a whole range of areas on which the vast majority have received only rudimentary training, or no training at all. For example, discounting cash flows to their present value is no longer enough. If we are to combat global warming, discounting future greenhouse gas emissions is just as important.

To adjust the economic and financial system to fit within the planet’s limits, we need to rely on the teaching profession. Training for transition is a necessity.

Education for these skillsets must be based on sound initial training, and regularly supplemented with ongoing training. A few introductory hours and awareness training is not enough if we want to achieve significant results. Acquiring the skills required on these issues is a long-term but virtuous process where the more you know, the more you want to learn. To adjust the economic and financial system to fit within the planet’s limits, we need to rely on the teaching profession. Training for transition is a necessity.

Teaching people about the environmental challenges in finance is essential. The backdrop is the pressing need to reinvent practices, tools, and economic and financial models. Today’s financial intermediary must be an enlightened citizen. It is standard for today’s curriculums to cover financial and banking crises but it is also high time to make teaching the impact of finance on environmental and societal challenges a priority.

How can we imagine that financial intermediaries will be able to make a significant contribution to financing the environmental transition unless they understand the planet’s limits and the implications of this for the risks and returns associated with the allocation of capital? And how can they, in turn, educate and encourage their clients to care about the impact of their investments? Investment advisers must understand sustainable investment in order to help clients implement their preferences and priorities properly.

The economic, financial and education sectors must accept their responsibilities and rise to the challenge of transforming production and consumption models.

Time for a reset

When talking about greenhouse gas emissions, we often think of heavy industry or the energy and transport sectors. The direct greenhouse gas emissions of a bank, i.e. the emissions of its offices, heating and electricity, are clearly paltry in comparison with those of industrial businesses. But if we include indirect emissions, i.e. emissions financed by banks’ investments and loans, it’s quite a different story. For financial intermediaries, consideration of the emissions derived from holding financial assets (investment and financing) must be prioritised as a lever for combatting global warming.

Inconsistent public policies are clearly working in tandem with an underestimation of the financial risks linked to the climate.

As things currently stand, and despite commitments made as part of the Paris Agreement to align financial flows with the objectives of mitigating or adapting to climate change, the environmental transition is crying out for funding. At the same time, funding for the fossil fuel sector remains at high levels. Inconsistent public policies are clearly working in tandem with an underestimation of the financial risks linked to the climate. Evidently, carbon reduction trajectories based on a cost/benefit analysis are futile when faced with a set carbon budget. Similarly, analysis of the cost of biodiversity replacement relies on a misconception of combinatorial, exponential and irreversible impacts. The erosion of biodiversity is a particularly complex issue and still much misunderstood by financial markets, which often forget that gains in one area in no way offset losses elsewhere, in contrast to greenhouse gas emissions.

Greenwashing and competence greenwashing

While greenwashing¹ has now entered the lexicon, a new term is emerging: competence greenwashing. The origins of this term can be found in a publication by Prof. Kim Schumacher² on “the impacts of greenwashing and competence greenwashing on sustainable finance and ESG investing”. Prof. Schumacher denounces a glaring lack of skills among the professionals involved, identifying the gap between statements made by companies and financial sector participants on the one hand, and the organisational resources and capacities devoted to ensuring the precision and consistency of impact measurement on the other.

If you’re a fan of comic strips, you may remember Asterix album no. 25, entitled “The Great Divide”, where a Gaul village cut in two by a large ditch becomes mired in interminable quarrels. This is like manna from heaven for the infamous Codfix: a dark manipulator with a head like a pickled herring, who is always ready to stir things up. Similarly, the divide analysed by Prof. Schumacher favours greenwashing and undermines the credibility of efforts to promote the environmental transition.

Greenwashing is dangerous as it is deceitful and can hinder efforts to achieve sustainability objectives. It also causes harm by sowing doubt and discrediting sustainable finance.

Greenwashing is dangerous as it is deceitful and can hinder efforts to achieve sustainability objectives. But greenwashing also causes harm by sowing doubt and discrediting sustainable finance. Among the Codfixes of today can be found the doubt and fabrication merchants, conspiracy theorists, and science and information deniers.

It is essential to transmit the message of Prof. Schumacher and call for skills on these issues to be ramped up in the financial sector. The time has come to champion stronger education for financial intermediaries on sustainability, but also to insist on the necessity of partnerships between the world of finance and the world of science in order to guarantee maximum solidity, integrity and scientific coherence. It’s time to advocate for humility among bankers and to ban the use of expert sustainability terminology by those without scientific expertise. The green finance roadmap must be real and not virtual. It must be concrete, transparent and honest, and must neither downplay negative impacts nor exaggerate positive impacts.

¹ Greenwashing refers to the practice of promoting environmental arguments which do not correspond or do not sufficiently correspond to the tenor of the message.

² Kim Schumacher is a lecturer on sustainable finance and ESG strategy at the Tokyo Institute of Technology.