Climate change: Ethical finance can help deliver a 'Marshall Plan for the planet' - Omar Shaikh
This article originally appeared in The Scotsman at https://www.scotsman.com/news/opinion/columnists/climate-change-ethical-finance-can-help-deliver-marshall-plan-planet-omar-shaikh-3001747
Faced with the biggest pandemic in a century grinding the global economy to a halt, or our ecosystem being on the cusp of the irreversible extinction of species caused by climate change and our insatiable demand for natural resources, or indeed the rupturing of deep structural barriers causing gender and race discrimination highlighted by the Black Lives Matter campaign, people are no longer willing to accept the status quo.
The gap between the rich and the poor has never been bigger and – despite all our advancements – the UN has called for the urgent implementation of the Sustainable Development Goals (SDGs) so that no one is left behind.
We sit at a key juncture and there is an unrivalled opportunity to rewire the system – for those nations, markets and companies which can demonstrate vision, leadership and courage.
And we have no time to lose: this must be the decade of action.
Change the world
Five years have passed since the countries of the world came together to set the SDGs – a blueprint to achieve zero hunger, quality education, decent work and climate action, among other targets by 2030.
Despite the challenges we all face, at the Global Ethical Finance Initiative (GEFI) we believe that when we come together to share insights and commit to action, we genuinely can change the world.
The plans that governments and institutions produce must be more about renewal than just recovery, building a responsible, inclusive, sustainable and green future. We must encourage bravery and allow our leaders to be courageous, because we will only achieve as much as their vision and courage allows us to.
At the heart of this is reframing capitalism – and the blood supply for this is ethical finance.
Last week, from our base in Scotland, we convened – virtually – over 1,500 professionals from 86 countries to shape a better finance system. Some of the world’s largest banks and asset managers attended the Ethical Finance 2020 summit, representing over $20 trillion of assets.
Ethical finance is a fairer system of financial management that combines profit with better outcomes for people and the planet.
There is a reason why we are based in Scotland and why the summit is convened from Scotland. In rethinking capitalism, Scotland, as a global citizen and with its heritage going back to Adam Smith, can play a unique role in this. The financial services and academic talent, progressive thinking and inherent culture provide an enabling ecosystem for solutions that can once again shape the world.
Financing a green recovery
A recent report from the Ethical Finance Hub found that Scotland’s £9.5 billion UK-domiciled responsible investment already represents 11 per cent of the UK responsible investment market, compared to the country’s seven per cent share of the total market.
There is an unrivalled opportunity for Scotland’s £800 billion financial services industry to tap into, service and grow the market.
We need to consider where climate finance can help fund the green recovery and create jobs through facilitating foreign direct investment (FDI).
There is therefore a prerogative for those in charge to demonstrate ambition and moral leadership. The Scottish Government has already demonstrated a willingness to think beyond GDP, with Nicola Sturgeon rightly talking about the fundamental need for health and well-being. Ministers now need to take the next steps to progress this agenda and organise and commit to realising the financial innovation that is required.
Finance firms too must continue to take action. It is encouraging that Aviva this month set a new 2050 net-zero carbon emissions target for its own auto-enrolment default pension funds.
Steve Waygood, chief responsible investment officer with Aviva Investors, told our summit that “we need a vision for a Marshall Plan for the planet”, echoing the words of Prince Charles last month. Steve highlighted the COP26 climate change summit being held in Glasgow next year as arguably the most important conference that the UK has hosted.
Make My Money Matter
Preparatory work over the next six-to-nine months will reveal the world’s ambition to tackle climate change and determine whether the summit in Glasgow is considered a success.
With the fifth anniversary of the Paris climate agreement coming this December, governments including the UK Government should soon be setting out their commitments and ambition to tackle the emergency.
Our ‘Path to COP26’ campaign has now become the largest financial services sector movement in the run-up to COP26 with over 40 firms registered. The initiative is designed to encourage banks, asset management firms and other financial companies to demonstrate their commitment to the climate agenda by sign-posting existing initiatives and standards for them to sign up to.
For Scotland, there are great opportunities for asset owners to invest in the clean energy sector and deliver greener pensions. Investments in wind power and green hydrogen present considerable, unique opportunities to Scotland that can attract energy-intensive businesses and allow Scotland to become a leading net green energy exporter.
All this needs to be financed and our pensions are an important source. As part of our ‘green your pension’ campaign, we know that only 13 per cent of Scots who have a pension actively chose their own investment portfolio.
We have partnered with the Make My Money Matter campaign led by Richard Curtis, encouraging the public to shift their pensions away from harmful assets and in line with their values.
There is an opportunity in the months ahead to make a positive difference.
For the sake of all people and the planet, we must seize it.
Ethical finance poised to unleash the green recovery
Ahead of next week’s Ethical Finance summit, Shepherd and Wedderburn Senior Associate Peter Alderdice and Solicitor Daniel Boynton explore the challenges and opportunities of green and responsible investment – and how pension funds are uniquely placed to deliver ethical finance and support the transition to a decarbonised economy. Click here to reserve your free place.
The COVID-19 pandemic has made one thing abundantly clear: when disaster strikes, major societal change is possible overnight.
The measures taken around the world to save lives and protect public health systems – such as shuttering non-essential businesses, furloughing almost 10 million workers in the UK and putting children’s education on hold – had been the preserve of dystopian fiction until earlier this year.
As governments start developing policies to rebuild our economy after this time of unprecedented disruption, we should not lose sight of the lesson that fundamental transformation is not only possible within a short period; sometimes it is essential.
That lesson and, in particular, the need for a green recovery, is of critical importance for achieving the targets set by the Scottish and UK governments of reaching net-zero greenhouse gas emissions by 2045 and 2050, respectively.
The challenge posed by those targets is enormous – not least in the midst of the biggest public health and economic emergency in recent times. However, the coronavirus pandemic has demonstrated that society can adapt to major change when it has to. As the saying goes, “needs must when the devil drives”.
If we are to succeed in achieving net-zero by the target dates, then the economic recovery from COVID-19 must be green. A key challenge in achieving this will be finding the investment required to turn ambitious targets into reality.
The transition to a decarbonised economic system will require unprecedented levels of investment; estimates from the Committee on Climate Change suggest that investment in the UK’s power sector alone needs to rise from around £10 billion to £20 billion annually to achieve this goal.
However, green investment is required not only in the energy sector, but across all areas of the economy if we are to tackle the impact of COVID-19 and climate change at the same time.
While some investment will come from government funds, measures to tackle the immediate impact of coronavirus have left the Exchequer’s coffers depleted. The scale of the net-zero challenge means the private sector has an essential role to play.
Many businesses may be contemplating restructuring to take advantage of the opportunities that the green recovery presents and need to be confident that investors are with them for the long-term in supporting the radical steps required to make the green recovery a reality.
Pension funds – whether in the traditional defined benefit sector, or up-and-coming master trusts in the defined contribution space – are uniquely placed to help meet the challenge of delivering ethical finance to support the green recovery:
- They have the capital. Thanks to automatic enrolment, more people than ever are actively saving for retirement and already by 2018 the value of UK pension wealth stood at more than £6 trillion. A green recovery offers many new sustainable investment opportunities for pension fund trustees and managers, such as green bonds.
- Members are demanding change. New disclosure requirements mean those running pension funds now need to explain how environmental, social and governance (ESG) factors are used in investment decisions. Recent high-profile campaigns have resulted in investment changes at the largest pension funds, and the pressure is set to build with greater public awareness of impact investing and fossil fuel divestment strategies.
- It’s good for business. A growing body of evidence indicates businesses that prioritise ESG factors perform better in the long-term. Being environmentally sustainable, socially responsible and well governed reduces business risk and ultimately improves the bottom line. At a time when historically low interest rates and gilt yields make returns harder for pension funds to find, harnessing the green recovery promises better outcomes for their members.
While these factors present pension funds with a great opportunity, more needs to be done to make sure that opportunity is seized:
- Pension scheme trustees can work with their advisers to develop better reporting tools to help them understand the ESG impact of investments.
- Automatic enrolment providers can offer default funds taking account of environmental factors and ensure that pension savers have the right information on those ESG points available to them.
- The UK Government and the Pensions Regulator can support pension schemes in their green recovery journey, recognising the importance of this issue to members.
As well as the patient capital offered by pension funds, the green recovery will also depend on businesses having access to working capital and shorter-term finance from sources such as banks.
The global financial crisis that befell us in 2008 led to systemic reform of the banking sector to rein in unethical behaviour and excessive risk-taking and to improve corporate culture and individual accountability in financial institutions. The increased regulatory scrutiny since then on responsible and sustainable conduct means the banking sector is now better placed than ever to meet the financing needs of the green recovery in an ethical way.
The deployment by banks of tools such as ESG ratings, more commonly seen in the asset management industry, to inform lending decisions is still in its early stages, but initiatives are already underway to help banks proactively accelerate the transition to a green post-COVID economy.
The Loan Market Association, a trade body for the syndicated loan market, has developed Green Loan Principles to promote the development and integrity of the green loan product.
On the international stage, the United Nations Environment Programme Finance Initiative (UNEP IF) is working with signatories to the Principles for Responsible Banking to increase lending that supports socially and environmentally sustainable economic activities.
The root-and-branch reform of our economic system required to achieve net-zero targets is daunting, but policy-makers should not be timid when it comes to proposals for the post-COVID recovery. Change is the only constant in life, as they say, and ethical finance stands poised to unleash the green recovery.
Shepherd and Wedderburn’s Head of Clean Energy, Clare Foster, will be speaking with Chris Stark, Chief Executive of the Committee on Climate Change, on climate action and the path to net zero at the opening keynote interview of the Ethical Finance Summit on 5 October. Click here to reserve your free place. You can find out more about the firm’s Clean Energy Group and the contribution it and its clients are making to a green recovery here.
Accounting for Sustainability at Ethical Finance 2020
“If you can’t measure it, you can’t improve it”. This quote, often attributed to Peter Drucker, gets to the heart of why accountancy is key to the sustainability revolution gripping finance and business. If we want to understand the impact that business activities have on climate change, biodiversity, society and more, we have to be able to measure that impact, and report on it in financial statements and annual reports.
At the Global Ethical Finance Initiative (GEFI), we are seeking to bring in the perspectives of accountants, as well as others from across the financial services ecosystem, for Ethical Finance 2020. Taking place on 5th-8th October 2020, the summit features an impressive list of speakers, including NatWest’s Alison Rose, Aberdeen Standard’s Keith Skeoch, Professor Michael Mainelli and Kate Forbes, Cabinet Secretary for Finance in the Scottish Government.
While accountants might not fit the public image of what a climate activist looks like, it is increasingly recognised that their participation is essential to creating real action on climate change. The WEF at Davos earlier this year saw a major step taken, with a push from the Big 4, along with other partners, to standardise ESG (environment, social and governance) reporting, creating consistency internationally and moving away from the current status quo where firms are faced with a plethora of reporting standards.
Several sessions at Ethical Finance 2020 will focus directly on the issue of sustainability in accounting, including GEFI founder Omar Shaikh (CA) interviewing Professor Michael Mainelli. Anne Adrain of ICAS and Louise Pryor of The Institute and Faculty of Actuaries will be showcasing the Green Finance Education Charter, a commitment from professional bodies including ICAS to include environmental skills in their curricula. Taking a wider perspective, Jeff Hales of SASB will be explaining collaborative efforts to standardise sustainability reporting worldwide.
These sessions will discuss a range of issues, including whether we need to rethink our idea of the going concern. In the face of devastating climate change, as well as related issues such as biodiversity loss, is the traditional horizon of 12 months appropriate? Environmental damage, including climate change and deforestations, is already impacting supply chains, and stands to cause even more harm if left unchecked.
Then there are technical questions, such as how exactly to measure carbon footprints and other ESG impacts for alternative asset classes. Measurement and disclosures for listed equities are still imperfect but have improved markedly. The level of transparency is far lower in the world of private equity, debt and other asset classes, creating huge data challenges for ESG accounting.
Taken together, this raises the question of whether we are adequately reporting the negative environmental impact of business operations sufficiently. If we are depleting the natural resources of the planet or mistreating people, then the true costs of that are unlikely to be reported in accounts, which reflect the income generated but not the corresponding loss to natural resources. There are efforts to remedy this inconsistency at the national level, through initiatives such as ‘Gross National Happiness’, or the Scottish Government’s drive to measure natural capital.
These discussions are underpinned by the assumption that things can actually be measured: that we can “put a number on it”. But what if the fundamental data is qualitative, rather than quantitative? One area where ESG risks can easily be compared is the carbon emissions held responsible for climate change. The impact of finance on social issues and other environmental issues such as biodiversity and extinction is much harder to quantify.
The last few months have demonstrated the deep inequalities that exist within our society, with the Black Lives Matter movement being the most prominent example. In this climate, ignoring social issues simply because they are difficult to quantify is unacceptable. This point is underpinned by the recent Boohoo scandal around COVID. Despite being linked to unsafe working conditions, and labour rights abuses, the company had scored highly on ESG, ranking in the top 15% of their MSCI peer group index.
What does all this mean for ICAS members? Their involvement is key and they can make a huge impact, but to overcome some of the issues mentioned, accountants may need to broaden their skillsets beyond traditional financial accounting, into environmental, and social accounting, highlighting the need for education and training.
Reflecting our ambition to curate open, accessible debates, Ethical Finance 2020 will be free to attend. To find out more, including our full range of speakers and agenda, visit ethicalfinance2020.com now, or visit https://www.eventbrite.co.uk/e/ethical-finance-2020-tickets-82579199609 to reserve your free place.
NEWS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE
NEWS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE
THURSDAY 10TH SEPTEMBER 2020
GLOBAL SUMMIT IN SCOTLAND TO BUILD ETHICAL FINANCE SYSTEM
A major global summit will be convened virtually from Scotland next month to bring together over 500 leading professionals to shape a more ethical finance system. Ethical Finance 2020 has the theme ‘protecting our future’, with a key focus on delivering a green recovery after COVID-19 and seizing the opportunities of COP26 in Scotland.
Over 300 organisations, representing over £22 trillion in assets and including some of the world’s largest banks and asset managers, are taking part in the summit to help develop a sustainable finance system that works for people and the planet. The summit is staged by the Edinburgh-based Global Ethical Finance Initiative (GEFI) in conjunction with the Scottish Government and the United Nations Development Programme (UNDP). The Royal Bank of Scotland is the host partner and the global event is supported by Chartered Banker and the Chartered Institute for Securities & Investment. Speakers include filmmaker and campaigner Richard Curtis, NatWest Group CEO Alison Rose, Banking Standards Boards chair Dame Susan Rice, Baillie Gifford partner James Anderson, Aberdeen Standard Investments CEO Keith Skeoch and Bank of England director James Talbot.
GEFI is the driving force behind the ‘Path to COP26’ campaign, as well as a campaign for greener pensions. The Ethical Finance summit will be held over four days from October 5 to 8 and will explore how financial institutions can take practical steps to support inclusive economic growth without depleting natural resources or leaving anyone behind. GEFI works towards a fairer finance system for people and the planet, focusing on sustainability, climate change and social justice. Ethical finance in the UK is valued at around £40billion, creating thousands of sustainable job opportunities. Scotland has a long history of social enterprise with a growing reputation in ethical finance. A recent report from the Ethical Finance Hub found that Scotland’s £9.5billion UK-domiciled responsible investment represents 11 per cent of the UK responsible investment market, compared to the country’s 7 per cent share of the total market. There has been rapid sector growth of around 27 per cent per year since 2004, mainly in climate, impact and Environmental, Social and Governance (ESG) funds.
Gail Hurley, senior advisor to the Global Ethical Finance Initiative, said:
“It is now widely recognised that the financial services sector has a fundamental role to play in delivering universally supported targets such as the Paris Agreement and the UN’s Sustainable Development Goals, as well as supporting economic recovery from the COVID-19 pandemic. However, despite its potential, the current financial system can be a cause – rather than a solution – to some of the pressing challenges our planet and its people currently face. Ethical Finance 2020 will explore how the financial sector can support inclusive economic growth without depleting natural resources or leaving anyone behind. Scotland’s proud history in ethical finance makes this the right location for such a major summit, and with COP26 coming here next year it is vital that we come together to deliver a sustainable finance system for people and the planet.”
Thom Kenrick, head of social strategy at the Royal Bank of Scotland, said:
“Royal Bank of Scotland is delighted to be host partner for the Ethical Finance Summit once again this year. Over the past four years we have seen the conversation around ethical finance develop and mature at an incredible pace. Ethical Finance is a truly global summit of leading thinkers who are committed to developing social and sustainable financial systems. As Scotland looks forward to 2021 and COP26, this event is more relevant than ever. We look forward to being part of the conversation as we continue to embed purpose and sustainability into our strategy.”
Simon Thompson, chief executive officer at the Chartered Banker Institute, said:
“Ethical and sustainable finance are more important now than ever before, as we rebuild businesses, communities and lives impacted by COVID-19 whilst continuing to meet the challenges of the climate emergency. Building a global community of finance professionals committed to embedding ethical and sustainable finance within their own professional practice, in their organisations and across finance as a whole is core to our purpose at the Chartered Banker Institute, and it’s one of the core aims of Ethical Finance 2020 too. That’s why I’m delighted to support the summit, and look forward to welcoming a large global audience to Edinburgh virtually in October.”
Photo for publication is available here. L-R, Simon Thompson, Gail Hurley, Thom Kenrick.
More information is available here: www.ethicalfinance2020.com
More information on Path to COP: www.pathtocop26.com
What is ethical finance?
A fairer system of financial management that combines profit with better outcomes for people and the planet. The full working definition of ethical finance: A system of financial management or investment that seeks qualitative outcomes other purely the management of returns. Outcomes sought may reflect ideas from faith, environmental and governance theories.
Why does ethical finance matter?
Although ethical finance is not a new concept the financial crisis has led to a growing interest in sustainability, climate change and social justice. This has seen a collective desire to create a fairer, more inclusive and responsible global financial system. Trust in banks is diminishing and today’s generation of consumers believes that investment decisions should reflect the issues they care about. Ethical finance in the UK is valued at around £40 billion, creating thousands of sustainable job opportunities. Today, with the world facing a climate emergency there is a pressing need to develop environmentally sustainable financial solutions.
Contact: Alan Roden at alan@quantumcommunications.co.uk or 07753 904 531