I wrote last year about why it’s time to think of ESG, not as environmental, social and governance but as existential, seismic and global. Yesterday (29th November 2022) I spoke at a conference – Sustainable Finance Live – and again called on people to think of ESG as existential, seismic and global.
Not only is the message still valid, but it’s also even more urgent today than when I first started talking about it. Climate change is one of the most serious challenges we face. When we add this to all of the pressing social and governance challenges, the threat is existential, the action required is seismic and the need for solutions global.
Capital investment has such an important role to play in addressing many of the environmental and social problems facing us globally. Twenty times more environmental impact can be achieved by moving savings, pensions and investments to green products rather than some of the lifestyle changes we are advised to make. If we consider that statistic alongside the fact that 70 per cent of retail consumers want to avoid harm and achieve good in investment, then the opportunity speaks for itself.
It is also positive that ESG funds are consistently outperforming the broader market with more than half beating the MSCI World index. I am delighted that progress is being made here but, unfortunately, the finance industry is also tainted by bad actors aiming to capitalise on the growing demand for environmentally sound products by conveying a false impression about how green their products actually are.
This problem with greenwashing is a powerful argument for the need for the financial services sector to resolve gaps in ESG data. I still believe the UK can establish a lead in green finance by continuing to lead on regulation and standard setting globally, but we need to get to grips with the data as well as the right political signals, a standardised taxonomy and consistent, trusted, regulated standards.
I am interested in the potential for data collected by satellites and sensors, which are able to track the supply chain of factories and proof of concept through blockchain technology. Transparency and the ability to analyse data in real time can play a critical role in sustainable finance. Technology cannot be effective if we continue to have gaps in data as I said during my keynote:
“We are looking too often at the aggregation of data, which is not good enough, is not up to date enough. As we have aggregated it potentially in our mind, we hire it to a level that does not necessarily take you anywhere. We have got to be able to go back to those initial data sources, touch them, understand them, analyse them, and be as rigorous with all the data in this space as we would with all of the data in any decisions that we are making.”
Lord Chris Holmes, Sustainable Finance Live, 29 November 2022
It is also positive that the UK Infrastructure Bank is providing £22bn of infrastructure finance to tackle climate change and support regional and local economic growth across the UK. But I believe more can be done here and in June I tabled an amendment to the UK Infrastructure Bank Bill that would have added “nature-based solutions” to the definition of “technologies and facilities relating to climate change”, which was the actual wording on the face of the Bill, now Act. It was disappointing that the Government did not accept my suggestion, but our recent Science and Technology Select Committee Report made many excellent recommendations on how to promote nature-based solutions and I am hopeful the Government will act on some, if not all, of these important policy suggestions.
A pension is probably the most significant financial investment most of us will make in our lifetime and if we are able to choose a new washing machine on the basis of an energy efficiency rating then we should certainly be able to do something similar for our pensions. Investors are interested in ESG investing and the momentum is certainly moving in the right direction. The title of my keynote was – is sustainable finance sustainable? – but I think the real question should be – is it sustainable for finance not to be sustainable? – and the answer, of course, is no. What point profit if no planet on which to spend it?
Sustainable Finance Live. Is Sustainable Finance Sustainable? Finextra