With the public gaining awareness of the social and environmental problems facing the planet, sustainability issues have moved into the mainstream. There are plenty of news stories about the increase in extreme weather, plastic pollution and people living without food or basic sanitation. Sustainability is the intersection of the triple bottom line, known as the three Ps: people, planet and profit. This business concept focuses on growing the economy while also taking into account the needs of the environment and society.
Humanity has been operating out of balance with the natural world for decades, placing economic growth ahead of environmental and social costs. Individuals, businesses and governments are starting to realise that we need to radically change this. An economy cannot thrive without a healthy planet or people. Most recently, the coronavirus crisis has demonstrated this quite dramatically.
A global effort
Solving environmental and social problems is no longer the purview of non-governmental organisations and governments alone. The finance sector plays a crucial role in economic growth. It controls the flow of money and can direct capital to companies that understand and manage their sustainability issues well, or are developing business models to solve the global challenges that society faces.
Banks finance the real economy and have the opportunity to contribute to a more sustainable world. How money is used today determines the world we will live in for decades to come. The UN’s 17 Sustainable Development Goals outline the challenges that must be overcome by 2030. The funding gap that needs to be bridged in order to achieve these goals is estimated to be $2.5trn a year. Put another way, this is a multitrillion-dollar opportunity to invest in companies that are providing sustainable solutions.
Businesses can help create conditions that push sustainable finance into the mainstream. For example, they can meet the growing demand for socially responsible products and services. The Global Sustainable Investment Alliance reports that sustainable investing grew 34 percent in the two years to 2018, reaching $30.7trn (see Fig 1). And the appetite for sustainable investing is not limited to Millennials: the 2019 Schroders Global Investor Study found that Generation X is the most likely to consider sustainability factors when selecting an investment product.
Similarly, investors and rating agencies are increasingly integrating sustainability into their analyses. Through the UN Principles for Responsible Investment, more than 2,200 investors with $80trn of assets under management have committed to integrating environmental, social and governance (ESG) factors into their investment decisions. Likewise, 19 credit agencies have committed to integrating ESG factors into their ratings.
At the same time, regulators are implementing policies and requirements for sustainable finance. Requirements already exist for non-financial disclosures, and this is only set to increase. As countries develop their strategies in line with their commitments to the Paris Agreement, the finance industry will have to adapt. The European Commission’s action plan on sustainable finance is a bold initiative to redirect capital towards a greener European economy; there is global coordination backing up these efforts. In October 2019, the EU, alongside 10 countries outside the bloc, launched the International Platform on Sustainable Finance, which aims to provide cohesion and promote integrated markets for global sustainable finance.
Governmental initiatives are not the only thing encouraging companies to operate more sustainably. Increasingly, employees want to work for businesses that place sustainability at the heart of their culture and values. Additionally, consumers are more aware of the role financial institutions have in working towards a sustainable future, and so they expect companies to reduce their environmental impact. Some social movements are galvanising people around the world to demand action from political and business leaders.
Get your priorities straight
The topic of sustainability is broad and can be confusing. Given the role of the finance sector and expectations from stakeholders, banks should consider the risks and opportunities sustainability brings to their business. This helps define what sustainability means to them specifically.
The first step is to prioritise. A common framework for helping companies decide what is important to them is a materiality assessment. Engaging with internal and external stakeholders – including employees, shareholders, clients, regulators and experts – is a useful way to bring these perspectives together. Topics that are identified as highly important to the company and society can then be used as the basis for developing a corporate strategy and guiding implementation. The materiality assessment should look at how a company’s activities can be improved by integrating ESG into all decisions.
A successful sustainability plan needs to be embedded in a company’s overall business strategy. Without this alignment, it is difficult to realise value and grasp opportunities. At VP Bank, we have a unique ownership structure comprising three long-term anchor shareholders that provide solid foundations. This core characteristic has supported the bank’s long-standing commitment to the principle of sustainable action. For many years, the bank has implemented measures including using renewable energy, reducing waste, supporting art and philanthropy, and offering an ESG mandate.
Building on our history of support for sustainable initiatives, VP Bank has developed its sustainability goals in line with its Strategy 2025, which was announced in March 2020. An extensive stakeholder engagement process helped us define our material topics and shape the plan accordingly.
Our ambition is to grow our business while creating a positive impact. We will do this by offering our clients sustainable solutions through our Investing for Change initiative. This includes integrating ESG into our investment decision process and aiming to create a net positive impact through our offering. We have developed a methodology based on the understanding that sustainability is much more than the mere exclusion of companies from an investor’s portfolio: the aim is to use sustainability indicators to identify opportunities as well as risks. In addition to growing our assets under management in sustainable investments, we also integrate sustainability into our business operations.
The right game plan
Our sustainability plan sets out what we want to achieve by 2025, but we do not yet have a clear path to reach these goals. Still, we are working with stakeholders and partners to develop the right solutions. In our business activities, we are committed to achieving carbon-neutral operations and improving gender diversity across our workforce. Meanwhile, in our product offering, we will integrate ESG issues into the investment process and grow our assets under management in sustainable investment solutions.
Sustainable investing is simply good business. Integrating ESG into the investment decision process allows investors to understand how sustainability poses risks or opportunities to long-term value creation. This means identifying attractive investments in pursuit of financial returns. Even with the supportive conditions that stakeholders are providing, there are some challenges to scaling up. These include a lack of consistent and comparable data and the need for common standards and definitions. These are not insurmountable problems: for instance, we expect that increasing disclosure requirements will lead to improvements in data quality, which will result in better comparability and more robust ESG ratings.
One of the misconceptions surrounding sustainable investing is the view that there is a trade-off between returns and doing the right thing. This myth has been debunked by many studies. A meta-analysis of 2,000 studies published in the Journal of Sustainable Finance and Investment found that, in 90 percent of cases, integrating ESG led to the same level of performance or outperformance of the benchmark. This holds true even during times of crisis: the Financial Times reported in April that ESG leaders had outperformed the benchmark rate in Europe, Japan and the US since the start of 2020.
Another misconception that has been debunked is that this is a short-lived fad. Sustainability and sustainable investment make good business sense and will continue to grow – the demand is there, as demonstrated by the rate of inflows. Stakeholder groups are creating an environment that will propel the industry forward.
Sustainable investing is simply intelligent investing where sustainability factors are integrated into the decision-making process. Capital flows are directed towards solving solutions to global challenges while generating returns. ‘Investing for change’ is VP Bank’s motto; we know the future is determined by how we invest today.