IN SPITE OF THE urgency in the fight against climate change, the system of finance remains stubborn in its tradition of focusing on short-term profit, rather than long-term sustainability of said profits. Our goal is to highlight the radical changes that Green Finance is making, and the multitude of positives stemming from this new way of thinking. As Orwell once said: “One’s got to change the system, or one changes nothing”. The system cannot continue with one of its components having such differing values than the rest, like a human body with a transplanted organ. There must be a modicum of compatibility.
Green Finance is a concept that focuses on looking at the long-term, trying to future-proof finance in order to ensure long-term profitability in all sectors of business. It’s about financial instruments or investments that support the transition to a green financial system, one that mobilises investment in clean and resilient growth. The announcement of the UN’s Sustainable Development Goals (SDGs) in 2015 has provided a lens through which such investment can be assessed.
The structure of the financial sector plays a key role in the economy, so it is essential that there is a unified framework through which the sector can deploy finance to achieve societal goals. This is all only compounded by the lessons we learned from the most recent financial crisis, along with the urgent need to address climate change in all sectors. The goals expounded by the SDGs have been disseminated widely and are now being put into practice. Examples include the EU’s Sustainable Taxonomy, Green Bonds, and the TFCD’s climate risk reporting guidelines.
The public sector seems more open to adapting to the SDGs and making long term sustainability central to its development strategies. Governments tend to be able to see these issues in the long run, and will therefore consider the long-term impact of a project before investing.
Understanding that sustainability is, in many cases, about long term risk management can bring massive benefits for both public and private sector organisations that can be both financial and non-financial. Avoiding the late-stage costs associated with non-sustainable projects can improve profit margins for private sector firms (and also means avoiding the danger of having a stranded asset). The social and societal benefits of this outlook cannot be overstated as they do not simply have an impact on the organisation itself, but on society around them.
A common concern among business leaders is that sustainable approaches could result in short term cost increases, or even a reduction in profits. This is not always the case, and becomes less so when looking at impact over time. In the same way that energy efficiency implementations may take investment today, most projects pay back in 2-3 years. Due to the rapidly changing nature of the regulatory environment, supply chain concerns and a better understanding of risk management and good governance, the short-term cost will almost definitely be recouped in the long-term gain.
The dramatic drop in the costs of technology are also playing a role. In the energy sector the cost of wind and solar: there has been a 90% drop in the price of solar power technology over 5 years, which allowed even private homeowners to install solar panels and contribute to the energy sector’s development. This type of innovation cycle can be reflected across a range of sectors when the right policy and investment frameworks are in place.
It is also essential to educate decision-makers on the effects that their decisions will have in wider society and the role of corporations within society. Of course, it is more complicated to decide who will bear the cost of such education. Summits and conferences make an important contribution in highlighting the risks and opportunities of sustainable development, but there is always more to be done. There is increasing value in the dissemination of data between organisations, sharing best practice. The importance of analytics in sustainability continues to grow as the technology develops whether that’s AI or machine learning. New tools such as predictive analytics will greatly reduce the temporal and financial costs that have been such a cause for concern. The growth of predictive analytics
There are a multitude of opportunities to be found in the journey towards sustainable development and the achievement of the UN’s SDGs. Governments are keen to support the development of sustainable infrastructure, and large firms are slowly realising that the long-term benefits can be very attractive. Green Finance plays a role in this, as divesting from unsustainable projects to support sustainable development allows organisations to follow the SDGs and remain financially viable.
By Param Barodia