A roadmap towards sustainable finance
For too long finance has been primarily about returns and risks. The ethics of how the funding is used have often been considered irrelevant. This has fuelled investment into pollution and exploitation with pervasive negative impacts. There has been little attention given to prioritising investments with positive social and environmental impacts. That’s the approach that got us into the Global Finance Crisis, as well as the climate crisis, the biodiversity crisis and so on.
But things are changing. There is positive movement amongst leading businesses, and there are simple and powerful actions that individuals and companies can take.
At the global level, a sign of the changing times was a recent statement from the US Business Roundtable on business purpose. Milton Friedman must be stirring in his grave. One of his sayings was “the purpose of business is business”. Yet the US Business Roundtable gave priority to meeting the needs of customers, employees, suppliers and communities, and only then, the interests of shareholders.
One of the most powerful arguments in favour of this change is that businesses that have a socially beneficial purpose do well financially, as well as doing good in society. The rationale is that a focus on profits leads to short termism and financial unsustainability, as well as negative impacts on society.
Yet institutional investors argue that the changes are more apparent than real. When it comes down to the trade-offs, the incentives are still for companies to prioritise financial returns. In addition, shareholder primacy is well-established in law, in New Zealand as well as the US, and some company directors and trustees are still wary of taking decisions that might be construed as contrary to their fiduciary duties.
However a recent legal opinion in Australia makes it clear that Directors are not only allowed to take climate risks into account, but they could be considered negligent for not doing so. The reality is that there is still confusion (as noted in the UK’s current consultation) on the issue, and clarification in New Zealand’s Company Law and the Trustees Act is long overdue.
In the fund management industry there is unlikely to be a conflict. The weight of evidence now shows that funds taking Environmental, Social and Governance (ESG) issues into account have returns that are, on average, at least as high as conventional funds. This has propelled responsible investing out of its niche into leading practice. Members of the Principles of Responsible Investment now manage funds of US$90 trillion.
Yet this movement for change has not yet been fully reflected in current government policy frameworks or in the choices of consumers. It is these two aspects of sustainable finance that are the focus of the Mindful Money event this month addressed by the Minister of Finance.
The time is right. There have been a number of international initiatives recently launched to reorient finance towards sustainability, including; the EU’s Sustainable Finance Action Plan, Canada’s Expert Panel on Sustainable Finance, and interestingly, China’s Guidelines for Establishing a Green Finance System.
As these initiatives make clear, we face dual challenges: to shift financial resources to meet the sustainability challenges now and in the future, including climate change and Sustainable Development Goals (SDG’s); and to meet the challenge of ensuring that our finance system is resilient and sustainable. As the UK’s Green Finance Strategy neatly puts it;
“we need to finance green and we need green finance”
A step change is clearly needed.
New and scaled up finance is needed. At the international level, around US$7.6 trillion per year of investment is needed to meet the SDGs and commitments under the Paris Agreement, according to the recent Foundations Platform report to the G20.
In New Zealand, our investment needs include financing the transition to net zero greenhouse gas emissions; investment in sustainable and climate-resilient infrastructure; cleaning up our rivers and restoring our natural environment; as well as fostering innovative solutions to redress inequality and provide opportunities for all.
The government has put a number of key economic policies in place to support investment into these areas, and further policies are underway. These include reform of the ETS, a feebate system to encourage EVs and low emission vehicles, new investment into social needs such as mental health, and a reorientation of spending priorities through the wellbeing framework.
In the financial sector, the government has established the Green Investment Finance initiative, capitalised at $100 million, and has allocated $300 million of growth capital for emerging companies, but the scale of finance needed is far greater. The government cannot do this alone and the bulk of the funding will come from private sector finance.
In a welcome development, the Aotearoa Circle’s Sustainable Finance Forum is developing a roadmap towards sustainability, and its first report will be produced in 2019. As a participant in the working group process, I see a growing recognition of the need for new approaches emerging from government, the financial sector and civil society.
Campaign to take ethical investing into the public mainstream.
There are also practical and powerful steps that can be taken immediately. My organization Mindful Money is a registered charity established to make investment a force for good using radical transparency to show members of the public where their hard-earned KiwiSaver funds are invested.
It is easy to see what sectors and companies any of the 265 KiwiSaver funds invest in and our analysis shows that over $4.3 billion of KiwiSaver funding is invested in companies that members of the public are concerned about, including fossil fuels, gambling and weapons. Shifting this funding towards sustainability is an important step.
Mindful Money matches a users’ criteria with the available ethical KiwiSaver funds. The message is that investors can feel good about their investments, they can do good with their money, and they can earn good returns.
Most New Zealanders want to invest ethically but it is still too complex, with a lack of transparency and no objective information. I believe we have overcome some of these barriers with extensive research and a simple, quick and free way to switch to an ethical KiwiSaver fund so it’s not just individuals who can benefit – employers too can encourage their staff to invest ethically.
Investing ethically is a powerful way for both businesses and staff to support their CSR and sustainability aims. As a society, we are starting to move towards sustainable finance but it needs greater urgency and vision to meet the challenges ahead.
Making the right choices with our KiwiSaver investments is a great place to start.