Sustainable investing: of vital importance, still a lot to do

This short article emanates from our attendance of the United Nations Environment Programme`s Swiss Symposium in Bern last week on May 6th

The often cited Stern Review (http://mudancasclimaticas.cptec.inpe.br/~rmclima/pdfs/destaques/sternreview_report_complete.pdf) says failure to act on climate change could in future cost 5-20% of global GDP pa, versus the cost of effective international mitigation now of perhaps 2% of GDP pa. So strong action is necessary. Out of Switzerland’s world-leading, cross-border AUM of CHF 2.1tn, only 4% is explicitly devoted to sustainable investing. Plus, demand for potentially environmentally damaging goods still looks to have massive growth ahead: for example, the world needs USD 8-35tn more infrastructure expenditure (depending on whom you believe); three quarters of Africans still live without electricity; and think of the billions of new car owners to come. To cope, the world must raise resource use efficiency by 4-10x by 2050.

 

Bank of England Governor Mark Carney has coined the term “tragedy of horizon”: most of the financial world is only thinking a maximum of 2-3 years ahead when putting to use the world’s USD 19tn of annual savings (macroeconomically speaking, funds available for investing). There are two major problems to address: (a) the time mismatch of 2-3 year investment horizon versus much longer term environmental costs; and (b) these environmental costs being externalities that financial innovation hasn’t yet devised a workable internalisation of.

 

It should be possible to solve this over time, but important challenges remain. The discourse at such conferences is still quite “fluffy” rather than “hard”, a reflection of the newness of the field. An exception to this was Californian public pension fund CalPERS, who seem to have mastered at least the governance aspect of sustainable investing. Definitions are still lacking (for example, are we clear yet on exactly what a “green bond” is?) and standards need to be harmonised. Environmental/social/governance issues are not necessarily non-financial in scope, but a whole new measurement system needs to be erected, and this takes time. Regulations (eg: banking licenses awarded or renewed only upon operations passing a sustainable finance test), enforced laws (eg: every public company must publish an “environmental profit and loss statement”, to precise standards), and policy making (eg: strong, internationally implemented use of tax incentives) will be critical in building this architecture.

 

The principle should be to allow red-blooded capitalism (ESG adherence creates plenty of business opportunities, after all) within a new regulatory and legal architecture that forces a faster ¬†conversion to sustainable investing. Only 4% of total investing devoted to such is too small, and time is not a luxury of which we have much. Relying on pure voluntarism is not sufficient. The UNEP’s important work must soon lead to the creation of this architecture.

 

Mekong Man

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