CPD: Responsible finance – kick-starting the USD 90 trillion ‘new normal’ playbook

George Littlejohn MCSI, senior adviser to the CISI, on the upcoming agenda in the field of responsible finance


In late September 2020, as world leaders flocked to their first virtual United Nations General Assembly, Henry J (‘Hank’) Paulson Jr warned in The New York Times: “Saving our planet from the worst effects of climate change won’t be cheap.” A report for the UN meeting had said that the world will need to mobilise US$90tn in public and private capital over the next 15 years.

Paulson knows his numbers. He is a former US Treasury Secretary and chair and CEO of Goldman Sachs. The task is enormous. “As a point of comparison [with that US$90tn],” he wrote, “global gross domestic product in 2015 was US$73tn. But there is no question that the world needs to ramp up its transition to a low carbon, environmentally sustainable and resilient economy, and to do so rapidly. The question is, how do we pay for it, given the limited availability of government funding, particularly in developing countries?”

The answer, he said, echoing comments of recent years from the City of London, led by cheerleaders such as Sir Roger Gifford, chair of the Green Finance Institute and former Lord Mayor, is private financing. (Sir Roger banged this drum in September’s Mansion House City Debate, on CISI TV.) “The good news,” says Paulson, “is that there is a global abundance of private capital. To unlock these riches, governments must create conditions that encourage private investment in clean technologies and sustainable development.”

Sir Roger nurtured the Green Finance Education Charter, launched in June 2020 and bringing together Britain’s top 12 global financial professional bodies (including the CISI). ‘Green’ now sits neatly in the growing family of ‘responsible finance’, including environmental, social and governance (ESG) and its cousins in ethical, faith-based, impact, and sustainable investing.

These professionals – including investors and wealth managers – work at the coalface of building effective investment screens for the ESG criteria that are no longer nice-to-have but must-have features of any sizeable investment mandate or funding programme. Corporates, and governments, wanting to raise money from investors – ‘woke’ or otherwise – are following suit.

Leon Saunders Calvert runs the mergers and acquisitions and capital raising business at data provider Refinitiv (née Thomson Reuters), which services these professionals with data, news, insights and workflow tools to allow them to provide expert advice and deal execution for companies and government institutions. Data is the lifeblood of finance, and Calvert sits on a mine of valuable information, not just on companies and markets but on what corporates and investors are seeking out. In short, data on data. He shared insights on CISI TV in July 2020.

The good, the bad and the sanctimonious

Calvert identified several key factors behind the burst in ESG activity, such as general awareness, a capital shift to millennials, the regulatory overhang, and the role of active managers trying to find alpha. Investors’ ethical values are driving growing demand for ESG data to measure ESG outcomes as well as financial returns. Even pure valuations-based investing needs material non-financial data to manage risk exposures and identify alpha generating opportunities.

As Paulson comments, “A new universe of financial instruments and policies are lowering the cost of capital for green growth. The challenge now is to build on these successes and ensure that green finance mechanisms are widely adopted so that capital markets can allocate financing to low-carbon sectors of the economy that have the potential to generate growth and jobs.”

These strategies are not without problems and challenges, says Calvert. There is a general lack of disclosure of non-financial data, and big swathes of missing data, notably for private companies. Standards of data reporting, regulation, ratings, and so on are still in development, and greenwashing and sanctimony are rife.

The Covid-19 crisis has brought to the fore the need to manage short-term financing of unsustainable practices to keep companies alive so they remain in existence and able to transition to the ‘new normal’. Recent months have also highlighted the correlation between social and humanitarian crises that affect the real economy, and the fact that financial markets cannot divest or diversify away from these risks. The focus on quantifying and internalising these external risks and opportunities – such as climate, reputational and social, like #metoo and #blacklivesmatter – has grown.

What about the vaunted correlations between ESG investing and financial performance? “Sustainable investing is often thought of as managing long-term risk and opportunity” says Calvert. “These are often risks and opportunities that have not occurred before now, so historical regression testing does not help validate or refute the models. However, many studies show correlations between certain ESG metrics and long-term outperformance – particularly on diversity and inclusion, though there is less clarity on causality.”

The trends from Refinitiv data are clear: they show, year-on-year, strong inflows into ESG funds, growth of green bonds and general sustainable financing, and correlations of ESG scores to superior resilience and lower volatility.

The use of benchmarks and indices has become a fundamental building block of responsible portfolios. In September 2020, at the beginning of a series on this core theme, Daniel Broby, Chartered FCSI, of Strathclyde University outlined the basics on CISI TV.

Compliance and operations professionals face mounting challenges on these themes from regulators worldwide. See the recent take from Nadia Humphreys, Bloomberg’s senior strategist on sustainable finance, on CISI TV.

Across the responsible finance world, much urgent work is in hand. Adam Smith’s enduring spirit of enlightened self-interest looms large: the link between ‘good’ behaviour and sustainable profit, for business and, importantly, for finance, is clearer by the month, and the sanctimonious need not trouble our thoughts or actions.

This article was originally published in the October 2020 flipbook edition.
Published: 13 Jan 2021
  • Operations
  • Compliance
  • Fintech
  • Corporate finance
  • Wealth Management
  • Covid-19
  • Leon Saunders Calvert
  • impact investing
  • Green Finance Education Charter
  • Green Finance Institute
  • Hank Paulson
  • ESG

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