Sustainable finance is no longer just a buzzword; it’s here to stay. Consumer demand for sustainability nowadays is high, and, for that reason, it’s unwise for banks to attempt to “greenwash.” Greenwashing refers to the practice of creating marketing spin around a company’s products as being “green,” while covering up their total contribution to climate change.
Doing the work to become more sustainable and taking full advantage of the green economy holds great promise for the finance sector. Before we discuss why , let’s start from the beginning.
What is sustainable finance?
Historically, the economic aspect of an investment has been the determining factor in whether to pursue it, together with the investor’s risk profile. Today, however, the sustainable aspect of an investment plays an increasingly important role. Consequently, this leads to greater challenges within the finance sector where profit maximization is expected on a quarterly basis, year after year.
With today’s knowledge of the ongoing climate crisis, more and more people understand that it is not sustainable to look at an investment opportunity with only a short-term profitability perspective. We also have to look at the long-term impact of the opportunity from a sustainable view. What are the environmental implications of this opportunity? What social responsibilities does it involve? Who governs the company and how?
These considerations often require a longer investment horizon. As an example, when you invest your hard-earned retirement funds, would you want to invest in a power supply company that delivers short returns but has a longer-term negative environmental impact? Or, would you rather invest in a business that looks after the planet, thus ensuring your future retirement is actually possible?
Making sustainable decisions often is difficult because of the “greenwashing” practices mentioned above. In Europe, to prevent this, the European Union Commission released a standard-a taxonomy-so that consumers can compare the sustainability of one company with another on an equal basis. The EU released a final report on its taxonomy in March 2020, at the beginning of the coronavirus pandemic. However, it disappeared almost completely from the news, which is very unfortunate.
The aim of the taxonomy is to establish a uniform, harmonized and international classification system for sustainability activities and reporting within the finance sector. Some have referred to the EU taxonomy report as a “procurement plan of the future” because it reflects how the EU will achieve a 50% reduction in carbon emissions by 2030 and 0% carbon emissions by 2050 through its mandates. The taxonomy also will help to prevent greenwashing and provide the basis for future policy actions to ensure that we, as citizens, can trust company sustainability reporting.
Mandatory sustainability reporting is on the horizon, but why wait?
The EU taxonomy will take full effect on January 1, 2022. Compliance with new regulations like the EU taxonomy is top of mind for banking executives based on findings in the 2020 CGI Client Global Insights. However, even without the taxonomy, implementing sustainable strategies and actions today will open up a wide range of opportunities.
Sustainable strategies can act as a catalyst for product innovation. Think about ways you can help customers make more environmentally friendly choices in their banking and investing. There are some brilliant examples of this already out there. One is from Ålandsbanken, which developed a credit card that displays the climate impact of every transaction by classifying purchase patterns.
Another example is from mobile payments provider Alipay in China. AliPay gamifies shopping by awarding “green” points for sustainable purchases. More than 500 million people are using Alipay, and when a user achieves a certain number of green points, Alipay’s subsidiary, Ant Forest, plants a tree in the user’s name. Since 2016, Ant Forest has planted more than 122 million trees. If it continues planting trees at this same pace, China will lower its carbon footprint by 5% as a result.
By developing more sustainable products and services that benefit the environment and society, a finance company’s brand image will improve, leading to stronger customer relations. Companies following this advice in Europe also are eligible for the EU’s tax-related green subsidies.
Through a commitment to accurate sustainability reporting and green product innovations, finance companies now have an excellent opportunity to increase revenue, attract a better workforce, reach new customers, and contribute to a sustainable future. This is a win-win-win-win situation-for the environment, society, people and companies.
I am enthusiastic about the EU Commission’s commitment to advancing sustainable finance through its taxonomy. I also am hopeful that banks in other countries will embrace the opportunities sustainable finance promises. The finance sector has an important role to play in driving sustainability, so let’s get started!
If you’d like to discuss this topic further and learn more about how you can increase your sustainable finance posture, feel free to contact me.