The BFS sector’s laggards need to stop only seeing uncertainty in sustainable finance—and think about the innovation process

Many investors still make excuses for not moving toward sustainable endeavors, often citing the uncertainty surrounding the technology, policies, and environments required to transform. While some established giants and newcomers in the banking and financial services (BFS) sector, like HSBC and Nutmeg, incorporate environmental, social, and governance (ESG) factors into their investments, many remain purely focused on financial return. True, we might not know the exact technologies and regulatory environments that will solve the climate crisis, but we do know the innovation processes that will get the green machine moving. Take the dramatic fall in the cost of solar or wind power over the last decade as a proven case. To drive the well-understood sustainable investment vehicles, the BFS sector must connect its capital experts with the technology experts—enterprises, service providers, and policymakers—to nail down viable roadmaps that guide sustainable finance forward.

BFS leaders are rising above the uncertainty to focus on sustainable investment vehicles—don’t end up stranded with a personal carbon bubble

Perhaps the most commonly cited barrier to sustainable finance (broadly defined as finance aiming to meet the UN Sustainable Development Goals) is the uncertainty surrounding the technologies that will trigger a mass-revolution against fossil fuels and a move toward sustainable energy. Carbon capture, sequestration, and utilization (CCSU) is a leading example. But the leaders of the BFS sector aren’t dwelling on the technological uncertainty; instead, they’re targeting the transition phase… best summed up by Cambridge University’s Institute for Sustainable Leadership (CISL, Exhibit 1).

Exhibit 1: BFS’ sustainable leaders are financing the processes that will allow others to achieve net-zero—rather than worrying about the uncertainty of which assets to fund now

Source: Cambridge Institute for Sustainability Leadership, 2020), Bank 2030: Accelerating the transition to a low carbon economy.

Rather than aligning with the economists predicting future ecosystems, environments, policies, and technology—a difficult if not impossible task—there are some proactive BFS leaders that have moved on from investments purely based on financial return and realized that we now know which innovation processes will create the technologies we need. We are funding those through knowledge capital, natural capital, and human capital. Leading BFS players are getting ahead of the curve so they aren’t left at the end with stranded assets and forced divestment or scrappage, once everyone else has embraced that we’re heading to net-zero, one way or another. 

HSBC’s financial services integrate ESG into decision making. Named 2019’s World’s Best Bank for Sustainable Finance, HSBC works throughout its ecosystem for the sake of investment transparency and critically for this piece, creating the right conditions that support long-term sustainable investment. In addition to pledges which include monetary commitments to sustainability and addressing risk in partnership with expert-led groups like the TCFD, HSBC goes on to provide services that aid transition activities such as merger and acquisition (M&A) support for renewable energy customers; they also support industry policies, standards, and principles required to make the transition.

We know which policy processes get the green machine rolling—we’ve already done it…

Ten years ago, the conversation surrounding renewable power was all about cost, but that very focus meant that the cost came down, and now it is a more beneficial investment even if you don’t care about the climate (wind and solar power are leading examples; see Exhibit 2).

Exhibit 2: In 10 years, policies and investment have triggered a dramatic fall in the cost of wind and solar power

(Levelized cost of electricity, US dollars per megawatt-hour)

Source: IMF, Bloomberg, and the Federal Reserve, 2019

Smart investors are already putting a number on sustainability risk—forcing businesses to make it a KPI—and giving those investors a better understanding of businesses’ long-term viability

Investors face competing pressures to divest from non-sustainable business (fossil fuels, deforestation, and so on) and to continue producing financial returns. A massive part of the future investment landscape will be dictated by businesses’ boldness in addressing climate change. Investors worth over $35 trillion have already come together as the Climate Action 100+ to put pressure on firms to decarbonize—and there are also predictions of dramatic devaluation of non-sustainable businesses (the Principles of Responsible Investing [PRI] predicts as much as 43%!) as regulation comes in.

Businesses will no longer be investable if they don’t take climate change seriously. The evolution of climate science and the sheer number of data points is adding to not only the pressure facing business leaders but also the ability of investors to confidently make tough calls.

On the consumer side, Nutmeg, an investment management challenger, is coined “socially responsible investing” or SRI. Nutmeg differentiates itself on the transparency of investments, supported with industry data that helps it surpass the labels of “green, sustainable or ethical” finance. Investors are given the control to guide their funds to the issues that matter to them across ESG, in combination with benchmarking metrics that map out how these investments stack up.

The Bottom Line: Succeeding in sustainable finance starts with connecting BFS’ capital experts with the technology experts in enterprises, providers, and policymaking.

BFS firms must go out and cover these bases to avoid being stranded when the carbon bubble bursts:

• Work with service providers to understand the technology and processes that determine technology’s adoption and roadmap.
• Work with policymakers to get as good a sense as possible for what the regulatory roadmap is and how BFS can best invest in innovation.
• Work with the firms you’re currently financing to understand how capital can help them develop sustainable technology and solutions.
• Simultaneously, continue to finance the usual sustainable suspects like solar, wind, and other renewable technology, but also consider from the steps above how to finance hard-to-abate sectors like oil and gas and agriculture in such a way that green finance becomes more attractive to the wider market and encourages these sectors’ own sustainable transitions.