In this last part of the series (see Part 1, the price of our investments and Part 2, the search for answers in the market) I deepen the reflection on: how to give form to the sustainable finance industry and become sustainable? While the field is in its initial stages, the demands for it are more and more salient.
I continue exploring the dissonances of finance, revealing the gaps existing in countries, banks and corporations. I make a point of emphasizing that it is not only gaps in institutions, but essentially the gaps in individuals. It seems like sometimes we forget that it is individuals who are making up each of these institutions, who help to finance them, that manage them. Individuals are benefiting from these products and services and that is why they are consumers. Individuals make up our society and culture. I myself and you who read this, in fact.
Towards the end, I suggest examples of how we can help give form to and nurture this new sector so that it may grow and flourish steadily.
What is the demand, and where do financial resources go today?
According to U.N. estimates, investments of an order of 5 to 7 trillion dollars a year until 2030 will be necessary to achieve sustainable development goals. For the developed countries alone, the figures are 3.5 to 4.5 trillion, while up to now investments have been limited to under 2 trillion!
We could ask whether there are not enough resources to fulfill this demand. But when we check to see that, globally, with military defense alone more that 1 trillion dollars is spent, and that with subsidies to fossil fuel industries, including their environmental and social costs, more than 5.1 trillion is spent, it becomes clear that the problem is not the lack of resources. It is a question of allocation and prioritization. And even prior to this it is a question of consciousness. How do we prioritize, what do we prioritize, for whom do we prioritize, and with what purpose?
The corporate sector, in its expressive majority, including banking, continues to seek short-term returns and to prioritize financial capital. This strategy exposes their investors to the “green swan” bubble (see Part 2 of this series). To illustrate the gravity of this situation I cite the case involving 33 banks in the world. Since the adoption of the Paris Climate Accord up to 2018, these banks put 1.9 trillion dollars into fossil fuels.
This amounts to more than the total amount of dollars circulated in the U.S. economy in one year. They include the major American banks JPMorgan, Wells Fargo, Citi, Bank of America, Morgan Stanley, Goldman Sachs. But borders are crossed with this behavior and do not limit themselves to the U.S. In this list of 33 are also the Canadian banks RBC, Scotiabank, Bank of Montreal, british banks like Barclays, and HSBC, swiss banks like Credit Suisse and UBS, the spanish bank Santander, the german bank Deustshe Bank, japanese banks like MUFG and Mizuho, and Bank of China, among others.
Dissonance in the banking sector
Some of these banks demonstrate one more example of dissonance. Two months before the Paris Accord, five of the principal American banks JPMorgan, Wells Fargo, Citi, Bank of America, Morgan Stanley and Goldman Sachs, jointly communicated to the press underscoring the importance that governments strike a deal for the climate. In this same document they declared that their institutions were collectively “committing significant resources towards the financing of climate solutions”. But in practice, collectively they ended up investing 16 billion more dollars in fossil fuels in 2018 than in 2016.
Initiatives that instigate change
To deal with this problem and, alternatively, accelerate the transition to the decarbonization of the economy, regeneration of the planet and social justice, I highlight in this post two global initiatives that have played an important role.
- . Disinvestment to pressure institutions (e.g., banks, asset managers, universities, cities) to reallocate their resources away from fossil fuels.
- . Promotion of greater transparency in the financial and corporate sector with the aim of strengthening investments aligned with environmental, social and governance values.
In the first case, one of the most prominent initiatives is lead by 350.org.
Until now, 1,182 institutions have disinvested around 14 trillion dollars and 58,000 individuals have disinvested 5.8 billion dollars. The theory of change of this initiative is based on the movement that advocated for disinvestment from South Africa in the 80s, which had a central role in overthrowing the apartheid system.
When the world’s biggest investor signals change in finance
One of the more recent and noteworthy cases involved the world’s biggest hedge fund BlackRock, with investments of up to 7 trillion dollars. This sum is greater than the entire economy of Japan, the third largest in the world.
In mid-January of this year, the fund’s head, in his traditional annual report to CEOs of an assortment of major companies in the world, stated that the climate crisis would redefine finance and that his company would revise its high risk investments and would make environmental sustainability one of the key criteria for its investments. The announcement also indicated they would be disinvesting from coal business.
How are individuals influencing investors that are as big as a country like Japan?
I don’t wish to disqualify Blackrock’s CEO and management, but the story behind this great turnaround in investment strategy would be incomplete if I didn’t cite the fundamental role that activist and conscious consumer groups have been having. The pressure was mounting.
Five months before BlackRock’s announcement, the Institute for Energy Economics and Financial Analysis (IEEFA) put out some figures which showed that the hedge fund, for not considering climate associated risks, generated losses of 90 billion dollars to their investors. 75% of these were due to decisions to invest in ExxonMobil, Chevron, Royal Dutch Shell and BP — of which all had an inferior performance as compared to the previous decade.
Another significant loss, due to nonconsideration of risks in investing in coal and gas turbines, was with GE – General Electric. Instead of responding to these risks, given the global trend of investments towards renewable energy, GE continued to invest in thermal energy, acquiring Alstom and then the company Baker Hughes, which is in the oil and gas business, and this led to a loss of 67% in the company’s market value.
Because of this, the IEEFA report questioned to what extent investors were in fact protected.
Dissonance in the investment strategy at BlackRock
The report also exposed the institution’s dissonance. Despite having announced publicly a declaration of commitment to sustainable investment and exalted the importance of aligning investments with purposes beyond profit, in practice this was not reflected in their portfolio. Merely 0.8% of the total portfolio of BlackRock was being de facto invested in ESG funds (environmental, social, and governance).
And civil society continues to be active, not satisfied with the announcement of a disinvestment from coal made in early 2020. Activist groups and conscious consumers continue to pressure BlackRock so that it expands its disinvestment policy to include the whole oil and gas sector, in addition to coal.
BlackRock Domino Effect: other expressions of change in strategy
Another important demonstration of an initial break in the financial services paradigm came with the investment arm of State Street, with assets of 3.1 trillion. The announcement indicated that they would vote against the boards of large companies that do not have satisfactory performance in environmental, social and governance areas (ESG). Many corporations also made announcements indicating a greater concern and alignment with environmental values, like Delta (to go carbon neutral), Amazon (introducing electric trucks, and servers powered by renewables) and Microsoft with its ambitious plan of being carbon negative until 2030.
I will not analyse here to what extent these measures are really transformational or are marketing strategies, but I recommend a great episode of The Daily podcast for those who would like to explore this theme. For now, I would like to instil one additional reflection. On the one hand, Microsoft seeks carbon neutrality in their operations, on the other, it helps oil and gas companies increase their production capacity. It’s curious.
Principles of Responsible Investment: incremental improvements or transformational change?
The investments that live up to ESG values have garnered increasing attention since 2005, most of all after the launch of the PRI initiative (Principles of Responsible Investment). The initiative, supported by the United Nations, has now 2,200 signatories and seeks to foment investments that yield long term value and also benefits society and the environment. In Brazil, more than 60 institutions are signatories, including major banks like Itaú Unibanco and BTG Pactual.
More examples of dissonance in banking: From the USA to Brazil
It is an important initiative but not sufficient to deal with the emergency situation in which we live. Being a part of PRI does not mean the companies are dealing with the climate emergency, for example. Many of banks previously cited that increased their investments in fossil fuels are signatories of the PRI, including JPMorgan, Barclays, Bank of America, Goldman Sachs, among others. In Brazil, Banco Itaú is the largest asset holder of popular housing construction companies, which according to the Agrobusiness Observatory in Brazil – De Olho nos Ruralistas (“Keeping an eye on the Ruralists”) – is involved in activities that disrespect the rights of indigenous peoples like the Guarani in São Paulo and that deforest for construction.
What do I have to do to invest in a green fund?
Truthfully, it is not easy to be sustainable… the market is complex and we can be induced to simply choose brands that put a stamp on our investment so we don’t have to worry about the problem anymore.
If I could offer a recommendation, as a first step, and based on my experience, I invite you to investigate, with much curiosity, your own investment strategies. After all there are no “enemies” to be fought against… We are each of us, individually and collectively, and as the systems that we create and as a culture, responsible for the situation we find ourselves in.
The dissonances I illustrated in the examples of the big banks, in the U.S. and Brazil, in England and Germany, from investment funds to universities with a reputation for technical research like Harvard, the issues are not exclusive to these organizations, but belong to all humans. Myself included.
Initiatives like the Principles of Responsible Investment (PRI), the sustainability indexes in the stock exchanges, “ISE” — Corporate Sustainability Index, “ICO2” – Carbon Efficiency index, “IGC” – Corporate Governance Index, are all excellent, but do not alone take care of the necessity to promote change on the scale that we need it. The “green bonds”, fixed income securities used to raise money for sustainable investment, are also an important way of propelling the market.
How do we give form to the sustainable finance market and become sustainable?
Individual, collective action and openness to transformational dialogue
It will be essential also that each of us, individually and collectively, question the banks where we have accounts to ask where our resources are being allocated. And start dialogues with market regulatory organs to create instruments that make the financial sector de facto more transparent. Create a true “Open Banking”. The engagement and open dialogue to direct the disinvestment of fossil fuels and other activities that impact the environment and society are also fundamental to push this transition.
Just as it is important to continue to investigate our own consumption habits, our actions in the marketplace and in society. How can consumers, in our residences and in the institutions we serve, be able to drive the reduction in the consumption of fossil fuels? After all, no one who invests in fossil fuels does it because they are a fool or because they desire to destroy the planet. There has been a demand for this. And we are each of us consumers.
How can I reduce my consumption of fossil fuels?
To identify the areas where we have the most carbon emission impact, I invite you to get to know the app “Earth Hero”. It is a personal guide to orient and support the adoption of a lifestyle that is more healthy for you, your family, the larger community and the whole planet. A guide for becoming more sustainable. I hope you have fun with it!
Soon there will be a version in portuguese. In case you have any suggestions about improvements or if you wish to contribute, please contact me.
Innovative initiatives in finance
Regarding new kinds of investing, if you live in Brazil, I recommend you look up the great initiative by Sitawi — “Finance for the Good”. It is a veritable oasis in this market, where through a platform for crowdfunding, anyone can invest in small businesses that have an impact.
Internationally, I want to highlight the movement, still in its infancy, but with great transformative potential, which is the Global Alliance for Banking on Values. Currently composed of 62 financial institutions, and still without a representative in Brazil, the association is profoundly committed to transformational and concrete change in the financial sector, to promote transparency and positive social and environmental impact above and beyond economic impact. They are organizations, like the Dutch bank Triodos, that renounce investments with a high financial capital return if they do not create positive returns in other forms of capital like social, economic and human.
Cocreating a new finance that is more transparent and aligned with ESG values
I will continue to explore this theme and ways we can, as individuals and collectively, induce changes in finance, in such a way as to make it more transparent and open to clients. Follow the latest posts! And contact me to exchange ideas and join efforts to together give form to sustainable finance!
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