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The Case for Sustainable Finance
An economy that is increasingly structured on the basis of sustainability benchmarks, requires a financial sector in which the same standards form an integral part of strategy and operation. Simply complying with the legal requirements when it comes to sustainable finance is not a tenable strategy for financial institutions in the longer term. Customers, investors, regulators, politicians and society expect and demand more when it comes to sustainability. Banks, insurers, pension funds and asset managers will have to embed ESG aspects in their products, services, processes, systems, strategy and culture. Only in this way can they continue to be assured of a licence to operate, maintain a viable revenue model and contribute to a further restoration of confidence in the financial sector.
Financial sector key to systemic change
The EU Action Plan: Financing Sustainable Growth gives banks, insurers, pension funds and asset managers an essential role in the required reallocation of capital. Although most attention has so far been paid to the climate and energy objectives, the Action Plan explicitly includes much more. Social aspects (working conditions, privacy and data security) and governance aspects (behaviour with regard to competition, taxes and remuneration) of companies must also be taken into account in the investment decisions of financial institutions.
EU in 2030
CO2 emissions 40 to 55 percent lower than in 1990.
27% of the energy used by Europeans should come from renewable sources by 2030.
At least an additional €180 billion per year is needed to achieve this.
Four levels of leadership in sustainable finance
Financial institutions are increasingly aware of their role in the transition to a climate neutral, green, circular, inclusive and competitive economy. There is a growing awareness that sustainability can also be profitable in a strictly commercial sense. The new measures, their scope, impact and compelling nature, and the speed with which they are being implemented, make sustainability a strategic priority. Financial institutions cannot escape the issue of how to implement sustainable finance. An initial focal point is the way in which they wish and are able to distinguish themselves from their peers. Is compliance with legislation good enough when it comes to sustainability, or is the ultimate goal that investment choices lead to positive changes in society? We distinguish four levels of leadership that financial institutions can adopt compliance, active management, active engagement and frontrunner.
Sustainable finance offers financial institutions opportunities to distinguish themselves when it comes to products and services, risk management and reporting and disclosures.
The extent to which financial institutions are able to distinguish between compliance and frontrunner is not an easy matter. Sustainable finance touches on almost all aspects of financial institutions, and the development to frontrunner will therefore involve having to progress through various stages and being embedded in every fibre of the institutions. Being 'simply' compliant already involves a considerable effort. The active management and integration of ESG elements throughout the institution's operations is of an entirely different order for a several reasons:
Financial institutions that manage to start integrating ESG elements into their core processes soon distinguish themselves from their competitors. Financial institutions that integrate ESG into their entire operations are assured of a licence to operate and the trust of customers, investors and a society that expects more and more in this respect.
Would you like to know more about which approach best suits your organisation? And what the quickest route to achieving the desired sustainable finance ambition is? Get in touch with us. We will be happy to talk to you.