In order to achieve these flows, we need to ‘decarbonise’ the system’s very heart: capital markets.
Current financial dynamics still favour profits over sustainability and, as a result, the majority of available capital still goes to corporates and sectors, not compatible with a ‘net-zero’ nature-rich world.
Thanks to consumer pressure, the financial industry has started to offer products that should respond to this aspiration: finance that actually serves the planet and people. The range of products the industry has created goes largely under the definition of ‘sustainable finance’.
This is a positive and welcome ‘trend’. Sadly, to date, the ’Babel’ of standards, intense lobbying, rampant greenwashing and the poor understanding of conservation science have limited capital flows or labelled as ‘green’ unpalatable projects (e.g. biofuels).
Sustainable finance is a booming sector, and its ‘theme’ (sustainability) will become mainstream across capital markets. Twenty years from now sustainable finance will lose its pre-fix as legislation and market standards will reduce ‘unsustainable’ activities to a niche frequented by opaque, quasi-illegal investors. Sadly, this risks being a hollow victory for the environmental community. To date as much as 25% of the total assets under management (AUM) claim to be ‘sustainable’, but a closer look shows that only a small portion of these assets fund genuinely sustainable initiatives.
There are at least three areas that need tackling immediately:
- The technical definition of environmental sustainability at activity/sector/technology level;
- The issue of disclosure of sustainability data at corporate/product/fund level (reporting and accounting standards);
- The issue of computing such data with methodologies that accurately reflect environmental risk and impact (the ‘materiality’ issue).
The European Union is in the process of addressing all three areas and redesigning its sustainable finance industry. This commendable goal is a true legislative puzzle that relies on a number of moving parts. It is one one that is still at risk of being derailed or significantly weakened in its ambition, and 2021 and 2022 will be defining years for the success of the EU’s initiative.
The issue of quantity and quality of sustainable investments is one of strategic importance for T&E, since the majority of the stakeholders in the transport sector are privately owned.