Would you rather invest in a project that saves 0.5 or 5 tonnes of CO2? Would you be willing to...
Welcome to Supercharging Sustainability — my monthly newsletter featuring insights on sustainability, ESG 2.0, and sustainable finance written for non-experts and experts. Here, you will find a blend of management insights, case studies, regulatory changes, personal anecdotes, and practical tips.
The financial cost of achieving the net-zero transition globally involves investing USD 275 trillion in physical assets for energy and land-use systems from 2021 to 2050. Annual investments must increase by USD 3.5 trillion to achieve the transition. The financial sector can steer the required financial flows towards this investment gap. Risk and return, global and macro events, profits, regulatory environment, and psychological factors still drive investment behaviour. This leaves the question: What incentives does the financial market have in steering capital flows towards building a sustainable future?
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From climate goals to trust and transparency: evolution of the ESG narrative
Let’s examine the evolving sustainability narrative from one of the most influential figures in finance: Larry Fink, CEO of BlackRock. His letters wield significant influence over the decisions and priorities of a vast financial audience and company operators, shaping the trajectory of sustainable finance.
An interesting observation emerged in his previous letters to investors: "net zero" was mentioned 19 times in 2021 but zero in 2023, and "trust" was mentioned once in 2021 but 19 times in 2023. Not without cause, since trust is essential for a sustainable future. It fosters stakeholder collaboration and cooperation, encourages collective efforts, and is key to governing and implementing effective and meaningful change.
A somewhat surprising trend over the last year has been that some major investors are withdrawing money from sustainability efforts, and some are even going so far as to call ESG a scam. In the US, Florida's treasury reportedly divested USD 2 billion from BlackRock, citing BlackRock’s ESG investing and lack of focus on maximising returns. Some states are even introducing anti-ESG Bills to limit ESG investing. Recent ESG-related backlashes and increased anti-ESG sentiment have pushed the sustainable finance sector to rethink its approach to stay competitive and relevant.
In most investor presentations, listing documents, or prospectuses of sustainable financial instruments and ESG funds, we can find a clause saying something like “the issuer gives no assurance that the sustainable investments will satisfy, in whole or in part, any present or future investor expectations or requirements regarding any investment sustainable finance criteria.”
This captures the market’s current state, telling us that issuers of instruments or fund managers want to play along but are also trying to manoeuvre and create value and impact without taking on too much liability. This puts a question mark on the existing instruments and funds and how they might be classified in the rearview mirror in a few years, as we recently saw MSCI stripping thousands of funds of their ESG ratings.
The elephant in the sustainable finance room: fossil fuel industries
Despite global efforts to dissuade lending to fossil fuels, as we saw with Barclays recently, many oil and gas companies face minimal additional borrowing costs compared to less polluting companies. Environmental concerns seem to carry limited weight in funding decisions for these companies, as evidenced by the absence of a "premium" for issued bonds.
The decline in new bonds issued since 2021 reflects their strong cash flow rather than financing challenges, indicating that fossil fuels remain a significant part of the energy and financial landscape, albeit with a diminishing share.
At Accrona, we recently explored the role of oil and gas in achieving a net-zero future. Oil, gas, and coal still represent around 80% of the world’s energy consumption. Some investors are placing big bets on both ends of the green transition, investing heavily in the transition and against it. For example, the EPH Group, a Czech investment firm, is building a "fossil fuel empire," buying up assets in and around fossil fuel and high-emitting industries at low prices.
Is Sustainable Finance at a Crossroads?
In short, the answer is yes: sustainable finance is at a crossroads. There is a stronger narrative in the financial markets that investors demand risk-adjusted returns as many sustainable investments have not paid off financially, especially in a high-interest rate environment.
However, there are good reasons to be optimistic about the role of financial markets in sustainable development. Growing awareness and demand from investors for sustainable and responsible investments have increased the supply and variety of sustainable financial products. We also see improved standards and frameworks, government incentive schemes to help support sustainable investments, and regulations that force them.
I trust that there will be more evidence indicating that investing in a sustainable future can deliver strong financial returns. The increased corroboration would attract more investors to this market, creating a positive feedback loop to increase sustainable investing. On many fronts, 2024 has been named the year of sustainable finance, culminating in the COP29 summit in Baku in November that will focus on climate finance.
In the end, finance drives action, and with action, a sustainable future that fosters long-term prosperity and value creation remains attainable.
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