The financial sector on the path to greater sustainability
All necessary societal change processes must be financed: They can only succeed with the support of a committed financial sector with great expertise. At the same time, the transformations happening in a variety of other areas also affect the financial sector.
One example is the decarbonization of the economy, which is affecting all industries, their processes and their products. CO2-intensive industries in particular are prone to having major investments become worthless and turn into so-called stranded assets . Major investors are already beginning to respond by disinvesting. Moreover, regulatory authorities sometimes intervene in the markets, while consumers change their behavior—even regarding how they invest their money, too. These processes of transformation must be understood for risks to be managed successfully, change to be driven forward and business opportunities to be benefitted from—and the opportunities to be had are huge. The Cambridge Institute for Sustainability Leadership estimates that by 2030, investments into the transformation process towards a low-carbon economy will reach upwards of 93 trillion US dollars by 2030.
The EU is strengthening regulations for a sustainable financial market
Sustainability aspects are increasingly being considered when it comes to the regulation of the financial sector. Currently, regulations are being tightened for all players involved. This can occur via the EU Action Plan: by financing sustainable growth and through the recommendations of the High-Level Expert Group (HLEG) on Sustainable Finance and the Task Force on Climate-related Financial Disclosures (TCFD) along with the already implemented regulations on non-financial reporting. The EU requires classification systems, standards and labels for sustainable investments and financing. Sustainability is becoming part of the fiduciary duties concerning investments. Disclosure obligations for financial service providers and companies dictate how sustainability must be integrated into decision-making processes. In line with these obligations, they must also disclose how they sufficiently measure and control climate risks and opportunities and whether this is part of their corporate strategy and governance. This extends far beyond previous non-financial reporting requirements and must now be integrated accordingly into corporate practice.
Sustainability management pays off
A solid sustainability performance lowers risks and improves companies’ chances of financial outperformance. As found by the University of Hamburg, this recognition is not only backed by 90 percent of relevant studies worldwide—large investors such as BlackRock are also convinced. They’re requiring integrated sustainability management from companies, and in the financial sector, too. Actively committing to greater sustainability is considered a positive factor by rating agencies and also benefits the reputation of the company. According to the Reputation Institute, 41 percent of the reputations measured could be linked to sustainability topics. At the same time, the fields of sustainability management and finance are constantly developing: No longer inessential activities related to donations, sponsoring and business ecology, they’ve moved towards becoming a fixed component of corporate strategy and core business.