Despite some progress, the work around defining and improving sustainable investment ignores developing markets’ reality
Even in the midst of a global pandemic, sustainable investing is taking a victory lap as funds under management have skyrocketed, with estimates from the Forum for Sustainable and Responsible Investment showing that sustainable investing assets accounted for $17.1tn — or one in three dollars of total US assets under professional management in 2020.
The preoccupation of mainstream commentators and practitioners, including specialist media, has been on this phenomenal growth rate and on the anxiety around the accuracy of labeling funds as truly sustainable. This has meant a great deal of attention on verification to ensure that sustainable funds are actually what they claim to be. These really are ‘first-world’ problems, because while these issues have taken up many column inches and dominated social media conversations in this space, mobilisation and deployment of climate finance in emerging markets have stalled. And when funds have been available, these have come mainly as debt, rather than equity investments.
In Europe, the past two years have been focused on designing and discussing a comprehensive disclosure and standards setting regime as part of the EU’s sustainable investing framework, which includes the Sustainable Finance Disclosure Regulation — a complex, granular and in-flux set of rules. In early December, the European Commission announced that it was pushing back SFDR’s second phase of implementation to January 2023, a six-month delay, to give companies and financial markets the time to adjust and make appropriate arrangements.
While Europe has prided itself on being far ahead of others in the developed world, the challenge of measuring sustainability through an investment lens remains unsolved.
The ESG and sustainable-investing world is highly data centric. Announcements about new data analytics, proprietary systems and platforms are a regular occurence. This is true for the international development community too, where many different approaches to promoting ESG and sustainable investing exist within the UN system, industry and professional bodies.
But even within this cacophony of competing industry-led frameworks and including those put out by global bodies, there is a commonality: they all seem to be designed for conditions that only exist in advanced capital markets. The scaffolding that would make this system work does not yet exist, even in the financial ecosystems of a mid-sized European country or US city.
The underlying assumptions are based on an environment in which information flows are smooth and there are few hurdles to collection, processing and interpretation of company data. These systems require a plethora of specific and highly specialised intermediaries: credit ratings agencies, ESG specialist consultancies, data analytics firms to support the finance market, and specialist verification firms to monitor and assess the metrics and the disclosures from companies and investors. This need is neither acknowledged nor accounted for.
Look beyond New York, London, Brussels and Zurich
In advanced capital markets, the sheer size and sophistication of financial firms allow for dedicated ESG and sustainable investing teams alongside traditional ones. There are industry training opportunities and vibrant professional bodies that provide certification and continuous learning. Academic research in investment finance and management disciplines goes back decades, with exchange between scholars, practitioners and business schools often including adjunct professors who are actively practising.
Very little, if any, of this exists in the rest of the world, however. When banks from small island nations join the Responsible Banking Initiative, it is not as though they receive a separate six to 12 month onboarding or training programme with curricula designed to take into account the realities of the circumstances in those settings. Instead, this period is given the public relations treatment, with glowing statements of what membership in these organisations will achieve, while not acknowledging that they fail to cater to the needs of emerging markets.
It is going to be difficult to move back from the public relations-first approach, but we all have a lot riding on getting climate finance working.
The Principles for Responsible Investing and all related bodies can become more useful and effective by focusing on the realities of developing countries, rather than providing cookie-cutter approaches. There are serious structural bottlenecks facing developing countries as they transform their financial systems towards ESG and sustainable finance. The ESG and sustainable finance community ought to design learning and capability-building mechanisms suited to those needs and deliver those in partnership with domestic institutions.
The financing needs to achieve the UN sustainable development goals (SDGs) are reported to be approximately $4tn per year. This is needed for climate change mitigation and adaptation, improving resilience — particularly at community level — for institution building, livelihood support, entrepreneurship, health systems, food security and other social services. Fostering sustainability should be understood as a holistic undertaking. To my mind, that is a better frame and should be the overarching objective, rather than the preoccupation we saw during COP26 when there was a single-minded focus on reducing greenhouse gas emissions.
Making a start on this agenda requires acknowledging that the current approach is not working for the vast majority of people in the world. With the exception of some small circles, sustainable investing is not yet well understood — even within the narrow context of advanced markets — and has already produced some backlash in terms of accusations, and real instances of misinformation and greenwashing. We need to move beyond the merely performative and get back to the mission.
The bottlenecks that exist are manageable and there are already examples of progress. We can look at Sustainable Development Investment Partnership, a body working with emerging country leadership in Indonesia to shift mental models and actual practice, or the Green Climate Fund, which provides grants for improving the investability of developing country projects. Much more needs to be done and specialists with a knowledge of economic development, as well as finance, can be key connectors in this regard.
Once there is a will, we can undertake meaningful sustainable investing at scale and where it is needed the most.
This article is also published on FT Sustainable Views.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.
Gillian Marcelle, PhD leads Resilience Capital Ventures LLC, a boutique capital advisory practice specializing in blended finance. She has a proven track record in attracting investment to underserved markets (telecoms, renewable energy and regenerative agriculture) and designing architectures that facilitate partnerships.