While sustainable finance has made a number of leaps and bounds forward, there remain a number of challenges that must be overcome in order to ensure its continued development and uptake by the financial industry. Beyond the regulatory requirements being set across the globe, it will be a question of the development of new products, fostering talent, and ensuring growth in new markets.
We are very much at the beginning of this process; in the sectors where ESG activity can be measured, it represents on average between 4% to 6% of the total worldwide.
In a recent study, think tank NewFinancial noted that despite the considerable “noise” surrounding sustainable finance, actual activity remains marginal when compared to the overall global financial activity. However, activity is undeniably growing. “We are very much at the beginning of this process; in the sectors where ESG activity can be measured, it represents on average between 4% to 6% of the total worldwide,” noted William Wright, Founder and Managing Director of New Financial.
What then needs to be taken into account to truly allow sustainable finance to flourish? Beyond the regulatory sphere, there are a number of actions that are crucial, including broadening the spectrum of products available to investors, onboarding new talent or training existing talent in this field, and breaking through into the Asian markets. “Innovation is crucial, and not only in the technologies that are developing in relation to climate issues: it also concerns financial products and services,” says Denise Voss, President of LuxFLAG.
The clear advantage of these products is that they are available to all companies, no matter the sector they operate in. Therefore they play a critical role in broadening the spectrum of sustainable finance products.
Beyond the readily touted products that have paved the way for sustainable finance, such as Green Bonds, Julie Becker, CEO of the Luxembourg Stock Exchange, highlights the role that new debt products, such as Sustainability Linked Bonds (SLBs) could play. Still little known, these bonds provide those companies who are not able to issue a Green Bond with the ability to issue debt in order to achieve a specific sustainability goal – for example reducing water consumption, ensuring that products are not linked to child labour, and others. “The clear advantage of these products is that they are available to all companies, no matter the sector they operate in,” notes Becker, “they therefore play a critical role in broadening the spectrum of sustainable finance products.”
Climate-aligned issuers also deserve significantly more attention according to Becker. These are companies that generate at least 75% of their revenues from climate-aligned activities, such as renewable energy production/storage, low-carbon transport, water management, and others, and all bonds issued by such companies are therefore raising funding for climate-aligned activities, even if not labelled as green bonds. Investors can turn to climate-aligned issuers to not only identify untapped opportunities in the sustainable investment sphere, but also to support companies with a climate-aligned business model. Becker explains that “the objective of the product is to identify opportunities in the broadest sense of the sustainable finance universe in order to increase the number of investment opportunities.”
It is increasingly becoming an interesting tool for sub-sovereign issuers who may want to fund a range of new social and environmental projects, such as renewable energy generation or social housing, to their community.
Michael Ridley, Director, Global Senior Responsible Investment Specialist for HSBC Asset Management, highlighted sub-sovereign issuers’ growing interesting in green or social bonds. While not necessarily a new product, “it is increasingly becoming an interesting tool for sub-sovereign issuers who may want to fund a range of new social and environmental projects, such as renewable energy generation or social housing, to their community,” Ridley notes.
Ridley further insists on the growing importance of a subset of green finance, notably natural capital. “Preserving natural capital brings dual benefits: biodiversity preservation and helping to slow climate change.”
As we look to reach these next steps, it’s critical that the financial industry trains new talent and upskills existing staff members in relation to sustainable finance. Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investment for Fidelity International, observes that there is currently “significant demand for ESG professionals, not only in the financial sector, but also in companies, consultancies, and NGOs,” however a skill gap clearly exists. An LFF survey confirms this, with 51% of respondents from Luxembourg’s financial centre highlighting concern regarding access to talent.
An ESG professional is expected to be multidisciplinary; someone who is able to understand finance, regulation, product development, communication, and on top of that, have a specialised skillset in climate, biodiversity analysis, social impact, or other ESG specific factors.
Sustainable finance specialists are no longer solely focused on data and disclosures, rather they now sit at the heart of the corporate strategy. “An ESG professional is expected to be multidisciplinary; someone who is able to understand finance, regulation, product development, communication, and on top of that, have a specialised skillset in climate, biodiversity analysis, social impact, or other ESG specific factors,” highlights Tan. Soft skills are equally important according to Tan, who notes that “real ESG integration in finance is as much about persuading, influencing, and educating. It’s about winning hearts and minds, as much as its about policy, procedures and data metrics.”
Currently sustainability enthusiasts play an important role in filling the skill gap, however to Tan, it is essential that the specialised skills highlighted above are incorporated into the training of the next generation of finance professionals. Voss shares this view, explaining that “the demand for talent in this new sector has increased considerably in recent years and will continue to grow, but developing this talent is not easy; it’s about finding the right combination of skill and passion.”
While Europe remains the global leader, Asian regulators and companies, both financial and non-financial, are catching fast.
From the beginning, Europe has been a clear leader in the sustainable finance field, both in terms of industry involvement as well as a regulatory drive. However, Tan observes that sustainability is the fastest growing investment trend in Asian markets, which in turn is pushing companies in those markets to move in this direction. “While Europe remains the global leader, Asian regulators and companies, both financial and non-financial, are catching fast.” The potential for development in Asian markets is high, particularly given the fact that that 60% of the global population resides in these markets and the continent is responsible for more than half of global greenhouse gas emissions.
Ridley echoes this sentiment, nothing that Asia provides investors with the largest opportunity to have a strong sustainable impact. “If you invest in a wind farm in China or India, You may be replacing coal fired power generation; whereas if you build a wind farm in Denmark, you may only be replacing natural gas fired power generation, or other renewables.”
As the East has become a powerhouse for innovation, talent and investments, these avenues must be followed within sustainable finance as well to ensure it makes the most impact globally.