'Changing Finance to Catalyze Transformation: How financial institutions can accelerate the transition to an environmentally sustainable economy'.
UNEP (United Nations Environment Programme) has launched GEO for Business Briefs, a "series of stimulating briefs about the environmental challenges and business opportunities that demand transformational change at a global scale."
"The financial sector has an essential role to play in addressing global environmental and social crises. A dramatic transformation of energy, food and waste systems is needed to achieve the goals of the Paris Agreement and Agenda 2030. This transformation requires a transition towards sustainable businesses models and related production and consumption. The sixth GEO for Business brief ‘Changing finance to catalyze transformation: How financial institutions can accelerate the transition to an environmentally sustainable economy explores ways in which the financial sector is starting to play a catalytic role in financing businesses to transition towards delivering environmentally sustainable food, energy and waste systems."
ZeniZeni's Malango Mughogho contributed to the draft and was a speaker at this event, along with Carl Krosinsky and Jake Reynolds. View the event recording on YouTube or here, and read a transcript of it below.
CORLI PRETORIUS:
Hello everyone. Good morning, good afternoon. Maybe good evening to some. My name is Corli Pretorius, I am deputy director of the UN Environment Program World Conservation Monitoring Centre, or UNEP-WCMC for short. Welcome to the launch of another GEO for Business Brief, and today we’re launching the brief entitled “Changing Finance to Catalyse Transformation: How financial institutions can accelerate the transition to an environmentally sustainable economy”. And what we’re talking about here is the economic transformation to respond to our triple planetary crisis, all the ones around nature, around climate and around pollution. What we do at UNEP, since 1995 in fact, is that we produce periodically, these global environment outlooks.
Now this is really a synthesis, bringing together the science from across the world to look at what is happening to our environment, and what are the implications of these big environmental trends. This keeping the global environment under review, is a key mandate of UNEP, and that’s something thengat we provide from a United Nations point of view, as a large-scale tracking progress to the world. But we understand also that these environmental trends and the scientific analysis is not really accessible to everyone, and therefore we have developed a series of briefing notes to really elaborate the implications of these large environmental changes, these environmental trends to particular interest groups, and it includes interest groups such as youth or local authorities, cities, and for today's business brief also obviously the business community.
And what we want to do with these briefs is to really to provide the options and the recommendations to help business to thrive in times of environmental change, and not only to survive and struggle through it. So, we're looking at what are the key recommendations and transformations for business to respond, and opportunities, because it's not only crisis management. These trends also present major opportunities to business. The business briefing notes are written specifically for business and as much as possible by business, so we involved a variety of courses and I’m very pleased to today, also later in the panel discussion, invite some of the lead authors to share some of their perspectives on this particular business brief that we're launching today. But before we start, I’m really delighted to invite Ligia Noronha, who is assistant secretary general of the United Nations and the head of UNEMPS New York office to provide us with some opening remarks. Ligia, please.
LIGIA NORONHA:
Thank you very much Corli and good morning, good afternoon, good evening to everyone, it's a real pleasure to have all of you here today. And let me reiterate the welcome that Corli has already extended to you for being here for the launch of this business brief, as you mentioned, which is about changing finance to catalyse transformation, which is absolutely important in order to bring about the kinds of solutions and responses that we need to the crises that we face. So, ladies and gentlemen, welcome.
But first let me give you some of the stark messages that the sixth global environmental outlook that Corli referred to presents to us about the stated environment, just to set the context. We reflect on the importance of really urgent action as we go forward today. Six to seven million people die prematurely each year from poor indoor air quality or outdoor air quality; another 1.4 million die prematurely from pathogen polluted water, and nearly 2 billion don't have access to safe drinking water or sanitation. The global average temperature as we know has increased about 1.1 ° C leading to more extreme weather events and lengthier droughts, affecting our food supply. Global biodiversity has declined by about 60% since the ‘70s. Another 1 billion species are at risk of extinction. Ladies and gentlemen, these are just some of the facts that have led UNEP to call for transformational change across all sectors and economies to address the climate biodiversity and pollution crises would be called the triple planetary crisis.
So far that transformational change isn't happening, but if we stay on the path we're on, by 2050 the global population will reach about 9 to 10 billion. To feed this larger more affluent population, global average temperatures could increase between 2.5° C and 3° C, leading to sea level rise, to more intense droughts, to more frequent intense wildfires which we already see around us very often. More biodiversity loss, more plastics in the ocean, more solid waste in our landfills, and more pollution in our air and water. So we need transformation, but the scale of transformation requires a dramatic shift in the models of businesses and related consumption and production. These business models are influenced by what is financed and how it is financed, so the financial sector has a very important role to play in changing these trends and behaviours that drive climate change, biodiversity loss and the future.
Your presence on this cause is really a cause for hope for all of us. It's a clear sign that businesses and the finance community see the grave threats ahead of us. It also shows how the corporate world is fast becoming an ally in the push to accelerate the transition to an environmentally sustainable economy through financial products and services that heal our planet, and you're going to hear much more of this later in the panel. This is good because global financial flows estimated at more than $400 trillion have the potential to be a major driver of the transformation to green nature positive and net zero carbon economy. Without question, sustainability in business strategies is becoming an additional decisive factor and an imperative for businesses to access third-party financing for debt and equity. This represents a paradigm shift in the private sector and will result both in winners and losers across and within sectors during the transition that we're looking to.
Ladies and gentlemen, so what can the financial institutions do?
Firstly, they can align with global goals such as the U.N Paris agreement, including developing and scaling sustainable financial products and supporting clients that are transitioning to sustainable business models.
Secondly, they can invest in corporate disclosure frameworks using performance indicators based on science to enable finance institutions to measure and change and manage the environmental impacts of lending investment and underwriting solutions.
Thirdly, they can support ways to address environmental sustainability challenges through policy and regulatory frameworks in finance and specific market segments.
Fourthly, they can embed environmental and social sustainability objectives at senior organizational levels to create effective governance that steers the alignment of financing with environmental and social priorities that are required.
Finally, they can develop the framework, strategies, tools, and expertise to solve challenges, and develop common approaches to address sustainability-related financial risks and opportunities. Most of these are not complicated and all come with a compelling business case, but they require shift in mindset and a different way of seeing the world. Governments can also help with their green economic measures to support the recovery from crisis, such as the Covid-19 pandemic. These can represent significant investment opportunities for the financial sector as these stimulus packages can also increase the bankability of green projects and enterprises.
Before I close ladies and gentlemen, let me just say that we must seize this moment to bring about real change in our finance systems. Business leaders who work to bring about a nature-positive world and whose businesses thrive as a result could be hailed as pioneers of the new economy. I hope all of us here today can work together to drive the change we so desperately need. Thank you and all the very best as we move forward.
CORLI PRETORIUS:
Wonderful, thank you so much Ligia, and thank you for the reminder specifically around the alignment on the SDGS, other global agreements. In fact, there is a session that was held just earlier today around alignment of the financial sector to the proposed global biodiversity framework in its status, and there's a lot of interest around that theme of investing in nature. Thank you also for reiterating and highlighting the recommendations of the business for biodiversity brief. And I can promise you, there's a lot more in the brief. Very useful recommendations, case studies and examples, and it's all about financing change, but also changing the way that finance works. So thank you very much for those remarks.
I would like to move on and then invite the panelists to join the discussion, very pleased with the panelists that are joining us today. First if I can introduce Cary Krosinsky. Cary is a leading global educator, author, and advisor, teaching popular classes at institutions that include Brown, New York University, and Yale. Thank you so much for joining us, Cary.
Second to introduce is Jake Reynolds. Jake is the executive director of sustainable economy of the University of Cambridge Institute for Sustainability Leadership, and is responsible for, CICL, as we call it here colloquially in Cambridge, for the research also research director. Thank you very much Jake for joining.
And then, very pleased to welcome Malango Mughogho, who is the Managing Director of ZeniZeni Sustainable Finance limited. Fantastic name of the company as well. Thank you for joining.
So if I can kick off the discussion maybe starting with you Cary, as lead coordinating author, to provide us a little bit of the context and the framing from this GEO for Business Brief, specifically in, how is it framing sustainability? Because businesses are realizing that the sustainability strategies are also providing them with opportunities to access finance.
CARY KROSINSKY:
Yes, great to be with you. Thanks for having me and thanks for that question. We're excited that this brief has come out in the sequence that it has, because as was just outlined there are so many challenges that we face, and those challenges are why in many ways the pressure is on at financial institutions to alter their practices so that we can increasingly solve the SDGs. So, all the work that's happened to date has been very important, and what we're seeing is corporations all feeling the need to respond to this paradigm, and that's very much something the brief reflects, and it's something that has caused all sorts of shifts across asset class as well. So whether it's students we used to teach who now are at private equity firms like Blackstone or TPG who tell me, no LP is willing to touch an oil and gas fund anymore. I mean, that this is a major shift in investor behaviour that we're seeing actual changes in strategy are occurring. That's on top of banks committing a trillion or more in capital commitments to environmental solutions; hopefully also increasingly impact focused solutions, responding to calls for net zero.
So all these things are useful because they're creating pressure, and so when we look at the investment landscape we can see that the shifts are actually starting to happen, arguably for the first time here in 2021. But much more is needed, and so the brief is a great resource for those who are on with us today to take a look at what's happening, what's possible, and we'll get more into the barriers and the progress that we've made. It's always important to stress what's happening from a positive perspective, but there's a lot more to do to achieve the levels of capital allocation that are required.
CORLI PRETORIUS:
And what are some of the most promising or successful financial project products that's emerging from these early adopters, or pioneers, if I if I can frame it in that way?
CARY KROSINSKY:
Absolutely. Slightly longer answer to this question but I’ll try to I’ll try to be brief, because this there is so much happening in the field, which is great, what we like to call the seven tribes of sustainable investing. What you're seeing kind of kind of moving away from the more negative approaches that the field started with towards solution seeking strategies, and they're really in three categories as much as anything. It's investing in public companies that are trying to make a positive difference in a positive way, it's impact investing which is exciting to see continue to grow, and the case studies are mounting. And also thematic investing, and this is where we're still maybe three to five times underinvested in the energy transition for example or water infrastructure that's badly needed around the world.
And on top of that we see large firms like BlackRock and every other firm trying to do ESG integration and calls for making sure firms aren't greenwashing, which is a good thing because it makes sure that we're trying to actually have impact with our dollars. Now on top of that, we have record levels of shareholder engagement and groups, such as the Climate Action 100+. There's been research that we've been part of looking at the possibility of a Nature 100 responding to some of the biodiversity challenges that we face. And on top of that again we have minimum standards that our friends at New York State Common have been implementing, and actually Yale is implementing on fossil fuel as well publicly, and a lot of work at asset owners trying to figure out how to do more which is all very exciting.
And then when you flip your question on its head, what we see is activity in every asset class. So whether it's fixed income and the work of say the Climate Bonds Initiative, and in many parts of the developing world, in China in particular, I think 95 % of the financial system is in fixed income and lending. And so all of those efforts are welcome. Climate Tech VC has emerged as a major force for innovation and catalysing new companies. We had a hand in starting the free newsletter for Climate Tech VC that's become a bit of the rage, by introducing two amazing young women who are running with that. Again I mentioned private equity is shifting dramatically, hiring leading people and trying to transform their businesses. And so this is really starting to happen in every asset class, and increasingly what we're also seeing is Asia and other parts of the developing world, Africa, Latin America, starting to get into this game in a serious way as well, which is so important because Asia has, it's arguably half of the world's economy.
And so increasingly I’m trying to have to make sure that everyone's not just having western conversations, or what is needed, and also to teach as much as possible.
Because one of my theories of change is, get young people into the workplace, especially young women agitating for positive change. And my other theory of change is, help the developing world with its transition which is so badly needed. And so it's great that we had a global group working on this brief, and it's exciting to be with you today, thanks for those questions.
CORLI PRETORIUS:
it is a bewildering array of initiatives and new adventures, things that are springing up, indeed. But I still have a sense that proportionately, it's still a very small part of the money flowing. And so maybe if I can come to Malango and ask, what are the barriers to uptake for some of these initiatives and these new products, new services that are popping up everywhere?
MALANGO MUGHOGHO:
Yes, thank you. I want to start actually just by quickly thanking one of my co-authors, Cary who’s just spoken, but also Catherine and James who weren't able to join the call today. And the UNEP team actually gave fantastic input as well along the way and our expert reviewers, so just to get that out of the way.
Also to say in terms of context that, because, as you mentioned, this is a series of business related briefs. We largely looked at the private financial sector, so the brief does not discuss the public finance. I just want to make that clear. It's still a significant contribution, we hope, to private sector finance, but as you say there is a huge amount of financial assets in existence and currently only a small portion is really dedicated or allocated in a sustainable way. And so that does beg the question, what's stopping it, what's happening? It's impossible to go through a whole list of barriers, and there's several.
But I think it’s clear that because finance is a central part to our modern economy, it's not going away, it’s integral to our economy to our societies. And so in this move, this transition towards the nature positive and sustainable society, we know that finance has to come along with us, otherwise we're never going to get there. And being a banker myself, you can broadly classify the barriers in two levels. One at a project or firm level, and one at a larger or more systemic market level.
So, starting with the some of the project level barriers, actually I’m just reminded of a conversation I recently had with a colleague who's an engineer. We both work on a project infrastructure preparation facility, and my role was to mobilize finance for a particular project, and he was designing the project from an engineering perspective. And he says to me, "What is it that financiers are interested in, what are they looking for?" And it was almost as if he was saying, "Tell me, we engineer it that way and then we get the money". And so I said to him, "Well actually they look at absolutely everything". And he looked a little shocked and a little horrified, I think because it's probably impossible to include everything. But when I reflect on the answer that I gave to him, I’d say that financiers look at everything that matters to them, and I think that is the key barrier: what matters to the financier.
For example, a water infrastructure project. You find financiers who only are interested in delivering, say, clean water and sanitation in urban areas for example, and they wouldn't be concerned necessarily with upstream impacts of say, the climate on the ecosystem, or farming practices on the ecosystem that delivers that water that eventually gets delivered to people in a city. So different things matter to different financiers. And until that begins to change, I think that’s one of the key barriers I think, particularly at the project and firm level.
Another barrier at that level is also related to perceptions of risk, and this is at a firm level and at a broader market level similarly, well we're all human, so we have our own perceptions, real and otherwise. For example, Cary mentioned the need for a lot of financing to go to the developing world and, I’m generalizing, but generally, so-called emerging developing markets are considered more risky, irrespective of fundamental analysis which may say otherwise. So risk perceptions need to change, and some of that is to do with, as the physical and social science evolves and then there's information and data available to help change some of those perceptions, I think those sorts of barriers will shift.
And then at a market level, again there's a there's a long list, and in fact UNEP did great work on this in 2014, 2015 around the inquiry and the design of the sustainable financial system, so I don't need to repeat that. But some of those issues still exist. For example the Kay Review of equity markets, going to some of the points that Cary made, is that one of the key issues is short-termism, which is caused by various different things.
So you get strange results, and because of COP happening recently a lot of the talk has been around climate impacts. But of course, with the GEO-6 we're looking at many things, circular economy, a few systems as well. For example, there was research done that showed that, I think it's $238 billion of banks who are listed in the UK, they made equity investments in the firms with the largest deforestation risk in the world. And some of these banks on the other side are doing great things, say around gender or around sustainable agricultural practices, but through their equity investments they have made significant negative investments in deforestation which impacts food and climate.
So what matters has to change, and I think, to reiterate, that's one of the key barriers.
CORLI PRETORIUS:
And I think that that is a fantastic insight and a fantastic point to make because both, and I’ll get to Jake in helping us to understand, how do we get people to decide what matters. But it permeates so many different levels. the work that I’m currently doing is looking at, How do we create awareness and understanding of risks and dependencies as a result of the degradation of nature? So your dependency on ecosystem services you're the exposure of your portfolio so if you invest in particular industrial processes they may have greater dependencies and there's a huge disconnect in many financial decision makers that they don't have sight of these dependencies in their portfolio this is something that is coming in more and more in the discussion around the nature agenda and how do we manage those risks so not limited only to the market related risk but also real physical and transition risks but thank you for those great points. So over to Jake to help us understand, how can we change what matters to financial institutions? if I can paraphrase the question a little bit, how do we catalyse action?
JAKE REYNOLDS
Thanks Corli and Ligia, and UNEP for this opportunity. Well done to the authoring team on this report, it's really great.
That's obviously a pretty challenging question, Corli, so thank you for asking. The report points to, as do the whole series of these GEO for Business reports point to, transitions. Ror example, to circular economy business models or sustainable food system, regenerative food system, or new forms of infrastructure. And I think it goes without saying that we're witnessing those kinds of transitions in energy and in mobility, movement to a hydrogen economy or to renewables economy. I often wonder whether it's finance that's actually driving some of these transitions. I mean, we know it's not only finance, because the policy and regulatory architecture, that's obviously influential, l and businesses innovate entirely by themselves when they can spot opportunity. But I often wonder whether finance is driving is playing a useful driving role for those transitions, or whether it is simply reflecting the fact that those transitions are happening, and seeking in its usual way to identify profitable investments, lending, underwriting and avoiding risks. So who's driving who? What is going on here?
And it’s of course not just finance where you can pose that question. We've been having a modest dialogue with the advertising industry recently. We've become aware of their scope three emissions. Not just the supply chain for advertising, but the impact of their advertising. So this is a conversation which is happening all over the world, in every part of the economy. And I would say if financial institutions stopped to think, they are in an incredibly influential position. Not only do they have really good access to companies - a bank can really engage in the business model and the detail of what a company is trying to do when they're thinking about lending. They can engage very intensively with companies when they're thinking about buying stock or debt or some other financial transaction. Now the companies won't talk to everyone. They will talk to financial institutions. That means there's a prospect of very good quality dialogue, if financial institutions want to have it, about those transitions and what the company is doing in terms of moving from an older economic mindset to a newer one. And it's a mixed picture at the moment, isn't it?
I was just talking with an export credit agency a couple of weeks ago, and a very large part of their underwriting is into oil and gas, shale, coal assets, all over the world. This is a really big institution, so let's be realistic about this. There's a huge amount of attention on it at the moment and that's really welcome, but the financial system itself is undertaking a transition, and not all of those parts of it and players have really got terribly far down the road. But I can see a sense of excitement that's building.
Now just briefly, your question about, How do we wake the system up a bit presumably through disclosure. I think that is really important. We're not working with standardized information at the moment about all of the things that matter. And where we've made some progress on climate and carbon, even there just over 50% I think of the MSCI World Index, it’s a big global index of companies. It’s only just over 50% is actually disclosing scope one and two emissions. So that means an awful lot of companies, in an awful lot of parts of the world, are not disclosing that. And it's 2021 and we've just had COP26 and that for me is quite startling. So I sympathize with financial institutions a bit because the data just don't exist in a lot of areas if they want to focus on it. And where we've succeeded in carbon, we have a lot less data and a lot less consistency, in areas like protection of nature or the circular economy and resource management. You can't drag down the data that you need to measure corporate sustainability performance very easily from services like Bloomberg.
But I’m not picking on Bloomberg, it's just that those really widespread ubiquitous systems which financial institutions use, they don't have all of the right data sets to enable you to do the creative thinking that you might need to actually direct capital in an appropriate way. That's just as Malango says, finance focuses on the things that it considers material or things that matter, not necessarily the things which we worry about for planetary health. And biodiversity is a great example of that. But having said that, I don't want to leave a sense in which there's nothing happening. It feels to me very much the beginning of the story.
CORLI PRETORIUS:
So, we all really need each other also in terms of driving this transformation. Because it depends as much on policy signals as it does on consumer sentiment or public sentiment as it does on business action.
And you RAISE the point about corporate disclosure frameworks. How do you see them evolving, what are voluntary pathways, regulatory pathways? I mean we have a little bit of a mix appearing in at the moment. What do you think are the trends in terms of disclosure frameworks? Data problems noted.
JAKE REYNOLDS
Well I would hope collaborative problems, yeah data is a bit patchy it's true, yes. The other thing which is patchy is transparency, so there's still a lot of boxes. People who claim to have a score for a sustainability of a company which a financial institution can use, but it's really a bit unclear how they're arriving at that score. And then you look across the different raters and rankers and you find the same company being treated in different ways; I think that's a problem. Obviously speaking from a university, we like replicability, we like full transparency. If anyone has a good idea on the university they immediately publish it, that's instinctive for us. And I think probably more transparency, probably less measures. Because I think where I hope regulators come down ultimately is not bombarding the public and financial institutions with hundreds of different things about planetary health, but just a few but people can hold in mind and a few really really important ones. And to be honest I’m not even sure we've worked out exactly what those measures are yet.
I don't think, for example, bombarding people with carbon emissions data is terribly helpful. What they want to know is how aligned a bank or an investor or an insurance company or a company is with the Paris agreement. Is it a two degree company, a three degree company? It doesn't really matter if it doesn't really communicate, I feel, when you say it's releasing 200 megatons of carbon each year. Not many people understand what that means, and that's the easy one. So, finding something similar with biodiversity, for example. It might be, as you, say land degradation, might be the land footprint of a company or operation. The quality of the land which it's managing or responsible for or utilizing in some respects. And of course, really important ones about resource extraction, the use of finite resources, their toxicity. But again, it's easy to get excited by this, but I really do feel for the purposes of communicating with the public and indeed many staff who are non-specialists in financial institutions, it really has to be kept to a small number of really simple things that communicate.
I think you can see them emerging and different parts of the world will push that at different speeds, and I hope ultimately that's brought together in a framework globally that can be extended across all of the assets which financial institutions work with, so that we have a common data set of the right things that we need to know.
CORLI PRETORIUS:
Very helpful thank you very much. And maybe Malango, if I can pick up from your point of view also in moving the sector along. What's the role, what do you need from policymakers and regulators, what would help you?
MALANGO MUGHOGHO:
Yeah I think that's an important question, because I think especially recently we see them as our saviours as it were, to try to avoid a religious term. But in the brief actually the starting point was to say, Well where do we want to get to? What is the state of sustainable finance, say, look like? And then you work backwards from there to say, Well then, what role does a regulator play? What role does an individual financial institution and in an individual play in that?
And so in arriving at the so-called state of sustainable finance, we drew on work from the governance field, actually political government, someone called Alex van den Heever based in South Africa, who says that you need an accountability system for politics. And I think similarly the financial system needs to be held accountable and it also needs to be able to hold itself to account, to be able to address these issues.
And in that context there are four requirements to have effective accountability. One is performance standards, as Jake said. That's about what emissions are we talking about when we talk about carbon; what parameters should we be thinking about. The other is transparency, which has also come up; we need transparency. It could be through reporting, or it could be media. Media also plays a role in transparency. You need independent oversight of the sector which is typically the role the regulators play. Depending on the country independence is not always necessarily there. And you also need a system of reward and censure, and that's a key part of it. Because when things go wrong as they do – intentionally, unintentionally, accidents happen. What actually then happens to that financial institution or that exchange, for example? if there's no system that incentivizes a reward or censure, then it falls apart.
So you need those four things for an accountability system, that's the base of it really. But then more broadly looking at it, what's the state of sustainable finance, what other things make a difference? I think ethical and transformational leadership is a key part of it. Flash institutions, funds, they're all led by people that are involved there. And we saw for example in 2014, when the Dutch bankers had to take an oath, an ethical oath essentially. So this is very important.
And then on the other side, skills and capacity. So you can have all these standards and ideas, do it this way, do it that way. But if you don't have the skills to be able to enact those things, all the tools even. So a lot of central banks that weren't agreeing with the financial system, for example, they did not have an idea of how the system is affected by climate change, which is at the moment one of the key sustainability issues.
But that is paralleled across many impacts on sustainability, so there's an accountability mechanism at the base. You have ethical and transformational leadership, you have skills and capacity, and then, critically, advocacy. Effective advocacy. And this is where we've seen, particularly in the financial sector, a lot of voluntary initiatives have led the sector to shift. But as you as you started out in an introduction for me Corli, the shift is not happening fast enough or at the scale needed. But without that advocacy we would be much worse off.
So in the paper we argue, you need those things to create the so-called state of sustainable finance as it were.
And then going back to your question about the regulators and policymakers. Well, what can they do to support that? Traditionally they form that independent oversight role that I mentioned as critical for accountability, but I’d argue that they can go much further in terms of their policy, in particular in terms of their reach to try to arrive at this. And it's needed to level the playing field and, as I say, to get to the scale and to and the speed needed to address many of these issues which are time-bound unfortunately, and some of them then irreversibly. So I think going back to the Dutch example of an ethical oath, that that's something traditionally you would not have thought a regulator or policymaker would even bother or think about. But now we're seeing things like mandated transparency happening and disclosing happening, particularly in the EU across the whole range of sustainability issues. So those are some of the key steps I think that regulators and policymakers need to make.
Also I think the key thing is data. It doesn't have to be fully standardized, but the data has to be made available, and so regulation which requires the disclosure side to happen, but also policies that support the scientific endeavours. And as I mentioned at the beginning, when I say scientific, I mean the traditional physical sciences and the social sciences, a lot more effort in those areas to help inform these things. I mean, I’m always amazed that some of the colleagues I come across in my banking sector career. Incredibly smart, create these amazing credit models or risk models. And then if you say, well how do you integrate say a… I keep going back to climate, sorry I think it's because COP is on. But say, how do you integrate biodiversity into that? And then then it stops them, they think. Actually, it’s exciting because they're trying to do something new, but the credibility and the approach is not it's not clear enough to allow them to be able to stand by that model to say, yes, this is the way you should go.
And so I think that's another area where policymakers in particular can play an important role, so that's the vision. But as I say, it's not just regulators, policymakers. There are a lot of other moving parts to it that would make it work.
CORLI PRETORIUS:
There's a particular element or perspective for national policymakers and regulators. But I want to come back to Cary, in terms of understanding that, the interaction between jurisdictions, between countries. Also and levelling the playing field, because money moves in many different directions, so that's the one part. And then the other part also a little bit maybe, and all of you can contribute around this. Developing the skills or the understanding. Again starting with Cary and your role, and Jake also in university, training, executive education, these kind of things. How much is that coming through to provide people with the skills? And we don't want masters in everything in every office, but you need enough to be able to figure out what matters and to figure out how you're going to get there. But maybe to start with you again Cary.
CARY KROSINSKY
Yes, thank you. This has been a fascinating conversation. Maybe a two-part answer. I think what we're all getting at with our comments is that, what I think what we're all seeing, is a need for a systems approach, to what is what are systemic challenges? Whether it's more education, understanding, but also, it's really trying to get at what change needs to look like. How do we actually deliver that change? So, Jake and Malango's comments about the need for more data. So I think it's also important to understand what data is useful for, and what it's not useful for. Also, for example I think the ESG data that that we have, while it is challenged, rightly so, it does create a red flag indicator pool of information that investors are using. And this is causing corporates to respond, to not want to be seen as bad actor. That's a very useful dynamic, so more transparency absolutely. And that will be coming with increasing use of satellites, and it'll be harder to get away with what has been gotten away with before.
And so I think we need to also move from the static snapshot in time data to understanding change, and whether the change is happening fast enough, and appropriately. So I think we need to measure two points of time when it comes to ESG data and then see if the change is occurring at the rate that is required, and if not making policy and other changes and incentive changes, strategy changes. Measuring the strategies to see if they're delivering the results that we require. So I think our all of our efforts are moving in that direction, but more as needed.
And on your question about education; today I’m wrapping up my 22nd class of the last two years, which has been maybe a bit easier during the pandemic to teach from home. But we're back in person at Brown with 45 students. And we're seeing a proliferation of sustainable finance education globally at leading institutions such as Cambridge and others which is exciting and important. The leadership education at Cambridge is second to none. It's super important, but we're still not seeing a lot of more senior people participate. Whether it's adequate understanding at board level of where we're going as a global society and what's needed as a result, or the fact that large institutions have mainly older white men overseeing trillions of dollars of assets as financial advisors, who tell my wife and I, oh you don't want to do that stuff. So this all needs to change.
A recent analysis I did showed that two-thirds of global assets are in the hands of those 60 years of age and older, mostly white men. This too needs to change, so moves on the DEI front are important, making sure that people have a minimum level of understanding of the things we're talking about, and are incentivized accordingly. It's why I desperately teach as much as I can, including at executive levels. And it's wonderful to see these programs rise up. You'd like to see it happen more globally as well, and I think there's very few programs in Asia for example. So we're seeing progress I think on all these fronts, but clearly more work is needed.
CORLI PRETORIUS:
Thank you. Maybe, Jake do you want to come in? In terms of the executive education and, well not limited to.
JAKE REYNOLDS:
Yeah no, and I agree with Cary about the demographics as it were. Back in the early 2000s we produced our first online course for sustainability which lasted three hours, it was a three-hour immersion in sustainable business. And I remember at the time talking to some financial institutions and they said, That's really great I think we might do that, but do you have a 30 minute version? The attention spans are a bit notorious in that industry, or rather the culture of short-termism, and that was about as much time as many were prepared to invest in this topic at that point.
Okay, so cast ourselves forward to the present day. Financial institutions have been, for many years actually, the fastest growing segment of our executive education, and indeed in our in our master’s graduate probation as well. And they are taking programs up to two years in length, probably not some single individuals and institutions, but quite a number. There's critical masses of people who have been studying this, either executive development or graduate probational or whatever, and online education. And I think that is symptomatic of what of the degree of interest in the sector now in this topic, it's become really, really important.
And if I go back to what I said at the outset, it's because I think these transitions are real and happening, we don't have to argue the case for the energy transition, it's happening. You're either part of it or you're not part of it. You're either benefiting and you're investing in future infrastructure and companies, or you're stuck somewhere in the past, to be honest. And I think they get that, and they want to know how to do it in increasing detail. So I would encourage all financial institutions to really get down into the weeds on this topic, it really is crucial to the risk and return characteristics of the work that they do. And clearly there will be, I think as you said Corli, initially there'll be winners and losers in this, and there'll be winning financial institutions and losing financial institutions. And it's a complex area, but it's getting clearer. And we're getting more regulatory support, and the standardization is happening bit by bit.
Just to give one example; I was looking at a battery supplier recently that is making a huge contribution to the electric vehicle revolution. But they hadn't got themselves organized on waste streams. They weren't organized on some of the social diversity improvements that that were needed in this in this kind of sector. They weren't really able to talk properly about the supply chain and where some of the sustainability impacts might be. So what I would say is, if a bank or whoever is creating a portfolio, a lending book or an investment portfolio of companies, it's not actually purely enough that they're just in standout sectors like batteries or the renewables. They have to actually think through sustainability in the round, and get nature in there, and get people in there really quick. I think that's probably why we're seeing an interest in more capability in these institutions now, and it's a really good thing.
CORLI PRETORIUS:
And also, I think that’s a great insight and also the need exactly, because of these themes and the systems approach, that you need to look at cross-sectoral or cross-institutional collaboration. Because you may not be able and you should not be able to draw all of all of that expertise or to have all of that expertise inside your own organization, because it just becomes an impossible task also. But bringing it together and looking at these integrated approaches is going to happen.
JAKE REYNOLDS:
If I dare say, thinking to the pandemic and some of the very very important healthcare products which have become ubiquitous, and face masks and everything else. Even in the manufacturing of those and all the other health products that we need in our daily lives, in the future it won't be enough simply to produce those things. We'll have to think about where the plastic, where the waste ends up in the environment, that's going to become important. Just as if you're in pharmaceuticals, where are the pharmaceuticals going? Directly into the soil, into rivers etc. These things are going to have to be joined up ultimately, even if you're in a standout sector like healthcare or renewables.
CORLI PRETORIUS:
Yeah, exactly. So there's a question about the Global Sustainability Fellows Program, so I would invite my panelists that if you have promotional material that you would like to share, you’re welcome to share that in the chat, or we can make it available also after the webinar.
But maybe a closing remark from each of you, what is your key takeaway from the business brief? And how can we use this to engage more, to influence more, to change the way that the finance sector works? That's not a small question I appreciate that. So why don't you go first, Malango?
MALANGO MUGHOGHO:
Thanks, Corli. From my side, I think I’d like to leave a message of hope. I often say that finance is essential to everything, but when finance comes to the table things begin to shift really quickly, and I don't think there's an accident. For example, I call him superstar, Mark Carney has made so many shifts and inroads in climate because he's a central banker. And when that money comes to the table and that thinking comes to the table, because our economy is so financialized, things shift, and we have to make sure that the shift is in the right direction. And then people are left behind; I’m speaking here from something in South Africa, which is classified as a developing country. Say the climate has significant challenges from a biodiversity perspective. Africa, countries in Asia, across the world, cannot be left behind in this process, should not be from an ethical perspective. But cannot be, because for example most of our cobalt that we need for the clean energy revolution sits in the DRC. So that's the only thing, is to say we must move, but we must move together, and we have the tools and capacity to be able to do that, so I feel very hopeful.
CORLI PRETORIUS:
Wonderful. It's a great attitude. Jake, and then I’ll finish with Cary please.
JAKE REYNOLDS:
I’m super encouraged by the pace. It really has hotted up, it's really changing as they say, under our feet, and that that's extremely exciting. And you have the IFRS, thinking about The Sustainability Standards Board, we're making good progress. You've got a standard body, you've got WEF in terms of global convening, you're looking at measurement of companies in this way through the measuring of stakeholder capitalism. You've got the EU taxonomy and all the sustainable finance disclosure arrangements, you've got all of these things coming, meeting head-on with the innovation. And the excitement and the realization that these transitions are real, and that finance has to engage with it and all of that is super positive.
But it remains to be seen how quickly we're going to get that into the kind of core financial products that the public engage with. So if you've got a pension fund, how much of that huge knowledge opportunity is revealed to you, or are you basically blind as to what is going on in your pension fund? If you've if you have a bank account, what can you tell in a very simple way about how deposits are being used and the impact on the planet? I’m afraid at this point you can't really find those things out very easily as a non-specialist member of the public, and I’d really like to see progress there too, as well as the excitement and the buzz in the industry itself.
CORLI PRETORIUS:
Wonderful, also very optimistic and exciting. Cary, over to you.
CARY KROSINSKY
Yeah, last comment. First of all, thanks again for having us, great conversation. I think the missing piece for me is the estimates of how much investment is needed in the sustainability and impact space over the next 20 years. Estimated perhaps at $1 to 5 trillion per year, pick a midpoint that's $2.5 trillion or 50 trillion over 20 years, reasonable estimate. we're not anywhere near that amount, and I think what's coming out of this conversation for me is something that I’ve also seen quite a bit, is that it's really hard to change existing things, whether it's financial institutions, people and their perceptions, their own incentives. it's really hard to change existing corporations, existing financial institutions. They're changing, but they're changing too slowly.
But there's a difference between existing investments, like say bonds. Once a bond’s issued the only question is, will you get paid back? So, what's really important is the new allocations of capital, and that's where I think the action needs to go. How do we get that $50 trillion together? Prime Minister Modi showed up in Glasgow and talked about a need for $1 trillion. I mean, that's just one country across the developing world. What's the total dollars that's needed in the developing world, where is that money going to come from? I think that's the next conversation, we need to get very serious about.
CORLI PRETORIUS:
Oh I’m resisting to take the bait there, Cary. There are a lot of questions in those statements, and I think it can make another hour’s worth of conversation around the additional financing and how much of the existing financing needs to be transformed. But I take your point, also in terms of existing in the in the way that you described, in a way the system inertia or the reticence due to change. They are barriers, even if it's just a culture, or ‘the way we’ve always done it’ or these kinds of things that are slowing us down, to adopt new approaches new strategies. But you referred earlier to the demographic profile of where the wealth is at the moment. At some point it is also going to move to the next generation, so I think we have different time frames that we can work with in terms of looking at how we bring these shifts into the system.
Maybe we need to take a much more flexible and multi-pronged approach in starting to drive these changes and making sure that they find traction in different parts of the system that we're working with.
With that, I would like to thank you for joining this conversation, it's been really really interesting. Thank you to the authors, to Malango and Cary that contributed to the draft together. There were other authors just to be very fair, but to joining the panel in this case. And for Jack for also joining the panel.
And a big thanks to my UNEP colleagues as I also mentioned earlier, that have put this process together, engaged with many authors, many stakeholders. And a big thank you to Laura and the technical team also for hosting us so smoothly.
So with that, the business brief is launched, it's available online, and thank you very much, have a fantastic rest of the day.
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