By Professor Angela Sansonetti, Golden for Impact Foundation
This blog is part of a special series exploring subjects at the core of the Human-Centred Business Model (HCBM). The HCMB seeks to develop an innovative – human-centred – business model
based on a common, holistic and integrated set of economic, social, environmental and ethical rights-based principles. Read more about the HCBM here, and check out an event about it here
The HCBM project originated in 2015 within the World Bank’s Global Forum on Law, Justice and Development and is now based at the OECD’s Development Centre.
For too long, the financial system worked on its own set of principles focused on attracting clients and maximising short-term profits. These principles, growth within a capitalist and closed economy, are no longer suitable in a circular and sharing economy focused on customer needs as well as on environmental, social and governance rules. Today, several forces are pushing towards a new framework oriented to sustainable development, social innovation and human-centred approaches based on these rules.
In this transition environment, the financial system, plays a key role in driving economic growth towards values of sustainability based on promoting, amongst other factors, greater environmental responsibility, climate resilience, low-carbon, human rights, gender equality, social inclusion and sustainable economic growth. The financial system results from a long-term evolution related to global economic growth and founded on macro-economic choices as well as defined legal, technological and government rules. However, nothing is irreversible. So, in this changing context, sustainable finance plays a key role to support the shift from traditional economies based on high-impact and high-carbon industries to clean-energy and low-carbon sustainable industries.
Indeed, sustainable finance empowers environmental, social and governance (ESG) factors in the decision-making process for investments in mitigating climate change, eradicating inequality, reducing greenhouse gas emissions, and increasing energy efficiency and social inclusion. Given their nature, these ESG benchmarks capture sustainability goals, contributing to long-term competitiveness and durable growth, fostering low-impact industries based on resource preservation, re-use, recycling and renewable energies, and respecting the needs of future generations. And transforming society and the world’s economy on a green basis requires the active involvement of all actors in the financial value chain, from institutional and professional investors to financial intermediaries, accounting companies, rating agencies and businesses in general.
To promote this new paradigm, international institutions have already been implementing an effective legal framework for re-addressing financial investment towards a more sustainable economy. The United Nations launched the Principles for Responsible Investment (PRI) in 2006, for instance, that include a voluntary set of ESG issues in investment practice. Since then, the number of signatories has grown from 100 to more than 1 800 institutions worldwide, with more than USD 87.1 trillion in assets under management invested in ESG goals during 2018. Many investors are also including ESG strategies in their own individual portfolios: 21% of pension funds and insurance companies developed impact-investing strategies. Moreover,the UN 2030 Agenda for Sustainable Development and the Paris Agreement on Climate Change all define principles to guide the transition towards a sustainable, inclusive and resilient society, economy and financial system. Another example is the European Commission adopting its Action Plan on Sustainable Finance in 2018 centred on transforming Europe’s economy into a greener and circular economy.
Despite this set of political and legislative initiatives, current levels of investment are not sufficient to support the shift. The UN assesses the funding gap to achieve the SDGs at USD 2.5 trillion per year, concerning only developing countries (UNCTAD, 2014). According to the European Commission, achieving the EU’s 2030 goals, including a 40% reduction in greenhouse gas emissions, will require about 180 billion euros per year.
The World Investment Forum projects that global financial assets could be sufficient to meet the 2030 Agenda, but the challenge is how to orient and enhance the risk-return profiles of sustainable investments. Indeed, how can we re-orient political and investment choices to support sustainable growth and the planet’s long-term survival? Achieving such socio-economic and financial transformation will require governments to incentivise institutional and professional investors to increase ESG investments, paying particular attention to social infrastructure, green bonds and green business. Sustainable infrastructure investments are key, for example, as infrastructure contributes to about 60% of greenhouse gas emissions.
The transition is indeed an historical process that will take decades and involve every aspect of the economy, including the finance sector. Thus, what’s necessary is changing the financial system to embrace an integrated and holistic approach to sustainable development that involves financial and political institutions to sustain a dynamic global equilibrium, aligned with the planet’s ecological processes of development. Governments need to encourage sustainable investments and growth by integrating policies and actions to incentivise sustainable finance through a set of rules and behaviours that produce a positive impact on businesses, the real economy and, ultimately, the lives of their citizens.