Published 18 March 2019
In recent decades, the banking and financial sectors have garnered a bad reputation in the eyes of the public.1 After all, the industry is run by the likes of Gordon Gekko, American Psycho’s Patrick Bateman, Jordan Belfort of The Wolf of Wall Street, and the Martin Shkreli’s of the world, right? Fiction and pop culture aside, research indicates that confidence in financial institutions fluctuates cyclically, falling rapidly in response to crisis, scandal or economic insecurity.2 3 While justifiable, the popular assumption that finance is a greed-fuelled, power-hungry machine is “costly on an individual and societal level”, precluding the realisation that “finance is a power tool we can use for the public good”, and “an enabler of a wide spectrum of human goals”far beyond those that can be measured by income.4 5 6 There is no greater human goal than protecting the survival of our species and our planet, and finance might just be the best means to ensure that security and sustainability for the future.
It is estimated that approximately between five to seven trillion USD in annual investments are required in order to meet the Sustainable Development Goals (SDGs) by 2030, totalling between 75 – 105 trillion.7 Putting this into perspective, gross world product in 2017 was just over USD 80 trillion. But the clock is ticking, because “if the resulting financial gap remains unresolved, investment needs will grow over time because of a cumulative effect”.8 Although public spending has traditionally addressed social and environmental issues and strived to safeguard economic stability, it falls short in guaranteeing the “sustainability transition process”.9 In order to pave the way for sustainability, a concerted effort among public expenditures, international funding (provided by entities such as the World Bank, the International Monetary Fund and global financial markets), and private finance through household and corporate finance will be needed.10 In other words, a sustainable global financial system must come into play.11
With the effects of the global financial crisis still lingering, it may take an illustrious imagination to conceive a world where “once-reviled financiers” can “‘save’ the SDGs”.12 However, this is not a case of rose-tinted thinking, as sustainable investing and financing chains are already linking up. In general terms, sustainable finance is “finance that seeks alignment with sustainable development targets and policies”, by taking a “comprehensive approach to the management of the economic, social and environmental dimensions of finance to enable broad-based progress to sustainable development”.13 14 More colloquially, ‘sustainable finance’ is “often used to describe the desired performance and impact of financial institutions”.15 This is crucial, as classic applications of financing activities focus purely on financial metrics as indicators of performance; our modern interpretation of impact would be out of contention as a deciding factor.16 However, increasingly, ‘perceived gains’ are surpassing the purely monetary to include wider environmental, social, and governance factors — ‘ESG’ for short.17 18
Sustainable investing uses these ESG factors in the selection and management of investments.19 20 Strategies include screening to exclude ‘unsavoury’ “sin stocks”, which may involve funding ethically and morally dubious practices, such as tobacco or weapons manufacturing.21 Conversely, positive screening seeks “sectors, companies or projects selected for positive ESG performance relative to industry peers”.22 The next level is ESG-factor integration, which refers to welding “ESG information into quantitative and qualitative analysis (such as fundamental analysis of company value in equity investing or assessment of creditworthiness in fixed income investing), which could result in making adjustments to areas such as selection, weighting or asset allocation”.23
‘Thematic investing’ considers activities explicitly bound to sustainability concerns, such as clean energy and technology or sustainable food production and water supply.24 Impact and community investing are highly specific, requiring positive impact to be at the operational core of business activity and with measurable non-financial outcomes.25 Finally, corporate engagement and shareholder action strives to “influenc[e] corporate practice through ownership” via shareholder activism that can be expressed by either individual or group engagement with investee companies, pushing for further public ESG-related reporting and disclosures, and submitting shareholder proposals and exercising voting rights steering towards desired ESG outcomes.26 27 The intricacies of sustainable finance and investing are a mouthful, but they most certainly exist.
So how are they stacking up? Accounting for overlap between these strategies, in 2016, roughly USD 23 trillion, or the equivalent of 26% of all assets under management fell under sustainable investing.28 This represents an increase of 25% compared to 2014 estimates.29 The most widespread investment strategy at a global scale is negative/exclusionary screening, followed by ESG-integration, and corporate engagement/shareholder action, raking in over USD 15, 10, and 8 trillion, respectively, in 2016.30
Although the rise of sustainable finance and investing has been dramatic, few regions have shown as pronounced leaps and bounds as Australia. All forms of sustainable investing have skyrocketed and an impressive 50% of all professionally managed assets fall within this category.31 Just last year, ANZ’s euro-denominated sustainability bond “raised AUD 1.18 billion (USD 930 million), to fund loans and expenditures aligned with UN Sustainable Development Goals … including ones on clean energy and energy efficiency, green buildings, and good health and well-being”.32 Well, how about that.
Within the past decade, the continued global absolute and relative growth of sustainable finance and investing alludes that it is here to stay, and eventually become the new norm.33 This trend reflects deeper changes in values, as “the role of finance is changing from the dominant view rooted in neoclassical economic theory (to maximise profits, and shareholder wealth) towards one supporting sustainable development, green economy, low carbon economy also adaptation and mitigation of climate change”.34 However, just because sustainability is written on chequebooks does not mean that the path to sustainable banking, finance, and investing is clear.35 Although promising, the jury is still out on whether sustainable finance and investing can truly lead to genuine, long-term value-creation spanning the economic, social, and environmental spheres of sustainability.36 But hopefully the revolution that has already started to take global financial systems by storm will be enough to turn the tides.
1. Norberg, P., 2004. Financial Mentality beyond Good and Evil. Stockholm School of Economics & Economic Research Institute Working Paper Series in Business Administration, 12, pp.3–39; Zweig, J., 2017. The devil’s financial dictionary, New York, NY: Public Affairs; Kinley, D., 2018. Necessary evil: how to fix finance by saving human rights, New York, NY: Oxford University Press; Kristof, N., 2012. Is Banking Bad? The New York Times; Desai, M.A., 2017. The wisdom of finance: discovering humanity in the world of risk and return, Boston, MA: Houghton Mifflin Harcourt.
2, 3. Owens, L.A., 2012. The Polls–Trends: Confidence in Banks, Financial Institutions, and Wall Street, 1971-2011. Public Opinion Quarterly, 76(1), pp.142–162.
4. Denning, S., 2017. Why Wall Street Went Astray: Eight Ways To Humanize Finance. Forbes.
5. IMF, 2012. IMF Survey: Don’t Demonize Finance After Crisis, Says Shiller. Finance and Reform News.
6. Shiller, R.J., 2013. Finance Contributing to the Good Society. Business Economics, 48(1), pp.77–80. 77.
7. UNEPFI, 2018. Rethinking Impact to Finance the SDGs. United Nations Environmental Programme Financial Initiative.
8. UNEPFI, 2018, p.7.
9. Lehner, O.M., 2017. Routledge handbook of social and sustainable finance, London, UK: Routledge; Ryszawska, B., 2016. Sustainability transition needs sustainable finance. Copernican Journal of Finance & Accounting, 5(1), pp.185–194. 9(186); UNGC & KPMG, 2015. SDG Industry Matrix – Financial Services. United Nations Global Compact.; UNCTAD, 2014. Investing in the SDG: An Action Plan for promoting private sector contributions – Chapter IV. United Nations Conference on Trade and Development.
10. Ryszawska, 2016.
11. UNGC et al., 2015. Private Sector Investment and Sustainable Development – The current and potential role of institutional investors, companies, banks and foundations in sustainable development. United Nations Global Compact.
12. Tett, G., 2019. Governments won’t fund sustainable development. Will private finance step in? Financial Times.
13. UNEPFI, 2018, p.48.
14, 15. UNEP & Corporate Knights, 2017. Financial Centres for Sustainability – Reviewing G7 Financial Centres in Mobilizing Green and Sustainable Finance. Inquiry into the Design of a Sustainable Financial System. P. 12.
16. Economist, 2018. What is sustainable finance? The Economist.
17. Wiek, A. & Weber, O., 2014. Sustainability challenges and the ambivalent role of the financial sector. Journal of Sustainable Finance & Investment, 4(1), pp.9–20.
18. MSCI, 2019. ESG 101: What is ESG Investing? MSCI.; Groot, M.V.D.-D. & Nijhof, A.H., 2015. Socially Responsible Investment Funds: a review of research priorities and strategic options. Journal of Sustainable Finance & Investment, 5(3), pp.178–204.
19. GSIA, 2012. Global Sustainable Investment Review 2012. Global Sustainable Investment Alliance. p. 4.
20. MSCI, 2019; GSIA, 2015. Global Sustainable Investment Review 2014. Global Sustainable Investment Alliance. P. 3.
21.Thompson, J., 2019. BlackRock steps up ‘sin’ stock and ESG disclosures. Financial Times.; Economist, 2018; Groot & Nijhof, 2015.
22. GSIA, 2012, p.4.
23. PRI, 2017. What is responsible investment? PRI – Principles for Responsible Investment.
24. GSIA, 2012.
25. Groot & Nijhof, 2015.
26.Groot & Nijhof, 2015, p.179.
27.PRI, 2017; Groot & Nijhof, 2015; GSIA, 2012.
28. Economist, 2018.
29-31 GSIA, 2017. Global Sustainable Investment Review 2016. Global Sustainable Investment Alliance.
32. Griffin, M., 2018. Major Aussie Bank Issues $930 Million Sustainability Bond. Bloomberg BNA News.
33. Smith, P., 2018. BlackRock stakes claim on ‘sustainable investing’ revolution. Financial Times.; Paranque, B. & Pérez, R., 2016. Finance reconsidered: new perspectives for a responsible and sustainable finance, Bingley, UK: Emerald Group Publishing.; Krosinsky, C., 2014. The long and necessary death of socially responsible investing. Journal of Sustainable Finance & Investment, 4(3), pp.297–298.
34. Ryszawska, 2016, p.186
35. Wiek & Weber, 2014; Bloxham, E., 2011. The knowledge gap between investors and companies. Journal of Sustainable Finance & Investment, 1(2), pp.156–158.
36. Sherwood, M.W. & Pollard, J.L., 2017. The risk-adjusted return potential of integrating ESG strategies into emerging market equities. Journal of Sustainable Finance & Investment, 8(1), pp.26–44.; Dorfleitner, G., Halbritter, G. & Nguyen, M., 2016. The risk of social responsibility – is it systematic? Journal of Sustainable Finance & Investment, 6(1), pp.1–14.; Rezende De Carvalho Ferrei, M.C. et al., 2016. A systematic review of literature about finance and sustainability. Journal of Sustainable Finance & Investment, 6(2), pp.112–147.; Thomä, J. & Chenet, H., 2016. Transition risks and market failure: a theoretical discourse on why financial models and economic agents may misprice risk related to the transition to a low-carbon economy. Journal of Sustainable Finance & Investment, 7(1), pp.82–98.; Weber, O., 2014. The financial sector’s impact on sustainable development. Journal of Sustainable Finance & Investment, 4(1), pp.1–8.
de Haan, M., Dam, L. & Scholtens, B., 2012. The drivers of the relationship between corporate environmental performance and stock market returns. Journal of Sustainable Finance & Investment, 2(3), pp.338–375.; Wiek & Weber, 2014; Smith, 2018;
Nicole Jullian Sahr is a Master of Sustainability student at the University of Sydney. Her interests lie in promoting sustainability and innovation in the private sector through business strategy, management, and investments. Previously Nicole received a Bachelor of Science in Science, Technology, and International Affairs with a concentration in Energy and Environment from Georgetown University and has professional experience in asset management, investment banking, venture capital, and the social and environmental divisions of international organizations.