Green finance keeps the sky blue
The strategy of any company should encompass sustainability, e.g. in the production, supply chain process, and labor relationships.
The EC has set up a High-Level Expert Group (HLEG) focused on sustainable finance. Why now?
The first definition of sustainability was formulated back in 1992 at the Earth Summit in Rio de Janeiro, but it was the Paris Climate Summit in December 2015 and then the G20 meeting in September 2016 that marked the change and are the drivers of all the recent initiatives focused on climate action. By signing the Paris Agreement, more than 180 countries, accounting for 88 percent of global emissions, committed to keeping global warming well below 2˚C. In practice this means that governments took on the responsibility to finance climate action. This is a huge milestone and defines the ambition over the coming decades.
The current challenge, however, is that the process of financing sustainable development is starting without any legal framework. We face a number of risks, including the risk of financial stability (linked to failing to integrate ESG factors into mid- to long-term valuations), the risk of misallocation of capital, and even the obvious greenwashing risk.
Current risk models, in particular the Basel III regulation, mostly focus on short-term scenarios, whereas sustainability requires at least a 20- to 30-year perspective. There is a need to tackle this challenge and come up with a framework that will support this paradigm shift. More decisive action is required now and it needs to be supported by an adequate regulatory framework.
Performance magazine issue 23, May 2017
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.