Political leaders weren’t the only ones at the COP26 climate summit in Glasgow this month. The international business of Federated Hermes hosted the 2-day Further, Faster conference to discuss how the world community should tackle the climate crisis and steer organization to a more sustainable future. During the event, experts explained the vital role of the financial sector in that process.
Over a decade ago, taxpayers helped save the global financial system. Now the finance sector could repay the favour by helping save the planet, experts told attendees.
Investors will increasingly be able to steer corporations to go green and engage in sustainable growth.
Mitch Reznick, Head of Research and Sustainable Fixed Income at Federated Hermes, says: ‘As a financial stakeholder, you are in a very good position to influence a company to change.’
That is particularly the case in the debt markets, where Reznick works, because loans need to get refinanced regularly.
‘For many companies, refinancing is an annual ritual,’ he says.
This means investors like him get to pressure corporate leaders on the need to be more sustainable every time a company wants to sell more debt.
Staying engaged with corporations over sustainability is not something to be given up lightly, says Reznick. Simply being able to talk to and advise business chiefs is a useful thing that can bring about positive change.
He says it can sometimes make sense to disinvest, but that should only be the last resort.
‘If companies show no willingness to disclose key sustainability metrics, you can assume they have given up. Then relinquishing that right to engage is meaningless.’
If business leaders persistently refuse to act on advice or to disclose their sustainability results, then investors lose little by sending their money elsewhere.
The finance sector alone will not be able to fix everything, says Sarah Gordon, Chief Executive at the Impact Investing Institute.
‘All actors will have to come together to fight climate change,’ she says.
While governments may help lay down rules and regulations, the private sector will help funnel assets to the sectors and companies doing the most to bring a greener future.
There will be push factors and pull factors, Gordon says.
‘People want their savings and investments to do good,’ she adds.
People wanting their money to be invested in enterprises that improve the world is part of the pull factor, because the financial services industry has a long history of responding to increased demand. In this case, there has been a dramatic increase in flows of money into specialised investment funds.
Regulating to win
Regulations that require sustainability reporting will help investors to evaluate how well companies are doing in reaching climate goals, which will help people sort the good actors from the bad and the ugly.
That is particularly pertinent now given the formation of the new International Sustainability Standards Board. Just like an accounting industry body sets the rules for what financial data must get revealed, the sustainability board will decide what data companies must share about how they are tackling sustainability matters. Multiple years of reporting will reveal if companies are improving – or not – over time.
‘It is incredibly important because companies will need to be more consistent,’ Gordon says. ‘We will be able to compare like for like, and it will be much more transparent whether claims about sustainability are true.’
While it is likely that many sustainability metrics will be self-reported initially, eventually third-party auditors will offer their services to verify corporate claims.
‘The positive results of recent rules mean it will be harder for companies to exaggerate their sustainability credentials,’ Reznick says.
What gets measured gets done, and this sustainability arena shows no signs of being any different in this respect.
‘Regulation will make companies vulnerable to comparisons with their competitors and peers, and the leaders will want to deliver improvements,’ Reznick says. ‘There’s no going back on this matter.’
Reznick notes that while regulation is often imperfect, it does serve a useful purpose.
‘It converts a dotted line to a hard line, and that’s progress in this area of sustainability. Regulators can tighten up and clarify the rules later.’