Sustainable Finance – The Devil Wears Green

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When Vogues newest flashy magazine tells you that green is the new red, you go and buy greens. The dictating voice that incinerates the inner need to follow the trend is how the fashion industry works, creating artificial demand for its newest ridiculous creations. Finance’s continuously self-renewing investment product range does not settle far from that.

After Kyoto, but especially after Paris investors and corporates feel the need to dress for the occasion. Green bonds, sustainable ETFs up to biodiversity swaps, the shelves are stocked with sustainable brands for them to wear. Green bond issuance has grown from USD 1bn in 2011 to over USD 40bn in 2015. Headlines like “Morgan Stanley is a founding signatory of the Green Bond Principles”[1], “Goldman Sachs has been at the forefront of developing market-based solutions to addressing environmental and social challenges”[2], “Blackrock [has] build [a] sustainable product range”[3] plaster their websites. Wall Street’s runway is open and every big-name bank strikes a pose, giving the media time to take a snapshot of their youngest sparkly accessories[4].

Albeit, accessories are all they are, climate-aligned bonds make up only roughly 0.5%[5] of the total bond market and sustainable ETFs represent an even lower fraction of their respective one. Then again, of the green bonds merely 11.0% are labelled, meaning they provide transparency into what their proceedings are going. The rest is like that white t-shirt with the big, fat brand on front; nobody has the slightest idea why it has to cost forty dollars more than the blank one down the hall, but everyone is still buying it.

The celebrated movements in sustainable finance are not system changers, they are just an other string in an interwoven industry. In order to redirect capital flows in a significant manner, the basis of the system needs to be altered. To quote Yves Saint Laurent: ‘Fashions fade, style is eternal”. Style should dictate your fashion choice in the same manner as fundamentals should dictate your investment decision. Friede, Busch & Bassen[6] provide comprehensive evidence that ESG oriented investments outperform traditional ones. Still, 83% of financial institutions do not integrate ESG risks in their assessment at portfolio level[7].

For an iridescent investment to reveal its true colour it needs to be illuminated. Transparency has to be demanded, provided and implemented at both sides, investor and investee. Hence, reporting matters when ESG criteria really is to change an investor’s attitude of style. The groundwork for re-orientation is already set, the Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB) offer the means to this end. Quantifiable and unified standards are necessary in order to identify which of the opportunities available to an investor remain fashionable season-in and season-out. In the end fashion is what you get offered four times a year by designers and style is what you choose.

Written by Ferdinand Weiler

Scources:

[1] Morgan Stanley (2016) ‘Morgan Stanley Green Bond Program, available at: https://www.morganstanley.com/articles/green-bond-program

[2] Goldman Sachs (2016) ‚Green Bonds and Impact Investing’, available at: http://www.goldmansachs.com/citizenship/environmental-stewardship/market-opportunities/green-bonds-impact-investing/

[3] Blackrock (2016) ‘Blackrock builds sustainable product range with fixed income ETFs’, available at: https://www.blackrock.com/corporate/en-gb/newsroom/press-releases/article/corporate-one/press-releases/blackrock-builds-sustainable-product-range-with-fixed-income-etf_GB

[4] Climate Bonds Initiative (2015) ‘Scaling Up Green Bond Markets for Sustainable Development’, November 2015, p. 4, available at: http://www.climatebonds.net

[5] Climate Bonds Initiative (2015) ‘Bonds and Climate Change’, July 2015, p. 2, available at: http://www.climatebonds.net

[6] Friede, G., Busch, T. & Bassen, A. (2015) ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’, Journal of Sustainable Finance and Investment 5:8, pp. 210-233

[7] KPMG (2015) ‘Ready or Not? – An assessment of sustainability integration in the European banking sector’, available at: http://www.sustainablefinance.ch/en/market-research-_content—1–1089.html

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3 Comments

  1. You said style should dedicate your fashion choice which is true but does not hold in the financial market. We are still living in an egosystem and unless there is a change in awareness, to think about the planet, people, etc., there won’t be a change in the market. Two MIT professors introduced the term “Just Banking” which cuts down banking and finance to its original meaning. Being an intermediery for lenders and depositors. One of the key points in the framework is transparency which is, as you also mentioned, one the most important points when it comes to sustainable finance. Another point is to move away from standardized financial products and have a good look about what your customer wants and needs. “Just Banking” is supposed to help people to move foreward, to step onto the next level. But this is just possible if the power of banks is used in proper way. So moving from an egosystem to an ecosystem and by that creating an awareness for ones surrounding, is the only way financial markets can change. Interesting organistaions to look at, which already are “just banks” are GLS Bank, Triodos Bank or Oikocredit. In todays times those banks get more and more popular among the public because trust in the big banks is lost.

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  2. Hi Ferdinand,
    very good topic! What I found interesting, you are only dealing with the big investment companies in your article and not with those institutes whose finance is actually sustainable and ecosystem-friendly. The term “Just Banking” was introduced by two MIT professors and gives banks a framework of how to work sustainable and ethically correct. One of the main points is transparency, which you also highlighted in your essay. The second point, and the point which in my opinion differentiates the big banks for other institutes is the individuality of the financial products. Banks which are operating on an ecosystem basis are taking a close look at their customers to identify how and what they should offer to the clients. “Just Banking” leaves banks to their original role in the economy, being and intermediary. But capitalism and silo thinking has punished this and has opened the way for the egosystem. There needs to be a change in the awareness of people. Away from just making the big money and more towards what money, used in a good way, can do to a community. Institutes which already adopted this “Just Banking” thinking are for example GLS Bank, Triodos Bank or Oikocredit. It is worth to have a look at their work!
    Best wishes,
    Frederike

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