The role of financial institutions in the transition to net zero

By Stephanie Lipman, ESG Analyst, La Française Sustainable Investment Research

Putting an end to greenwashing and establishing a uniform understanding of what is – and what is not – sustainable.

The ever-increasing roster of regulatory reporting and classification frameworks that are being introduced or considered in the EU – the Taxonomy, SFDR, Green Asset Ratio, Climate Benchmarks – are important and serve a very clear purpose: to put an end to greenwashing and establish a uniform understanding of what is – and what is not – sustainable. They are working to define the two extremes, and to increase transparency around exposure to the greenest assets on one hand and the most harmful assets, activities and companies on the other.

But for financial institutions and their investors, these indicators must be seen as merely a starting point, not an end to be considered in isolation. To do so would be to misrepresent both the full picture of existing transitional efforts and the scale of the opportunity which exists.

Rather than bemoaning or celebrating the relatively small portions of portfolios which meet the criteria set out by regulators, banks and asset managers should focus on how much is left unclassified and see the enormous opportunity – be that commercial or societal – which that poses.

As we see it, the essential role of financial institutions in the collective effort to limit global warming lies not in one extreme or the other, but rather in the shift from one to the other, as well as the dynamic in the middle ground. Through a bottom-up approach, supporting individual clients in pursuit of their own environmental objectives, banks and assets manager can finance and secure the transition to a low carbon economy and in turn, gradually increase their own ‘green’ exposure and phase out the ‘brown’. Moreover, as new risks emerge, and opportunities evolve, a large part of what currently lies uncategorised in the middle, will inevitably be subsumed by one end of the spectrum or the other or at least face intense scrutiny. Financial institutions are uniquely positioned to ensure the direction of travel is positive and ultimately to facilitate the low-carbon transition.

The implications of climate change are becoming more tangible for financial institutions. The emergence of an accounting standard for financed emissions embedded in portfolios just marks the start for transition finance. It surprises that it took nearly two decades to reach that point since the GHG Protocol was introduced as a guidance for non-financial firms, and which has since become a widely adopted standard.

As climate change has become a priority for most stakeholders of financial institutions, now is the time to act. But the necessary action will not remain limited to climate change adaptation and mitigation. The EU Taxonomy is a transition tool that incorporates not just those two, but four other objectives as well: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The respective technical screening criteria are already under development. The much-needed social elements which complement environmental objectives are also moving up the priority list. For example, the European Commission is currently seeking advice on the extension of the Taxonomy to social objectives. The implicit link with the UN’s Sustainable Development Goals seems obvious.

The roadmap is clear. Transition finance is a multi-year programme on a massive scale. While today’s focus is on climate change the scope is broader. A secular trend manifests itself as an opportunity for the finance sector to play a crucial role as an enabler of a more sustainable economy.

Disclaimer

THIS DOCUMENT IS FOR NON-PROFESSIONAL INVESTORS AS DEFINED BY MIFID II.

It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals.

Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française.