It is undeniable that the importance of corporate environmental, social, and governance (ESG) performance is rapidly growing due to the urgent need to address issues of climate change, energy security, social diversity, human health and safety, and ethical conduct. We are in an unprecedented period that demands urgent collaborative action by all stakeholders to ensure a sustainable and fair transition at all levels. To enable this transition, major changes are needed that will not be possible without the right investments. Finance flows must be aligned with sustainable pathways.
Climate negotiations at COP27 in Sharm el-Sheikh brought sustainable finance into the spotlight once again, highlighting the fact that a global transformation to a low-carbon economy is expected to require an investment of at least USD 4–6 trillion per year. The financial sector is key in driving system-wide change across various sectors. It is so influential due to its ability to unlock capital, provide guidance and tools, and offer ESG-linked products like loans and bonds to support transition activities. Although the increasing number of commitments from the financial sector in terms of sustainability are encouraging, the path from ambitious commitments to real actions is not always straightforward.
Understanding the weight of this challenge, Schneider Electric teamed up with WAS (Women Action Sustainability) to conduct research to better understand the key drivers and challenges that financial institutions face when incorporating ESG criteria into their investment decisions and to examine opportunities available. The findings of the resulting report, “Sustainable Finance as a Fuel for Action,” were presented during a conference organized in Madrid on the 24th of November 2022.
Irina Gilfanova, Director Sustainability Consultancy, Schneider Electric
Tania Fernandez, Senior Sustainability Consultant, Schneider Electric
The report is informed by an online survey that was launched in July 2022 to key stakeholders from selected financial institutions as well as a series of interviews with both investors and corporates. The combined qualitative and quantitative information gathered provided valuable insights, giving a comprehensive perspective of the challenges faced on both sides.
The report highlights four important trends:
ESG integration and performance are gaining considerable relevance among both institutional and private investors
- Risk management emerged as a strong bridge between sustainability and finance; sustainability is seen as a reliable tool to ensure long-term resilience.
“We have seen a tectonic shift of capital. We strongly believe that the integration of climate and sustainable considerations into investment processes can help investors to build more resilient portfolios and achieve better long-term risk adjusted returns.” - Aitor Jáuregui, Country Head for Blackrock in Iberia
- Climate change is still the main topic of concern
“Most of the existing investment regulation and collective global initiatives are focused on climate. No surprise here: in addition to having more scientific data, climate change poses an existential threat, and we just have a narrow time window to address it. Transition planning is therefore critical for the financing of big companies, especially for the high emitting ones.” - Marisa Aguilar Villa, Country Head for Allianz Global Investors in Iberia points out.
- Most investors prefer inclusionary and impact investment in their strategy, calling for a strategic engagement with investees rather than excluding high emitters from their portfolio.
“The real impact does not come in excluding certain sectors and high emitters. Our work is to push the companies to promote a real change where it is needed most and invest in the transition.” - Lara Marín Fernández, Head of Global Product for BBVA Asset Management
These trends are setting the momentum for “sustainable finance as a fuel for action.” Sustainability and finance are not anymore two opposing concepts as they were some years ago. Nevertheless, survey respondents shared crucial challenges which must be addressed to bridge the gap in the financial sector to fully integrate ESG considerations.
- Difficulty in measuring the financial impact and incorporating ESG performance into ROI
- Insufficient reliable and comparable data, signaling the need for greater transparency from corporates
- Lack of ESG commitment at the corporate board level
- More resources to address challenging sustainability topics such as circularity and biodiversity
Recommendations for investors and investees to attain a sustainable future
Despite these challenges, respondents agreed on several solutions and recommendations to maximize the impact of sustainable finance to drive a fair and fast transition. For investors, recommendations are centered around helping build their sustainable investing strategies and bring their portfolios along on the journey. And for investees, the recommendations will help businesses to be better prepared to engage with financial markets of ESG performance and seize sustainability as an opportunity.
To access the recommendations presented for both investors and investees,
access the full report here.
In the words of Pasha Ponomarev, Head of Sustainability Business EMEA, Schneider Electric: “Transparency and disclosure of climate risks and opportunities is key, as is the resilience of an organization’s sustainability strategy under different climate scenarios. Companies not only need to communicate ambition but also to show progress on their implementation plans for decarbonization. Listening to several financial stakeholders, one of the main pieces of advice given to companies was simple: get started. Do not let perfection on methodologies or data be the enemy of progress. The time for excuses is behind us; the time for action is now.”