One of the main themes of Davos 2020 has been ‘climate and sustainability’.
The World Economic Forum was most fascinating to me when it came to the clear divergence in thinking between financial institutions that want to cut polluters off from the financial system — and those that believe it is not the financial institution’s job to police the climate.
On the one hand, we have CitiGroup’s CEO, Michael Corbat, who this week in Davos said, “As a financial institution, what I say to our clients is: I don't want to be the sharp end of the spear, meaning I don't want to have to be the [one] telling you, or enforcing standards in your industry or in your business. You should set those […] and we will be there to support you. What we don’t want to find ourselves is being the person that starts dictating winners and losers. A bank’s job is to support the communities in which it operates; it is not to dictate outcomes."
Snow at the World Economic Forum, Davos 2020.Committed to improving the state of the world.
On the other hand, we have this promotional video from ING, in which they say, “We make an impact with what we don’t finance. We say a flat-out ‘no’ to certain companies and sectors… then we say ‘yes, but…’ to companies that want funding but still can do better on sustainability. We tell them what they need to change, and then we help them.”
Is this just lip-service to appease public pressure?
Or is the beginning of a trend towards a serious shift in investor sentiment?
Whatever the answer, the wave of climate responsibility has swept more than just banks into its current.
In his influential annual letter to chief executives, Larry Fink, Chairman and Chief Executive Officer of Blackrock, announced a number of “initiatives to place sustainability at the centre of [Blackrock’s] investment approach, including making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels, and strengthening our commitment to sustainability and transparency in our investment stewardship activities.” [Source: here]
Larry Fink, Chairman and CEO of BlackRock, strengthensBlackRock’s commitment to sustainability
Blackrock is the largest asset manager in the world with nearly US$7 trillion under management. The world listens when they take the stage and state that “companies have a responsibility – and an economic imperative – to give shareholders a clear picture of their preparedness. And in the future, greater transparency on questions of sustainability will be a persistently important component of every company’s ability to attract capital.”
The reason I find the divergence so fascinating is that, within Reply, we have a company dedicated to Environmental, Social and Corporate Governance (“ESG”).
We call it “Green Reply”.
Green Reply assists financial institutions in defining and implementing their climate risk strategy. Frankly, it’s easy to talk about a strategy, the real challenge is successful implementation. Once a Board has determined how it wants to approach climate and sustainability risk, they own the responsibility to make it happen.
Take a bank that decides to ‘unbank’ polluters for example. Let us imagine a bank stops lending to polluters and even refuses to offer any kind of banking services. If we assume that the board believes it is the bank’s responsibility to do so – and that they are ready and willing to take ownership of “dictating winners and losers” – the experience of Green Reply’s clients shows that their greatest challenge is to quickly discover robust data to implement such policy.
They rapidly come to realise that sector codes, e.g., National Industrial Classification (NIC), do not provide the granular detail required to make effective assessments. For most financial institutions, once the policy decision is made, the management of climate risk quickly becomes a data challenge, and that’s one of the areas, beyond policy, where Green Reply adds value.
P.S. If you are interested to know more about the challenges and solutions of managing climate and sustainability risk, please reach out to my colleague, Gwennoline d’Avout, Head of Green Reply, at .