March, 02, 2021 | Rae Mpashi-Marx | ESG/Finance

The Mother of Invention

The finance sector is definitely responding to the crises of the anthropocene, leading to unprecedented opportunities for purpose-led businesses.

Rae Mpashi-Marx
is a Senior Consultant at Junxion.

Nudging people towards energy efficient transport options or renewable energy for their homes, creating communities of strangers through collective insurance of sharing economy assets, linking growth financing explicitly to ESG performance targets. The urgency with which we need to transition to a more sustainable economics is fueling creativity in the most unlikely of places, and it’s creating new opportunities for purpose-driven businesses.

Sustainable finance is one of those terms that is used pretty loosely to mean a whole range of things. Fundamentally, it refers to the flow of capital to the generation of positive social and environmental outcomes alongside financial returns. And that flow is rapidly growing. A record $357.5bn was raised by sustainable companies globally in the year to September 2020, a 96 percent increase on the same period in 2019.

So Why is Sustainable Finance Booming?

There are various reasons for this. Civic pressure has ramped up substantially as citizens experience the impacts of climate change and biodiversity loss. Initiatives such as Carbon Tracker and ShareAction are raising standards on disclosure, shining a light on companies with poor environmental, social and governance (ESG) track records. Politicians and regulators are starting to turn Paris Agreement and Sustainable Development Goal commitments into mandates for action. Shareholders and investors are starting to hold some of the world’s largest businesses to account for their impact on society and the environment.

It makes sense not only because of the scale and urgency of the challenges we face. The evidence is increasingly indisputable that prioritising ESG considerations has a positive impact on all aspects of business.

Prioritising ESG considerations has a positive impact on all aspects of business.

A recent review of evidence by NYU Stern Center for Sustainable Business and Rockefeller Asset Management, found that the vast majority of studies and meta studies conducted since 1995 demonstrate a clear positive correlation between ESG prioritisation and financial performance.

Everyone is Getting on Board

This message is definitely being heard by the financial sector. Perhaps because of the unusual nature of the work, and the scale and urgency present there is a creativity and experimentation happening in this space that is not usually associated with the finance sector. Examples abound. Finland has been experimenting with social bonds as a way of encouraging faster integration of new migrants to the country. It provided support to train and employ new migrants, and tackle the challenge of long-term unemployment many face.

It’s not just Governments exploring the options. JP Morgan expects to issue bonds to finance action on climate change and the Sustainable Development Goals worth up to $150 billion in 2021. These are targeted at social projects, such as affordable housing and support for employment generation in areas of high unemployment, as well as green projects, such as green buildings and renewable energy. This investment is global, and is tilted to favour countries performing more strongly against ESG criteria.

Allianz, one of the insurance industry’s sustainability leaders, has launched more than 200 sustainability-linked products. These range from giving discounts to owners of fuel efficient and electric vehicles to mobile-based, short duration, pay-as-you-go insurance products for small business owners in developing markets to encourage entrepreneurship.

There is a creativity and experimentation happening in this space.

Sustainable finance initiatives have been launched to facilitate the response to the global pandemic, including a €1 billion response bond issued by the Nordic Investment Bank to raise funds in support of healthcare systems and providers and another the European Investment Bank (EBI), to support the European economy through healthcare infrastructure improvements.

These examples are just a few of many that demonstrate the new ways that capital is flowing through our economies. This capital needs robust, resilient purpose-driven businesses to flow towards. The Cambridge Institute for Sustainability Leadership’s Rewiring the Economy identifies 10 steps, 4 of which are aimed at businesses, required to lay the foundations for a sustainable economy: align purpose and business model; set targets and measure progress towards them; embed sustainability throughout the organisation, and collaborate to advocate for change.

Purpose-led Businesses Are at the Forefront

For many socially and environmentally conscious businesses, these steps are already second nature, making them the ideal recipients of the flows of ESG capital intended to transition business processes to greener technologies, scale up social impact and increase global equity – capital many are not aware is available.

Purpose-led businesses are well-positioned to engage with the spirit of invention.

Years of experience with social and environmental issues, and insight drawn from the front lines also means that purpose-led businesses are well-positioned to engage with the spirit of invention that is driving many of those creating sustainable finance initiatives. The evidence suggests that the substantial uptick in ESG financing in 2020 is set to continue in the years ahead. Purpose-led businesses need to be ready to take advantage of the opportunities to experiment and create while they exist, and make the most of the capital available to scale their impact and solutions that create the change in the world we need.

Author Rachael Mpashi-Marx, Senior Consultant at Junxion