Sustainable Finance – The Devil Wears Green

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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