October 27

Logan Yonavjak

At the Tipping Point: How Can Global Financiers Create a Sustainable World Economy?

Last week’s UNEP FI conference, “The Tipping Point: Sustained Stability in the Next Economy” brought together over 500 participants, including senior finance executives and policy makers, and more than 100 speakers, including 20 CEOs and two former heads of government. Attendees discussed global financial sustainability and market stability from the perspective of three main sectors: banking, insurance, and investment.

Organized by the United Nations Environment Programme (UNEP), the goal of this event was to consider the emerging role of sustainable finance in reforming the financial sector to ensure long-term stability and sustainability in the global economy, especially as we move forward into the post financial crisis era.

The onset of another significant tipping point – the expected birth of the world’s 7 billionth person on October 31 – left me thinking about the paradigm shift needed if we’re actually going to revolutionize our carbon-based economy into a green economy. The convergence of a growing population with other macro trends like urbanization, increasing wealth, climate change, and an increase in protein-based diets around the world means that both government and the private sector need to collaboratively figure out ways for all these people to live in a just and sustainable way.

I think most people would agree that we’re still far from the “tipping point” of a green economy, given that most mainstream money is still largely being channeled into carbon intensive industries. At the conference, Jigar Shah, the CEO of the Carbon War Room, put it well: “[despite an interest in socially and environmentally responsible investing], many banks continue to hedge their bets and invest in extractive industries even though these investments are terrible in the long run.” This type of old-paradigm thinking doesn’t bode well for a green economy.

And from what I heard at the conference, if we want to reduce global greenhouse gas emissions so as to hold the increase in global average temperature below 2 degrees Celsius, we need US$13.5 trillion (or some US$500 billion per year) in clean energy investment and spending, in addition to the commitments that have already been made by governments, between 2010 and 2035. That’s a lot of capital that needs to be channeled.

Which is why the UNEP FI conversation last week was so important. We need more open and strategic conversation around how the financial community can reach consensus about investing in people, planet, and profits.

Although economic growth over recent decades has helped lift millions of people around the world out of poverty it has often come at the expense of the planet’s life support systems – the natural capital – on which we all depend. There is growing evidence, from the Millennium Ecosystem Assessment, Stern report, and other research initiatives like TEEB, that the current loss of natural capital is severely eroding society’s economic prosperity and, according to speakers at the UNEP-FI conference, there is mounting evidence that the current loss of natural capital has far exceeded the economic losses of the 2008 financial crisis.

While there were a number of conversations at the conference that focused on how to incorporate natural capital accounting into the lending and investment practices of banks and other financial institutions, one in particular stood out to me. This session was entitled “Absolute Assets: Accounting for natural capital in lending and investment.”

Pavan Sukhdev, the founder and CEO of GIST Advisory, and a 2011 McCluskey Fellow at Yale University, talked about the types of risk that our society manages well and those we don’t. He believes that, as a society, we are effective at managing credit, market, and event risk, but not overall systemic risk. By systemic risk he means the risk of ecosystem degradation and the erosion of the natural capital on which our economic activity and financial capital depend.

Sukhdev also highlighted a soon to be published report by United Nations Principles for Responsible Investment (UNPRI) which found the top 3,000 companies in the world are estimated to be responsible for environmental externalities worth at least US$2.2 trillion per year. This equates to 7 percent of their combined revenues and about a third of their profit. Essentially, the foundational role of natural capital is not being incorporated into the investment of these companies, and in his words, these companies are getting a lot of “free lunches.” He went on to make the point that many companies that we think of as profitable may not actually be profitable in the long-run if we incorporate these externalized costs into the bottom line.

He called for banks to quantify the costs of externalities, including greenhouse gas emissions and freshwater extraction. Luckily, some leaders, like Rabobank in Brazil, which is a global food and agribusiness bank, are already assuming this call to action. Banks like Rabobank have a particular impetus to incorporate natural capital into the investment equation, given that they have a large client base that is directly dependent on the land.

Daniela Mariuzzo, the corporate social responsibility manager at Rabobank International Brazil, spoke of the critical role of banks in the sustainable finance conversation, and its potential impacts on small and medium sized enterprises, by explaining the bank’s five Food & Agribusiness Principles. One such principle, responsible natural resource management, is broken down into a number of measures, such as preventing land degradation and soil erosion, minimizing pollution of ground and surface water, preventing overfishing, minimizing harm to seal life, and preserving high-conservation-value areas and biodiversity in general.

Derived from these principles, Rabobank has defined non-traditional supply-chain policies for a number of sectors in which the bank is very active, specifically in food and agribusiness. In each of these policies, biodiversity and ecosystem services play a central role, as they are treated as a risk or opportunity for credit decisions, acquisitions and engagement with customers.

Mariuzzo’s basic message was that although corporations can do a lot to incorporate externalized costs into the bottom line, there is also a lot that banks can do to lend to specific companies, especially SMEs in emerging markets, which already internalize externalities in their core business model. This would allow a bank to move beyond risk management and look for new opportunities for returns. Mariuzzo explained that it’s much easier to simply find companies that purchase products directly from primary producers that are sustainably managing natural capital. Through this form of investing, banks can leverage power within the supply chain.

From the perspective of New Ventures, which supports environmentally beneficial SMEs in emerging markets, more lending institutions like Rabobank must invest in socially and environmentally focused companies. These actions will help ensure that we actually reach the tipping point necessary to create a global green economy that provides for a growing population.

One speaker very nicely summarized what banks need to do to ensure this paradigm shift: 1) increase transparency; 2) act with a sense of urgency; and 3) make the right choices in investment that incorporate both environmental and social externalities.

With less than a year to go before the much-talked about UN Conference on Sustainable Development (or Rio+20) in Rio de Janeiro, UNEP FI’s conference was the first in a series of agenda-setting and action-oriented discussions on the private sector’s increasing role in helping scale up and accelerate the transition to a low-carbon, resource efficient economy while working to promote sustainable development and poverty alleviation.

UNEP FI is a unique global partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with nearly 200 financial institutions that are Signatories to the UNEP FI Statements, and a range of partner organizations to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realize the adoption of best environmental and sustainable practices at all levels of financial institution operations.

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Entrepreneurship, Environment
impact investing, New Ventures, sustainability, World Resources Institute