Is your firm ready for sustainable financing?

Over the past 30 years, the incidence of natural disasters has dramatically increased, and the actual and future potential cost to the economy has skyrocketed.

We are now in a situation where climate change is an existential risk to our future economies and way of life. Governments have been championing legislation and agreements towards curtailment of climate change as well as adaptation to climate change.

Last December, our government revised its national determined contribution (NDC) from 30 per cent emissions to 32 per cent reduction relative to the business-as-usual (BAU) by 2030. This is the commitment that the government has made towards the Paris Climate Agreement that came into being on 12 December 2015.

Towards this end, the NDC specifies adaptation and mitigation actions and responses that the government will need to champion to achieve its commitments.

To achieve the 32 per cent cut in emissions by 2030, there is a need to mobilise financial resources from the public and private sector, with the bulk of the funds expected to come from the private sector. From my conservative estimate, the funding required in the coming nine years amounts to $60 billion.

Banks, fund managers and insurers have a special role to play in providing this financing while maintaining a healthy ecosystem over both the short- and long-term.

Their decisions about what projects and organisations to fund essentially make them gatekeepers for sustainable development. That means assessing, managing and reporting on the risks involved in all those decisions.

I have been working with a couple of financial institutions that are exploring how to tap on the opportunities presented by sustainable finance. My message has been consistent that finance will be replaced by sustainable finance in years and hence the need for such financial institutions to alight to the new trend in financing.

It is clear that financial institutions are still a long way into exploiting the opportunities presented mainly due to lack of knowledge, lack of capacity, lack of appropriate tools and lack of enabling environment both from within and without the organisations.

There is a need for them to develop their decision-making policies and implementation procedures to enable sustainable finance. I highlight below some of the considerations that financial institutions should consider as they embark on the journey towards sustainable finance.

There is a need to build on the existing foundations to unlock the value-oriented by sustainable finance. This will call for the revision of the risk management framework by including climate change risks.

To achieve this, there will be the need for buy-in from the top management and the board as it will be difficult to implement the framework without their backing .

Knowing and preempting the environment will be key where financial institutions will be required to understand the existing and upcoming regulatory requirements and the relevant international standards.

Monitoring the environment and engaging various stakeholders is therefore an important step to identify the trends that may be useful or harmful for the institution.

Effective communication around the matters of sustainable finance will be a plus for an organisation that is determined to benefit from the opportunities presented by sustainable finance.

Such organisations require a communication strategy that will enable free flow of information to clients, employees and other key stakeholders. This strategy should show genuine commitment to sustainable development to avoid accusations of greenwashing.

Provision of support to the business units with tools, development guidelines, opportunities for discussions and feedback, training courses and guidance during implantation will lead to more success in unlocking the opportunities presented by sustainable finance.

Finally, there will be a need to consider hiring a subject matter expert who can support development and implementation, as well as day-to-day operations of your sustainable finance mechanisms and strategies. Institutions should also make sure that they have an internal structure that will allow sustainable finance to thrive.

As an example, organisations should make sure their environmental and social risk experts or sustainability experts have the authority to question and to escalate business decisions and have reasonable reporting lines and access to risk control and compliance.

In sum, sustainable finance adoption will be a crucial driver to the success or failure of any financial institution in the future and our ecosystems. It will enable nearly all equity and debt investments to become system change investments. It forms the most powerful short-term driver of the system change when it comes to sustainability and addressing climate change.

Sustainable finance will also provide substantial profit, growth and leadership opportunities for the financial community if well embraced.

This article was originally published on the Business Daily

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