As custodians of most of the world financial resources, the industry can and should provide guidance on strategies to close the funding gap. The seeds of success are already apparent, in the form of sustainable investment products.
Green bonds – launched in 2008 to enable new sustainability infrastructure – were already valued at $93 billion in 2016 $93 billion in 2016. The impact investing sector has grown dramatically in recent years and is gaining traction in mainstream banks. The Global Impact Investing Network (GIIN) – a trade association – is calling on the industry to direct more capital towards the SDGs.
Asset owners are also considering the SDGs as one of the lenses through which to invest. A coalition of Dutch and Swedish pension funds pledged in 2016 to use the SDGs as a framework to make investor decisions, citing the need to meet "mounting social and environmental challenges."
A new wave of investors
Fueling the demand for these sustainable finance products is a new demographic of investor. Both millennials and women are growing influences in the impact investing community.
Millennials’ key concerns are:
• good corporate governance, • social responsibility, and • positive environment impacts.
And, it is estimated that millennials will receive more than $30 trillion of inheritable wealth in the USA alone in the coming decades.
Meanwhile, the global income of women will grow from $13 trillion to $18 trillion in the next five years. More than the GDP growth of China and India combined during the same period. EY research shows that by 2028, women will control 75% of discretionary spending globally and that they see transparency as an important driver of trust.
This shifting demographic and mindset has been recognized by mainstream financial services companies. The number of available sustainable investing funds has nearly tripled to 925 to 338 since 2008.
How can FinTech help?
FinTech is rapidly emerging, especially in emerging markets. New online platforms enabling peer-to-peer lending and crowdfunding have both disrupted and democratized the traditional access to capital and credit. The 2017 EY FinTech Adoption Index placed the average FinTech adoption across emerging markets (Brazil, China, India, Mexico South Africa) at 46 percent. One example is how mobile phones are bringing financial inclusion to communities that have traditionally been excluded from banking services. An important move forward to addressing the SDGs of reducing inequalities and eradicating poverty.
One of the most disruptive and influential of all technologies is blockchain. It offers an opportunity for transparent financial transactions and accountability. Blockchain also has the potential to be used to track progress on the SDG funding gap, in real time.
Utilizing financial expertise and systems
Access to finance and financial literacy are critical areas that the industry can continue to make progress on. Two examples are expanding structures like microfinance and improving multi-stakeholder collaboration. One such model is blended finance. Governments, philanthropic organizations and companies collaborate to finance development projects that otherwise wouldn’t get funded. This takes the form of government aid being used to underwrite greater private sector investment.
Public sector and philanthropic participation help mitigate the risk for private sector investors. This then acts as a catalyst for much greater private sector financing of projects. One recent survey on blended finance identified capital commitments of $14.9 billion across 61 funds.
As part of the blended finance model the industry has the potential to provide financial advice and management of funds to NGO’s. This could ensure that donor funds reach their intended destination and that their use is impactful, optimized and reportable.
Principles, reporting and long term value
For FS organizations to make the SDGs a success, they will have to embed sustainable finance into their purpose, organizational structure and risk appetite. The motivation for these changes will come from understanding the long-term value creation offered by the SDGs, and how this relates to their shorter-term results.
UNEP FI’s Principles for Positive Impact Finance is a holistic approach to the SDG funding gap. Focused on developing a new financing framework based around impact. Processes, methodologies and tools will identify and monitor positive and negative impacts. Signatories can use the principles to help evaluate the risks and opportunities of ESG factors. Then, monitor progress via integrated or sustainability reporting.
The SDGs need to be more than a theoretical exercise. As an industry, we must combine corporate finance techniques with sustainability expertise to enable sustainable finance to take centre stage.
The cost of inaction
Some voices may argue that the industry is already contributing. Providing the finance that generates global growth for society. So, why do more? The stark reality, however, is that the FS industry has already been affected by the global megatrends and challenges the SDGs are designed to address. These include:
- Financial exposure to catastrophic climate events
- Potential overvaluation of companies in fossil fuel and resource-scarce industries
- Increased regulation to enforce SDG actions
- Rising shareholder activism
- The rapid increase in consumer scrutiny on corporate behavior
Recent extreme weather events have highlighted the issues the insurance industry faces in calculating risk, while providing responsible customer service. The global political and economic push towards decarbonization, meanwhile, looks set to create “stranded assets”. This could destabilize the entire fossil fuel sector (and those dependent on it) including some of the world’s biggest companies. The knock-on effect is that climate change could cut the value of the world’s financial assets by US$2.5t, according to a London School of Economics study.
New regulations about measuring and stating ESG risks in corporate financial disclosures is further changing the finance landscape. The Task Force on Climate-related Financial Disclosure recommendations and EU rules on ESG for pension funds to name two.
A case study: Fraud costs
Take SDG 16 — Peace, Justice and Strong Institutions. It deals directly with reducing illicit financial flows, corruption and bribery in all forms. As well as building accountable and transparent institutions with good governance.
Tackling financial crime is a key strategy that would support this SDG, and one of the main challenges financial services is facing today. There is a role for regulators too. According to the 2017 EY Fraud Survey, 77% of respondents believe prosecution would deter executives from committing bribery and fraud.
Whilst managing this risk is part of standard business practice, it remains a significant problem for companies. The targets underlying SDG16 aim to develop accountable, transparent institutions to combat these problems directly.
Ultimately, action towards the SDGs is more than a strategic financial move. It’s a reputation issue and battle to win customer trust.
How to start your SDG journey?
We have the framework for what we want to achieve. Now every organization should reflect on where their impacts lie and begin to build their roadmap to leverage the SDGs. As an industry, FS could give the SDGs significant momentum by mobilizing the resources needed to close the financial gap and build capabilities. A start to make that happen would be to:
Identify which SDGs will have the biggest impact in terms of risk and opportunity on your business. Then, publicly commit to tackling those relevant goals to drive action forward and help win the hearts and minds of stakeholders.
Develop KPIs and targets around those goals that are quantifiable, and identify new business models, products and services to achieve the goals. This will involve collaborating and leveraging networks for maximum impact. Local investments to improve education and capacity-building can support business growth while decoupling that growth from the intensive use of natural resources.
Measure the effectiveness of the SDG impact. Aligning reporting to the SDGs will help assess progress and provide a common dialogue among stakeholders. It will require developing systems to integrate the management of the SDGs into everyday business planning and decision-making.
Widespread adoption and support for the SDGs underline the serious sustainability challenges facing the world today. Failing to address them is not an option. However, those challenges are balanced with opportunities for the financial services industry. Prioritizing the SDGs is a chance to address influential emerging consumers and incorporate innovative new technologies. All aimed at delivering immediate value for the industry as well as long-term social and economic benefits for the world.
Find out more
“About us,” Green Bond data, http://www.greenbonddata.org/info/about-us.html accessed 27 September 2017
“Investors make impact investment commitment according to Sustainable Development Goals,” responsible Investor https://www.responsible-investor.com/home/article/dutch_and_swedish_investors_make_impact_investment_commitment_according_to_/ accessed 27 September 2017
“Millennials drive growth in ‘impact investing,” Boston Globe, https://www.bostonglobe.com/business/2017/01/17/millennials-drive-growth-impact-investing/aMNLchyEeedGdqphGwIn2J/story.html accessed 27 September 2017
“Engaging the millennial investor,” EY http://www.ey.com/Publication/vwLUAssets/ey-sustainable-investing-the-millennial-investor-gl/$FILE/ey-sustainable-investing-the-millennial-investor.pdf accessed 27 September 2017
“Harnessing the power of women investors in wealth management,” EY, http://www.ey.com/Publication/vwLUAssets/ey-women-investors-in-wealth-management/$FILE/ey-women-investors-in-wealth-management.pdf accessed 27 September 2017
“Sustainable Investing,” EY http://www.ey.com/Publication/vwLUAssets/EY-sustainable-investing-how-the-millennial-generation-invests-its-wealth/$File/EY-sustainable-investing-how-the-millennial-generation-invests-its-wealth.pdf accessed 27 September 2017
“EY FinTech Adoption Index 2017,” EY, http://www.ey.com/gl/en/industries/financial-services/ey-fintech-adoption-index accessed 27 September 2017
“Sustainable Development Investment Partnership (SDIP),” WEF, https://www.weforum.org/projects/redesigning-development-finance accessed 27 September 2017
“Insights from Blended Finance Investment Vehicles & Facilities,” WEF, http://www3.weforum.org/docs/WEF_Blended_Finance_Insights_Investments_Vehicles_Facilities_report_2016.pdf accessed 27 September 2017
Dietz, Bowen, Dixon & Gradwell, Climate value at risk of global financial assets, Nature Climate Change, April 2016
“Human instinct, Machine logic,” EY, http://www.ey.com/Publication/vwLUAssets/EY_-_EMEIA_Fraud_Survey_2017/$FILE/ey-emeia-fraud-survey-2017.pdf accessed 27 September 2017
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