An excerpt from Euromoney: “Six ways to fix sustainable finance” by Helen Avery
December 3, 2019
Euromoney has drawn up six recommendations for the sustainable finance sector based on the views of 20 experts in the field, including Boston Common’s Managing Director, Lauren Compere as one of the experts.
Six ways to fix sustainable finance:
- Join PRB
- Mandate TCFD
- Standardize climate risk measurements
- Develop transition finance
- Target Deforestation reduction
- Incentivize green finance
A sequenced approach was put forward by the Principles for Responsible Banking (PRB) – and it’s a coalition mentioned by nearly all sustainable finance heads interviewed as being an initiative that has a clear path to concrete change.
For the last five years Boston Common Asset Management has been engaging with 58 banks – originally selected as the biggest financers to carbon-intensive sectors – working with them towards greater governance and action on climate, and publishing a regular study on their progress as a group. One of its core recommendations to banks has been to sign up to the PRB. Lauren Compere, director of shareholder engagement at the firm says she knows of other large asset managers with bank shareholdings making similar recommendations.
The second of our six proposals to make sustainable finance work is for firms to mandate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Sustainable finance heads all agree that more data would help convince their colleagues and senior risk management teams to accelerate the transition away from financing fossil fuels, high carbon-emitting industries and those exacerbating deforestation or pollution. To this end, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) should be helpful.
The third of our six recommendations is to push for the standardization of climate risk measurements.
Sustainable finance heads say that standardized metrics and scenarios would help their banks feel more confident in disclosing their balance sheets in terms of green to brown and also in better managing their own risk.
Lauren Compere, director of shareholder engagement at Boston Common Asset Management says her firm has been asking banks to get involved in industry initiatives related to scenario analysis since 2015 and has made specific recommendations. “There are three things we have been asking banks to do that we feel will have the most impact in shifting the direction of finance towards a low-carbon future and reducing financial risk,” says Compere.
The fourth of our six proposals is to develop transition finance. It is here in this grey area, where finance needs to support the transition of the global economy from brown to green, that sustainable finance heads say greater action is needed.
Boston Common Asset Management’s study showed 55% of the banks it surveyed have set explicit targets to increase and promote low-carbon products and services, up from 46% last year. Lauren Compere, director of shareholder engagement at the asset management firm says it is not enough.
While many metrics and proposed disclosures are focused on carbon emissions, onlookers say that the financial industry is missing one large part of the sustainability pie: deforestation.
But improved policies and greater disclosure regarding deforestation and other physical risks need to be given higher priority by banks. Boston Common Asset Management expanded its study this year to ask banks how they are supporting zero deforestation in addition to fossil fuel financing reduction, and the results were bleak. Only 16% of the 58 banks in the study require clients to commit to no-deforestation policies and only 14% require soft commodities clients to adopt time-bound certification plans.
“Even in the relatively advanced markets in Australia and Europe, only about a third have required no-deforestation policies and even fewer have expanded these policies to all soft commodities. Strikingly, none of the US or Canadian banks – and few in emerging markets – require clients to adopt no-deforestation policies,” says the report.
“We are already off-track and heading into a three degree world,” says Lauren Compere, director of shareholder engagement at Boston Common Asset Management. “What worries me as an investor is the sleeping giants of the earth system.
“The Amazon is one of those that if it wakes up – in terms of emitting carbon rather than being a sink – we will have reached a point of no return; yet deforestation is continuing at a rate at which we have lost 20% of our world’s forests. If we lose 40% then there will be earth shattering implications.”
Boston Common Asset Management’s study also points to the Soft Commodities Compact, coordinated by the Banking Environment Initiative (BEI), as an initiative that could help banks take action regarding their financing activities and deforestation.
The last of our six recommendations is for efforts to be made to incentivize green finance. Convincing dealmakers at banks to start viewing their work through a sustainable lens is an uphill battle, say those in sustainable finance roles.
Incentives would be welcomed say sustainable finance heads. “A regulatory nudge would be helpful – such as partial incentives towards financing green or hits against financing brown,” explains one.
Read the full Euromoney article here
To learn more, check out Boston Common’s latest report, Banking on a Low-Carbon Future: Finance in a Time of Climate Crisis.
The information in this article should not be considered a recommendation to buy or sell any security.