Establishing an effective ‘market’ in delivering on our climate and sustainable development goals

Stephanie Maier, Director of Responsible Investment at HSBC Global Asset Management explains how to establish an effective ‘market’ in delivering on our climate and sustainable development goals.

The latest Wold Economic Forum Global Risks Report once again presents a global risk landscape densely populated with environmental and societal risks, with the top 10 highest impact risks dominated by those that are either caused or exacerbated by climate change, including extreme weather events, water and food crises and the spread of infectious diseases. These risks are complex and inter-connected, and can have profound economic and financial impacts.

It is perhaps therefore no surprise that we now see a much closer interest paid to these issues by financial policy makers. Indeed, the European Commission High-level Expert Group (HLEG) on Sustainable Finance issued its final report a few weeks ago and we expect recommendations from the UK Green Finance Taskforce in the coming months. There is now significant political support behind this agenda, more so than at any other time, but how should policymakers take forward these recommendations and make the necessary changes?

We need to create a policy framework that harnesses existing market mechanisms and establishes an effective ‘market’ in delivering on our climate and sustainable development goals.

In this way, we can help the market adjust and mitigate the financial and real economy risks while benefiting from the opportunities that the necessary transition brings.

Before focusing on what and who we should prioritise in creating this policy framework, it is important to remember three points:

1. Recognise the prize – Our ambition should not just be to grow the global market for green finance but instead ‘green’ the global market for growth. We need to remember that policy measures should be aimed at making a sustainable market the market, not just part of the market.

2. Marginal progress does matter – Quoted by some of the most successful Olympic coaches, the impact of aggregating marginal gains or doing 100 things 1% better – can be transformative. The market is a system with a myriad actors – asset owners, asset managers, analysts, regulators and ultimately citizens – each is currently incentivised to act in a particular way. The reason there are so many recommendations is that there are a lot of things that will make a small difference. Policy makers, across departments, will need to co-ordinate to take relevant steps in their own areas to ensure this adds up to a ‘big’ difference.

3. Prioritise positive feedback loops – We have seen the compelling dynamics in the energy sector where regulation and technology have driven down the costs and we now see the impact of investor choice further accelerating this trend. Just as the risks are inter-connected, so too are the solutions.

So, given the scale of the ambition and recognising that, while multiple actions are needed, the most substantive changes will be achieved when we create positive feedback loops, what actions should we prioritise?

1. Information – it is true to say that information is the lifeblood of markets. Market participants use it to drive their investment decisions and regulators use it to oversee the markets.  Information needs to cover relevant issues and over a relevant timeframe. Enhancing the uptake and quality of FSB Task force on Climate-related Financial Disclosures (TCFD) will be critical to prompt the market to more appropriately price the risks and returns associated with the low carbon transition and influences supply and demand dynamics across the economy.

2. Integration – the proposed HLEG ‘Think Sustainability First’ principle to embed sustainability considerations in policy-making could be transformational, if coupled with a recognition of the importance of policy stability and clarity on direction for providing market confidence. Policy-making needs to be coherent across departments and long term in outlook as this has an important signally power.

3. Infrastructure – it seems obvious, but we are building things now that will be around for decades, literally shaping our environment. In addition to specific facilities to focus on developing a sustainable infrastructure pipeline we should look at establishing requirements for all infrastructure – ensuring it is resilient to climate-relative impacts and supports markets towards a lower carbon transition at the speed and scale required.

Recognition and recommendations for how to make markets more sustainable are critical and welcome. However, this will only be achieved if we are sufficiently ambitious with our goals and recognise that getting it right requires engagement across policy areas and market participants at a national, regional and global level. 2015 showed us that governments across the world are willing to act on climate and sustainability – let’s take this chance to set our markets on course to support them.

Stephanie Maier is Director of Responsible Investment at HSBC Global Asset Management