Sustainable finance does not exist within a vacuum. In order to succeed, it must adopt a multi-stakeholder approach.
For decades, the notion of sustainability – at least as it has been adopted by the finance sector – has been driven by privatised definitions of what makes a company sustainable. Is Tesla the top performing car manufacturer on ESG, or the worst?Should India’s largest coal utility be ranked in the top 10th percentile of ESG performers? Should it, along with a tobacco company, gain a place on leading sustainability indices? It depends on who you ask.
Today, we are seeing an important shift towards delegating these definitions to experts, to science, and to multi-stakeholder processes. It’s a shift towards democratisation and towards extreme legitimacy; towards letting the experts that know best have representation in the methods and analyses that will guide the flow of sustainable capital. As we reach ecological tipping points and urgently need to achieve a socially just transition to a sustainable and resilient world, the timing couldn’t be better.
In the context of growing demand for sustainable investment offerings over the last two decades and the absence of globally-agreed sustainability goals, ESG ratings – scores given companies for their Environmental, Social, and Governance (ESG) performance – and analyses by internal sustainability teams have offered a convenient and scalable way for investment teams to take sustainability into account. But with over 600 ratings with almost consistently uncorrelated judgements of which companies are most sustainable and why, ESG integration has run the risk of being more about process than outcomes. Since 2015, however, the adoption of the Paris Agreement and the Sustainable Development Goals has offered us a clearer picture than any time in history of what outcomes we need to achieve – limit earth’s warming to well below 2 (preferably 1.5) degrees while ensuring equitable, healthy, and educated societies that function within our planet’s natural limits.
Using global goals asa guiding framework for sustainable investment offers a sobering reality check: one third of global capital is now managed under self-declared sustainability strategies [BB1] yet, we are still on track to a 3 degree warmer world, with all of the vast social, environmental, and economic disruptions that this means. Nature is declining at a rapid rate, and two thirds of the global population live in countries where inequality has grown since 1990.
We don’t question the need to see doctors when we are ill and physios for sports injuries. Now, driving capital towards sustainable outcomes will require working closely with the stakeholders that that know most about sustainability. And this happening everywhere we look. In the largest collective engagement in history – Climate Action 100 - 575 investors with $54 trillion in assets under management are asking the world’s largest emitters to align their business models with the Paris Agreement, an initiative driven jointly by investors and leading climate-change think tanks and NGOs. Corporate and finance sector climate targets have evolved from ad hoc commitments in the early 2000s to robust emission reduction plans aligned with science and what is required under below 2 degree climate scenarios. The EU’s Action Plan on Sustainable Finance is being designed with the input of leading academia, think tanks and NGOs (now under the “Platform” for sustainable finance), guided by deep consultations on which economic activities pass science based criteria for sustainability, and what these criteria should be.
Just last week, nine of the platform’s advisors argued that the latest criteria under the EU Taxonomy – which will define what is and isn’t “green” - had been too influenced by industry interests and would undermine climate science: exactly the sort of hearty and informed checks we need when designing large-scale classification and reporting frameworks for sustainable finance. For every issue we can think of – from deforestation, to sustainable food systems, to the pricing of critical medicines, to digital rights, the finance sector has access to expertise that defines what we really need to expect from companies and how to measure this.
We believe these insights deserve to be integrated by the finance sector at scale. This is why, at Matter, we delegate the analysis of sustainability to experts. Our technology solution connects investors to the experts that “know best”, and we ground our analysis in multi-stakeholder and science-based frameworks.
When we bridge the gulf between current investment practice and the growing wealth of expertise on how companies interact with society and the environment, sustainable investing becomes more accountable, more likely to deliver real-word impact, and more able to deliver multi-perspective solutions to complex problems.