Creating a more sustainable future requires an all-hands-on-deck approach from most industries—finance chief among them. Enter: sustainable finance.
The financial sector holds enormous power in funding and bringing awareness to issues of sustainability, whether by allowing for research and development of alternative energy sources or supporting businesses that follow fair and sustainable labor practices.
Sustainable finance is defined as investment decisions that take into account the environmental, social, and governance (ESG) factors of an economic activity or project.
Environmental factors include mitigation of the climate crisis or use of sustainable resources. Social factors include human and animal rights, as well as consumer protection and diverse hiring practices. Governance factors refer to the management, employee relations, and compensation practices of both public and private organizations.
Sustainable Finance Jobs on the Rise
Investing in businesses and projects with sustainable ESG practices is already on the rise, as is demand for finance professionals with expertise in this niche yet rapidly growing field. Bloomberg recently reported on the trend, stating that it’s already one of Asia’s most in-demand fields.
“Clients do understand that the talent pool is very thin, particularly in finding candidates with a proven track-record and relevant ESG experience in both private and public sectors,” said Arthur Leung, a consultant covering financial services at leadership advisory firm Egon Zehnder in Hong Kong, quoted by Bloomberg Green. “They understand the rarity of talent and most are willing to pay for the roles.”
Harvard Extension School offers a master’s degree program in sustainability as well as six graduate certificates in the field. These programs aim to prepare the future workforce for a more sustainable future as climate change increasingly poses threats to public health.
A recent report by the United Nations’ Intergovernmental Panel on Climate Change makes the urgent case for integrating ESG, among other factors, into investment decisions for fast, actionable impact on the environment.
We asked three of our instructors why it’s important for finance professionals to build expertise in ESG and sustainable finance. Here’s what they had to say.
Kevin Hagen, Vice President of Environment, Social, & Governance (ESG) Strategy at Iron Mountain
Sustainable business thinking is a disruptive force in business. At one time, folks may have thought of it as marketing or storytelling. Today, the leaders in the space are demonstrating that thinking differently about environmental and social performance can drive change that delivers more business value while harnessing the power of enterprise to deliver better outcomes for people and the planet.
If learning new sustainable business skills and competencies is making companies more successful, the same is true for us as business professionals. Perhaps nowhere is that more true than in the accounting and financial world.
For example, the accounting functions need to add skills for gathering, managing, analyzing, and reporting a whole new genre of business metrics, such as greenhouse gas emissions, gender pay gap results, and ethics and anticorruption indicators.
Finance functions need to model renewable energy contract risks or do the analysis of the balance sheet versus profit-and-loss implications of investing in everything from electric vehicle conversion to energy efficiency to inclusion training for employees. Treasury teams need to understand Green Bonds and how climate risk assessment might impact credit facilities or insurance considerations.
In short, ESG thinking is rapidly changing the job of financial professionals across the board. While that disruption could leave some folks behind, people who learn (or help invent) this new space are likely to help their company create more value, accelerate their own careers, and create the opportunity to use their day job to make a big difference in the world.
Dr. Carlos Vargas, Lecturer of Sustainable Finance and Investments; and Environmental Economics
Sustainable finance has emerged as a response to a world that’s finally seeking to bridge social, racial, and gender gaps. We are already undergoing a green revolution from which we can learn every day. New milestones are frequently added that lead us to a better understanding of sustainability.
PricewaterhouseCoopers, one of the four largest accounting firms in the world, announced its intention to incorporate more than 100,000 new employees to assist on ESG issues in a strategy they called “the new equation.”
In addition, the investment giant Blackrock proposes reaching its plea of “net-zero” by 2050, which implies a drastic reduction in greenhouse gas emissions. That a leading global investment manager is pursuing such an ambitious goal is significant. The world has to pause for a second, take a deep breath, and think about how to cater options given the more than $9 trillion in assets that Blackrock manages. This might be just the beginning of the unprecedented opportunity for sustainable finance. It may even be just the push that global economies need to truly align with the Paris Agreement.
Graham Sinclair, ESG Architect
Instructor of Making the Sustainable Investment Case
The future of finance is stakeholder capitalism. Companies can no longer operate by prioritizing shareholders as the dominant audience. Now, employees, communities, customers, regulators, and the planet itself all require their “voices” to be heard. That means decision-making needs to be fluent in integrating all factors—including environmental, social, and governance (ESG) factors—when making choices about where to allocate capital.
Sustainable finance is important for at least two reasons:
First, good practice has shifted to where it always should have been: valuing all forms of capital. Every business on planet Earth directly or indirectly relies upon biodiversity and natural ecosystems. But population sizes of mammals, birds, fish, amphibians, and reptiles have seen an alarming average drop of 68 percent since 1970.
Historically, typical business behavior has centered on for-profit businesses seeking to capture as much profit as possible while pushing as much of the costs onto society—and onto nature. For example, only 9 percent of plastics made are ever recycled. The reality is that all lives and livelihoods are made on one planet, relying upon humans to make/do/buy/sell stuff and the rules of law to protect the contractual relationships of all market participants. The SEC will be implementing increased ESG reporting standards soon. The Climate Action 100 initiative counts 575 investors managing $54 trillion. These investors are demanding their 167 portfolio companies—which account for 80% of global industrial climate pollution—to take “necessary action.”
Second, investors are demanding more transparency and accountability from companies, not less. Self-described ESG-branded assets are on track to reach $53 trillion by 2025, driven in part by demand from the increasing influence of women and millennial investors.
The customer value proposition is changing. The increase in trillion-dollar investment firms with growing passive investment strategies that cannot exit stocks has also driven these professional investors to be better stewards. They are now looking more critically at management and engaging with companies to improve performance.
BlackRock, Vanguard, Fidelity, and State Street Global Advisors together manage 20 percent of global publicly listed securities, an aggregate $20 trillion assets under management at the end of 2020. These investors’ dissatisfaction was significant in the paradigm-shifting vote against Exxon Mobil directors on May 26, 2021.
The fundamental question asked by investors is: Why should I deploy my limited assets today to support your business growth tomorrow? Without ESG, the answer is, you shouldn’t.
Conservation of nature, promotion of biodiversity
Consideration of humans, relationships
Standards for running a company and economy
|– Climate change|
– Biodiversity destruction
– Energy efficiency
– Waste management
– Water scarcity
– Air quality
– Waste creation
|– Customer satisfaction|
– Data protection and privacy
– Employee engagement
– Community relations
– Human rights
– Labor standards
– User safety
– Valuing employees
|– Board diversity|
– Audit committee structure
– Separation of powers
– Bribery and corruption
– Executive compensation
– Political contributions
– Whistleblower schemes
– Stakeholder accountability
SOURCE: G.Sinclair 2021, adapted from CFA Institute, July 2021.