Being green today is more than just thinking about the climate, and sustainability means more than the E in ESG, Anna Stünzi writes in her essay for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
An unusually hefty cadre of three federal councilors is to represent Switzerland at the international COP26 climate conference in Glasgow, which starts this Sunday. Among other things, they will be participating in the discussions on sustainable finance. This is also an area where the private sector has a key role to play in helping to achieve the Paris Agreement objectives of limiting global temperature increases to less than 2°C from pre-industrial levels.
Key themes up for discussion will be the mobilization of private finance in the transition to a net-zero economy while looking at what steps are needed to ensure that every financial decision takes climate change adaptation into account.
«This has prompted a flurry of well-meant announcements»
As part of this, private financial institutions, particularly publicly listed ones, have been invited to set targets for net-zero in advance of COP26. That has prompted a flurry of well-meant announcements as the major players and hubs jostle to position themselves as models of sustainability. But we should not forget what this is all actually about.
Research shows that the financial industry can play a vital part in prompting significant steps to transform and re-scale legacy infrastructures, which, if left intact, will leave the planet increasingly vulnerable to the disastrous consequences of climate change.
Lest it be forgotten, insurers have now calculated that Germany’s devastating floods this past July have cost about seven billion euros in damages to date, with the German government committing 30 billion euros in assistance.
«The financial sector sits on an important lever»
And we have not begun to even talk about the human toll. But investments alone will not help us to reach the Paris targets. Political measures that impact the real economy are also needed. The financial sector sits on an important lever here, given that the investments must be made well in advance of the 2050 objective. As part of that, it has become of increasing interest to clients, as well as politicians, as to whether banks are financing new projects in the coal sector or not.
A continued focus on positive environmental impacts must remain central to everything. Swiss finance manages about a third or all cross-border private client assets. The question is where individual Swiss institutes stand on the matter and in what direction are they going.
«Sustainability is more than CO2 emissions»
A survey that covered about 80 percent of the total Swiss financial market shows that the sector is not yet fully focused on the Paris targets. There has been some improvement from earlier surveys, but they still have a long way to go. In order not to fall behind internationally, financial institutions must break down their targets into concrete and measurable objectives. The first financial institutions had their climate targets scientifically certified recently. But none of them were Swiss.
The climate is attracting a great deal of attention now, which is a good thing. But sustainability is more than CO2 emissions. The loss of biodiversity in natural habitats has increasingly become an issue. The animal population worldwide has fallen by 70 percent on average since 1970. That is extremely worrying. The Dasgupta Review shows how that decline is directly connected to finance.
«Switzerland is a real innovation hub»
Being green is more than just thinking about the climate and sustainability means more than the E in ESG. The meaningful role of finance is no longer connected to environmental protection alone. Although it is indeed a significant challenge to even understand the 17 UN SDGs (Sustainable Development Goals), it is an even larger one to fulfill them all.
It would be cherry-picking of the worst kind to pick out a few and be quiet about the rest. It must be about the whole thing and not just about selected SDGs.
Switzerland is a real innovation hub with its universities and institutes of technology, and it can ably compare with peers globally. This will be central in the transition to sustainable finance in Switzerland. At the end of the day, it is mostly about data acquisition, collation and then the provision of intelligent, forward-looking analysis.
«The digitalization of financial transactions is challenging»
Diverse, interdisciplinary teams are needed to assess climate, biodiversity, and gender risks. The Swiss financial hub can set ambitious targets as incentives for the tech or tech-related sector to develop and implement innovative projects for a sustainable economy – and then bring them to the market successfully. With that, they will be competing as both employer and sponsor with the WWF or Google.
The digitalization of financial transactions is enormously challenging, but it is critical for a forward-looking enterprise. It is about building bridges between the need for more sustainability and the need for transparency and digital availability. A central task for finance is to assess and rate risks.
«The financial industry can jump on the last train wagon»
Traditionally that has been through financial earnings, company forecasts and cyber-security risks. For climate, they must adopt the same risk-based approach, asking companies to disclose their CO2 balances. That is exactly what the EU Green Taxonomy is about. Financial institutions can take an active leadership role in being a conduit in that area.
Looking ahead also means taking care of internal business affairs. The financial industry can jump on the last train wagon or prepare actively – now – to build the necessary infrastructure (I would choose the latter).
Anna Stünzi studied psychology and economics at the Universities of Zurich and Copenhagen and received her Ph.D. from the Center for Economic Research at ETH Zurich. She currently works as a Postdoctoral Fellow at the University of St. Gallen, has an affiliation at the Potsdam Institute for Climate Impact Research (PIK) and lectures at the University of St. Gallen and ETH Zurich. She is also a member of the Board of Directors of Descartes Finance, a member of the Executive Board of GOE mbH, and President of foraus, the Swiss foreign policy think tank. In 2017, she co-founded and established the Sustainable FinTech project at foraus.
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