Sustainable investing is here to stay. The financial services industry needs to nurture and drive it, argues Ylva Baeckström
The increase in sustainable investing has been inspired by large scale public protest and by new regulations. The financial services industry has the opportunity to really make a difference by modelling sustainable investment practices that focus not only on the old environmental, social and governance (ESG) targets but also on biodiversity and the wider environment.
Of course, humanity’s impact on biodiversity can be difficult to measure. But we cannot use that as an excuse for business-as-usual. As financiers and investors, financial services must help mitigate climate change and the loss of biodiversity. Increased regulatory pressures will force change but is it morally acceptable to wait for that? We belong to a powerful industry that has taken serious reputational blows. Some could be regained by making the right decisions, but how?
Client base
Some answers can be found by looking at its own wealthy client base. Sustainable finance strategies can reduce organisational risk, create long-term value, and improve social and environmental impact. With a long tradition of engaging in philanthropy, the wealthy know that. Their donations ensure a flow of capital towards causes close to their hearts, many of which fit into ESG or ‘sustainable investing’ more broadly.
These philanthropists often hold visible positions as business leaders or entrepreneurs as they build their wealth. Regularly admired for their achievements, people follow their actions closely. The donations they make are therefore likely to impact not only the supported causes but also the behaviour of other potential benefactors.
In recent research, forthcoming in the Journal of Financial Transformation, I am finding that philanthropists invest in a diverse range of causes. Three quarters allocate at least some of their funds to two categories: health and social wellbeing. Nearly half donate to disaster relief and one third give to environmental causes. The vast majority channel funds to more than one cause and therefore several parts of society benefit.
I have found that philanthropists are mainly driven by their own beliefs but also by the media, family, friends and by travelling the world. Philanthropists often feel a sense of accomplishment and delight following their donations, which underlines that their motivations for giving are “values based”.
Equally, when evaluating new causes or considering increasing the amount of existing donations, they may be deterred by not feeling knowledgeable enough. They are concerned about how their funds may be used once out of their control. And they worry that their donations are too small to make any measurable impact.
Time to engage
My research offers insights into how the financial services industry can benefit from engaging more with wealthy philanthropists. If the financial services industry gets it right, the effects can be multiplied many times over.
Philanthropists are not seeking a monetary return on these investments. Instead, their motivations are varied, but often driven by “wanting to make a difference”. This contrasts with the view the public can have of “narcissistic” prestige-seeking, especially in relation to eye catching donations to causes that are receiving lots of media attention. Philanthropists are already playing an important part in economic development evident in the rapid rise in altruism among the wealthy. In line with the movement starting several decades ago, we seem to be experiencing a profound shift from “what can we extract from the natural world?” to “without a healthy natural world we will all have nothing”.
Although philanthropists are not interested in making a financial return, they share some of the problems of the financial services industry in that they want to measure the impact of their investments. They need to know that their contributions really make a difference. This can be more difficult with environmental causes that seek to preserve biodiversity as the impacts may not be easily visible in the short term. We need to develop quantitative and qualitative measures that can evaluate the impact of sustainable investments. We need to be able to use metrics that we trust. If we or our clients are vulnerable to accusations of “greenwashing” then the battle will be lost from the start.
Risk and return
Understanding the relationship between risk and return and the impact on sustainable finance is critical for an industry that must think in numbers. Businesses and humans depend on nature and much of our world uses nature to make financial gains. We cannot hide behind the fact that the financial services industry has more of an indirect rather than direct impact on nature.
Financial services has incredible power to transform current practices. It is time for financial services to take this seriously. We all need to encourage the financing of businesses that are biodiversity positive and make investments that generate returns in a nature friendly way. Returns need to be sustainable. To get there we already have a sustainable resource waiting for us to engage with them: the wealthy philanthropists in our client base. They do not have all the answers of course, and we must do our own rigorous assessments, but we need to start speaking with them today.
Dr Ylva Baeckström is senior lecturer in finance at King's Business School
