22 Feb Breakthroughs in Sustainable Investing and Finance
2018 will see a surge in sustainability reporting, as companies listed on the Singapore Exchange are now mandated to disclose their sustainability practices or explain why they have not done so. While such a move is positive, there are no set standards for how companies should report. A lack of clarity on what should be reported and the inconsistent data present difficulties in benchmarking companies against each other. How can we address such challenges and encourage more sustainable investing?
For the first session of our SIIA Sustainability Workshop series for 2018, we invited Prof Daniel Esty, Hillhouse Professor of Environmental Law and Policy, School of Forestry & Environmental Studies and Clinical Professor of Environmental Law & Policy, Yale Law School to shed light on these issues. The workshop series aims to highlight innovative best practices to achieve sustainability objectives and serve to facilitate knowledge exchanges across different stakeholders. The workshop on 6 February was moderated by SIIA Chairman Prof Simon Tay. Here’s a look at what came up during the discussion.
Global shifts in sustainability strategies
Past international efforts to tackle climate change and sustainable development have yielded mixed results. While progress is seen in certain matters such as protecting endangered habitats and endangered species, other issues including climate change have not advanced as much.
Notably, the Paris Agreement reflects a shift in the environmental arena as it has resharpened the focus on the common obligations of all nations to combat climate change instead of their differentiated responsibility. The Paris Agreement as well as the Sustainable Development Goals further move us in a new direction, so that we are now focused on solutions and incentives to change behavior. Investments must match up to these ambitions in order to achieve concrete progress.
Current challenges in sustainable investing
While there are promising signs that private investors are increasingly aligning their investment portfolio with their personal values, some major obstacles persist. For instance, “sustainability” may carry different meanings for different investors such as climate change and social concerns. There is a need for greater clarity on what sustainability means and a need to recognize that investors will require some options about which parts of their portfolio they prefer to focus on.
Moreover, investors adopt different investment strategies, a reflection of their varying risk tolerance. Banks and investment advisors must customize their approach to their clients’ needs.
In addition, as people undertake sustainability reporting on their own terms, there is a lack of methodological consistency and the data is largely not comparable. It is critical to normalize the data to avoid drawing wrong signals and developing the wrong conclusions.
Rethinking the role of governments
At the same time, governments must also reconsider how they can play a supporting role in this process. As a facilitator, governments can help to de-risk the flow of private capital, so that projects and activities such as clean energy loans can be implemented.
Moreover, policy innovation and intervention are critical to create the foundations that encourage the flow of capital to sustainability related investments and to support the robustness of the marketplace. One example is a carbon charge that penalizes those who operate unsustainably. Over time, this could bring better returns to the companies that adopt more environmentally- and socially-friendly practices and thereby reward good performers in the market.