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EXECUTIVE PERSPECTIVE: Accelerating the business case for Green

Tim Nixon

30 Apr 2018

30 April 2018

“I believe that the green finance agenda can reap significant economic benefits for the UK as well as helping to meet our own obligations to protect the environment.”

The United Kingdom and City of London are continuing to see significant financial benefits from the new greening economy.  Sir Roger Gifford is the Chair of the Green Finance Initiative which is working to accelerate these benefits, and the piece below outlines the latest developments.  Timothy Nixon, Managing Editor, Thomson Reuters Sustainability.

“Accelerating Green Finance” sounds to many like something only an idealistic policymaker or a well-healed impact investor would undertake. Conventional wisdom suggests that green finance accelerates only with some help on the policy or subsidy front, and without that help, there is a price to pay.  On its own, it will remain a niche because “green”, while undoubtedly increasingly important, is simply not sufficiently transparent, priced into investment decisions, and therefore not sufficiently rewarded. However, in increasingly important corners of the financial system, these assumptions are being turned upside down.

One of the most recent pieces of evidence for this paradigm change in “green” comes from the U.K.’s Green Finance Taskforce, which has just issued a new report entitled the same: Accelerating Green Finance.

Its chairman, Sir Roger Gifford, level-sets: “When it comes to green finance, it is clear that this process is at an early stage of development and shows huge potential for growth.”  But contrary to what its name might imply, this is not a report calling for traditional taxpayer funded subsidies in order to save the planet.

On the contrary, this report is all about growth through increasingly profitable green driven by improving market efficiency.  “Over the last two decades, we have led the world in demonstrating that cutting our emissions does not mean sacrificing the standards of living for hard-working families. Since 1990, we have reduced our emissions by more than 40%, while our economy has grown by two thirds – the best performance in the G7. “

One of the consequences of following the growth strategy outlined in the report, per the figure 2 below, is an increasingly competitive finance and industrial sector, with all of the innovation, employment, trade surpluses, tax revenues and health benefits that implies.  Gifford summarizes, “I believe that the green finance agenda can reap significant economic benefits for the UK as well as helping to meet our own obligations to protect the environment.”

Source: Accelerating Green Finance

One of the dominant themes of the report is about data, or more specifically, the lack of it.  There is widespread evidence and acknowledgment that one of the reasons “green” is not accelerating as quickly as many would hope is that there is simply insufficient transparency on where there is or isn’t “greening” in our global economy, and therefore it cannot be systemically correlated with financial outperformance and incentivized by investors, regulators and the global policy community.

In short, as documented in our recent report on the top 250 publicly traded emitters of the world, the many firms which are not green chose not to disclose, or partially disclose in misleading ways which makes it difficult for the markets to act.

Gifford adds, “short time horizons in investment decision-making, information asymmetries, misaligned incentives, financial mis-education and perhaps most crucially, a lack of available data, co-conspire to under-allocate capital. It is this value chain that must be untangled.“  And untangle it is very much what they intend to do.

Specifically, the Task Force recommends a systematic adoption of the recent recommendations from the TCFD (Task Force on Climate Related Financial Disclosure), per figure 7 below:

Source: Accelerating Green Finance

This forced transparency is a game changer given that London is one of the largest financial centers of the world and these disclosure requirements will have sweeping effect across corporate and financial players.  And the timing is indeed accelerated.

By 2025, if the government adopts the recommendations in the report, the data landscape will be much richer, delivering new potential for stakeholders of all types to identify and profit from firms whose direction of travel is towards a greener, more prosperous world.  In this context those who do not disclose materially important aspects of their sustainability performance are de-facto demonstrating poor business strategy in light of an increasing regulatory and investor expectation.  Disclosure, data, predictive analytics and outperformance then fuel the accelerating green revolution on their own.

And those who choose to wait out this inevitable change simply accumulate risk and shed opportunity.  “The challenges of the transition to a low carbon economy are great, but the opportunities are greater” state both the U.K.’s Economic Secretary to the Treasury John Glen, and the Minister of State for Energy and Clean Growth, Ms. Clair Perry, in the introduction to the report.  That, combined with similar initiatives globally, see Box 1, drive home the global and inevitable nature of this movement towards prosperity through, and only through, green.

Source: Accelerating Green Finance

And at the end of the day, as Gifford summarizes, “this publication is the beginning, not the end of this work. The Green Finance Initiative will, as well as continuing its detailed work programme, set up a new implementation committee, charged with tracking progress on Taskforce recommendations, conducting further research where it is needed and continuing to champion this agenda amongst financiers and consumers alike.”

Gifford and his team are essentially setting forth a new logic for how to transform a business model, deliver environmental and social benefits, and capture competitive advantages.  The creative destruction of this new marketplace is accelerating for those who attempt to ignore or obstruct this reality.

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