Home Today's Paper Most Popular Video Gallery Photo Gallery
Subscription Blog Signin Register
Monday, June 25, 2018 02:30:20 AM
Follow Us On: Facebook Twitter Twitter Twitter Twitter

Sustainable finance requires a change in incentives

Share your thought
Post a comment »
Read all () »

Peter Blom :
Detached as parts of the financial sector may feel from society, the impact of uncontrollable climate change threatens to severely impact and destabilise the whole of finance, which is ultimately and inextricably linked to the economy it is meant to serve.
The costs of limiting climate change to the globally agreed goal of well below 2 degrees are much lower than the damage done by a further increase in global temperatures. The extra €180 billion needed, annually, for the next twenty years, to make the European economy sustainable is unquestionably a lot of money.
It is however much less than the costs of doing 'too little too late'. The cost of Hurricane Harvey's damage alone is estimated at $180 billion.
So what needs to be done? The High-Level Expert Group on Sustainable Finance (HLEG), installed by the European Commission, in its interim report made the right analysis. It pointed to two crucial misalignments in the financial sector: a time horizon that is too short; and an inappropriate conception of risk, generally turning a blind eye towards ecological risks.
Unfortunately, the early recommendations almost exclusively focus on increasing transparency. Here the report falls dangerously short. Because more transparency by itself will not bring the Union the €180 billion a year of sustainable investments it so urgently needs.
For that, we need game changers that go to the heart of finance. We need to change the incentives that drive behaviour in banking and investment: by tackling capital requirements and investment mandates.  These ideas, already discussed by the HLEG, should become part of the recommendations to be delivered to the European Commission in December.
Nothing drives the behaviour of bankers as much as the regulatory capital requirements. Requirements which currently almost totally neglect risks related to ecological stress.
Whether the risk of floods like with Harvey, or the risk of companies that have gambled on a fossil future, investing in gas guzzling cars instead of electric models. These sustainability risks should be reflected in the capital regulation if this is to reflect the true riskiness of assets.
This can be done through either supervisors using their discretion to increase capital requirements when they detect increased risk due to large exposures and portfolio concentration on 'brown assets', or with a general capital charge for 'brown' activities and if applicable a discharge for 'green'.
To change the incentives in the investment chain the key lever to pull is that of the contractual agreement between asset owners and asset managers. Many asset owners, like pension funds, have in recent years adjusted their investment beliefs, declaring they want to be long-term investors and that they believe that environmental, social and governance drive risk and return.
However, so far the changes in the mandates, the contracts that steer behaviour in asset management, have been rather limited. Who dares to be the first? To set the new norm in asset management?
Sustainable model mandates can help individual asset owners to overcome the fear of what should become the new normal in asset management.
These model mandates contain the requirement of full integration of environmental, social and governance factors in investment decisions, active engagement and voting on these issues, the choice of sustainable benchmarks, less frequent but more meaningful reporting by asset managers and a long-term oriented fee and pay structure.
This is financially sound as sustainability issues will increasingly drive financial risk and return. But it is also what the asset owners, like pension beneficiaries, want. A liveable world for their children and grandchildren. That is not a 'soft wish' but increasingly a 'hard reality'.
In its mid-term review of the Capital Markets Union, the European Commission rightly noted that 'a deep re-engineering of the financial system is necessary for investments to become more sustainable'.
The experts have put on the table the right analysis underpinning the need for such a deep re-engineering. If they now also provide the recommendation that will make this a reality the Union will be able to play its part in preventing a disastrous global climate change.
That's where the interests of society, the real economy and finance meet. For this, the HLEG recommendations need to go beyond increasing transparency, we need to change incentives as well.

(Peter Blom is the co-chair at Sustainable Finance Lab and CEO of Triodos Bank).

Add Rate

News Archive

Inside The New Nation

Sports »

Members of England's rugby league team celebrate a win over New Zealand by raising the Rugby League Football International Challenge Cup on Saturday in Denver. England won 36-18.

International »

First Russia air strikes hit southern Syria as govt assault looms

AFP, Beirut : Russia bombed rebel-held parts of southern Syria late Saturday for the first time since brokering a ceasefire there nearly a year ago, a monitor group said, as allied regime troops prepare a ground assault.Southern Syria is a strategic prize for local and global players involved in the country's ...

International »

Zimbabwe's President narrowly escapes assassination bid

The Washington Post :Zimbabwe's election campaign season took a worrying turn Saturday afternoon when a crude bombing at a speech delivered by President Emmerson Mnangagwa appeared to be an attempt on his life.Mnangagwa had just finished giving a speech in a stadium in Zimbabwe's second-largest city, Bulawayo, when the blast ...

City »

Newly -appointed Nepalese Ambassador Dr Chop Lal Bhusal called on Prime Minister Sheikh Hasina at her office yesterday.

Editorial »

Fatal accidents are increasing, make roads and highways safe for passengers

TERMING it as the deadliest day, the news media reported that at least 55 people were killed in separate road accidents in different districts across the country on Saturday. Bangladesh Jatri Kallyan Samity said it was the highest number of casualties in a single day in recent times. An 11-member ...

Entertainment »

Richi returns to country tomorrow

Entertainment Report :In last January, popular TV actress Richi Solaiman came to Bangladesh to pass times with her mother and brother by own way. After five months, she is returning to her motherland tomorrow. This time she is coming for several reasons including to celebrate Eid-ul-Azha with her mother, to ...

Editorial »

American people rose against inhumanity of Trump`s immigration policy : Trump remains un-American

US President Donald Trump took an U-turn and changed his own policy amid strong protest by American people.  There are huge criticism and outcry in America over the way undocumented parents and children have been kept forcibly apart. He said he changed his mind by seeing images of children who ...

International »

UN Chief appeals for end to fighting in south Syria

AFP, United Nations :UN Secretary-General Antonio Guterres on Friday called for an immediate end to a military escalation in southwest Syria and a return to ceasefire arrangements agreed by Russia, the United States and Jordan.US Ambassador Nikki Haley separately urged Russia to pressure its Syrian ally to uphold the truce. ...

Football »

Nigeria`s John Obi Mikel (left) and Iceland`s Gylfi Sigurdsson compete for the ball during the group D match between Nigeria and Iceland at the 2018 soccer World Cup at the Volgograd Arena in Volgograd, Russia on Friday.

Football »

Portugal's Ruben Dias talks to journalists during a news conference prior the training session of Portugal at the 2018 soccer World Cup in Kratovo, outskirts Moscow, Russia on Saturday.

City »

Prime Minister and Awami League President Sheikh Hasina inaugurating the newly constructed building of the party's central office by releasing balloons in the city's Bangabandhu Avenue on Saturday.

Entertainment »

Sunny Leone hospitalised

Bollywood star and reality show host Sunny Leone was hospitalised on Thursday. Leone was taken to Brijesh Hospital Kashipur in the Udham Singh Nagar district of Uttarakhand on Thursday after she complained of stomach ache. However, her state was declared satisfactory on Friday morning.The doctor attending her has given the ...

Editorial »

Trump disregards the American core human right values : He is against America`s greatness

The United States withdrew from the United Nations Human Rights Council on Tuesday, condemning the "hypocrisy" of its members and its alleged "unrelenting bias" against Israel vividly face-off US stance in favour of rights violation. National and international news outlets reported that the US ambassador to the UN, Nikki Haley, ...

Entertainment »

Kriti Sanon shares glimpses from her IIFA performance

Actress Kriti Sanon took to social media to share glimpses from her upcoming electrifying performance at the IIFA awards. Kriti Sanon who landed in Bangkok on Thursday morning for IIFA wasted no time as she took to rehearsals for her much-awaited performance. Sharing insights into her performances, Kriti Sanon posted ...

Entertainment »

A fan paints a wall with Nidhhi Agerwal’s graffiti art

An ardent fan of Nidhhi Agerwal took to Twitter to share a Graffiti art of the actress painted on a wall. The fan artist painted a wall with the actress’ image giving showcasing his love for Nidhhi. The artist spent a huge amount of time getting every detail right to ...

Items that you save may be read at any time on your computer, iPad, iPhone or Android devices.
Are you new to our website? Do you have already an account at our website?
Create An Account Log in here
Email this news to a friend or like someone
Write a comment to this news