Home Today's Paper Most Popular Video Gallery Photo Gallery
Subscription Blog Signin Register
Logo
Thursday, February 22, 2018 10:50:14 PM
Follow Us On: Facebook Twitter Twitter Twitter Twitter

Sustainable finance requires a change in incentives

By
08th-Nov-2017       
Comments
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).

Tariff
Add Rate

News Archive

Inside The New Nation

Editorial »

Ekushey tells us to be free and fearless against injustice


THE Nation celebrates 'Amar Ekushey' today with due solemnity and colourful festivities to remember the Martyrs of the 1952 Language Movement. It is a landmark occasion and a day of awakening in the history of Bengali people that gave us the clear realization that we have our own language and ...

Cricket »

Captain of Bangladesh National Cricket (ODI) team Mashrafe Bin Mortaza handing over a crest of honour to Hafiz Yasin Arafat at the Bashundhara International Convention Centre in the city recently. Yasin Arafat became Hafiz-e-Quran in 86 days. He was a student of Tanjimul Ummah Hifz Madrasah of Cox's Bazar. Ahlul Huffaz Foundation Bangladesh arranged the reception programme.


Sports »

Medalists in the ice dance, free dance figure skating (from left) : Gabriella Papadakis and Guillaume Cizeron, of France (silver), Tessa Virtue and Scott Moir of Canada (gold) and Maia Shibutani and Alex Shibutani of the United States (bronze) pose during their medals ceremony at the 2018 Winter Olympics in Pyeongchang, South Korea on Tuesday.


International »

Trump backs improved background checks on gun buys


US President Donald Trump signaled support Monday for improving background gun checks amid mounting pressure for reform in the wake of the Florida school shooting, as the accused gunman appeared in court.Nikolas Cruz, charged with killing 17 people, sat silently with his head bowed during a procedural hearing in Fort ...

International »

Nepal wants to deepen ties with China: K P Oli


PTI, Kathmandu : Nepal's new Prime Minister K P Oli has said he wants to deepen ties with China to explore more options and get more leverage in his dealings with India "in keeping with the times". Mr Oli, widely regarded as pro-China, also said he wants to "update" relations with ...

Business & Economy »

M Fakhrul Alam, Managing Director of ONE Bank Limited and Rezaul Islam, General Manager of Bangladesh Bank sign a participatory agreement regarding use of JICA assisted Foreign Direct Investment Promotion Project fund recently. Governor Fazle Kabir, Deputy Governor Abu Hena Moh. Razi Hasan, Executive Director Ahmed Jamal of Bangladesh Bank, chief representatives of JICA Bangladesh office Takatoshi Nishikata and among other were also present on the occasion.


Entertainment »

Inspired by the journey of Deepika and Anushka: Nidhhi Agerwal


Nidhhi Agerwal who hails from Bangalore and is living independently in Mumbai currently believes Deepika and Anushka's journey to the top has inspired her a lot. Just like the other two Bollywood divas, Nidhhi also went through her part of the struggle to make it to Bollywood. The young actress ...

City »

Law enforcers intercepted women leaders and activists of Jatiyatabadi Chhatra Dal when they were going to visit BNP Chairperson Begum Khaleda Zia with fruits at Old Dhaka Central Jail on Tuesday.


Sports »

Medalists in the women's 12.5-kilometer mass start biathlon (from right) Belarus' Darya Domracheva (silver), Slovakia's Anastasiya Kuzmina (gold) and Norway's Tiril Eckhoff (bronze) pose during their medals ceremony at the 2018 Winter Olympics in Pyeongchang, South Korea on Sunday.


Entertainment »

I am very excited about working with Akshay Kumar: Parineeti


Parineeti Chopra, who will be sharing screen space for the first time with Akshay Kumar, says she is excited to work with the superstar in Kesari.The film, being directed by Anurag Singh, will see Akshay essaying the role of Havildar Ishar Singh, while Parineeti plays his wife."(I) am very excited ...

Editorial »

We welcome UK`s removal of ban on direct air cargo


THE UK government has fully withdrawn the two-year-long ban on direct cargo flights from Dhaka to London ending the plight of exporters, particularly garment exporters who were facing difficulty to make emergency shipment of samples and other cargo to buyers within the stipulated time. The British government said it is ...

City »

Buyers flip through the books at a stall of Amar Ekushey Book Fair on Bangla Academy premises in the city on Monday.


International »

Syrian forces to back YPG` in fight against Turkey


Al Jazeera News :The Kurdish YPG fighters claim they have reached a deal to allow Syrian government troops to enter Afrin in the northwestern part of the border town.Nuri Mahmoud, a spokesman for the People's Protection Units (YPG), told Al Jazeera on Monday that they are calling on the Syrian ...

Editorial »

Cleansing operation to stop leakage of question


QUESTION leakage during the ongoing SSC examination showed that the government has no power and the Education Ministry has no control over the corrupt people handling the question papers. So far questions of all 10 tests were openly available around the examination centers in Dhaka city and other places from ...

Sports »

Simidele Adeagbo of Nigeria reacts in the finish area after the final run of the women's skeleton competition at the 2018 Winter Olympics in Pyeongchang, South Korea on Saturday.


 
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
Email:
Write a comment to this news