Blueprint for better: building a sustainable world

July 2021  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

July 2021 Issue

The world is at a crossroads in terms of ecological and financial sustainability. Across the globe, structural reform is required to finance a transition to sustainable economies – a need accelerated by a coronavirus (COVID-19)-shaped backdrop of geopolitical and economic shifts.

To help steer a path toward a more sustainable world, a raft of initiatives have been launched, among them the recent $1 trillion pledge by Bank of America (BofA) to achieve a low-carbon, sustainable economy by 2030. This is the largest climate-related commitment to date in the financial services sector.

BofA’s commitment anchors a broader $1.5 trillion sustainable finance goal that will focus on environmental transition, social inclusive development, scaling capital to advance community development, affordable housing, healthcare and education, as well as racial and gender equality.

“We recognise the important role BofA has to play in helping create a sustainable, low-carbon economy,” says Andrea Sullivan, head of international environmental, social and governance (ESG) at BofA. “To really solve the world’s most pressing problems, as our broader commitments demonstrate, we also recognise that the private sector will be the catalyst that will help to mobilise the trillions of pounds needed.”

Furthermore, Ms Sullivan believes three key dynamics are driving the ESG agenda and defining the role it has to play in the transition to a more sustainable economy. First, widespread understanding and agreement that there are large, systemic global issues that must be addressed urgently. Second, a growing belief that corporations have a role and responsibility to address these issues. And third, increasing understanding that companies that manage ESG well perform better.

“BofA’s $1 trillion financial commitment is an impressive number,” says Vincent Manier, chief financial officer at ENGIE Impact. “As sustainable finance becomes more mainstream, financial institutions (FIs) are positioning themselves accordingly. However, announcing a major commitment is one differentiator, but to have a real impact, strategy should align the bank’s overall financing activities with its sustainability priorities.”

Furthermore, BofA’s global aspirations are consistent with the 17 Sustainable Development Goals (SDGs) approved by the United Nations (UN) in September 2015 – ‘The 2030 Agenda’ – which all 193 UN member states have pledged to fulfil. The UN has designed these interlinked global goals to be a “blueprint to achieve a better and more sustainable future for all”, with the intention for them to be achieved by 2030.

Taking a holistic approach to achieving sustainable development and based on the principle of “leaving no one behind”, the UN’s SDGs consist of: no poverty, zero hunger; good health and wellbeing; quality education; gender equality; clean water and sanitation; affordable and clean energy; decent work and economic growth; industry, innovation and infrastructure; reduced inequality; sustainable cities and communities; responsible consumption and production; climate action; life below water; life on land; peace, justice and strong institutions; and partnerships to achieve the goal.

These goals, tallying as they do with BofA’s sustainability aspirations, as well as those of other high-profile FIs such as Goldman Sachs and Citigroup, represent nothing less than united global action to overcome the world’s biggest challenges.

“BofA’s commitment to accelerate the transition to a low-carbon, sustainable economy is set for 2030, when the global economy will look very different to today if national emission targets are to be met,” points out Joshua Brunert, ESG senior associate at the Apex Group. “As a result, whether this commitment is pushing the envelope or simply good business sense is difficult to tell. Either way, BofA is correct in recognising and reacting to the direction of travel.”

Intentions and expectations

With its trillion-dollar commitment, BofA has made its intentions abundantly clear: to provide lending, capital raising, advisory and investment services, and to develop financial solutions and drive innovation to ensure the transition to a sustainable economy. It is a far-reaching initiative designed and expected to have immediate and long term impacts on business and other activities across the globe.

Drilling down, of the bank’s overall $1.5 trillion investment, $1 trillion has been earmarked for driving environmental transition. This includes supporting companies across multiple sectors, such as energy and power, to help drive and meet business needs in their transition to sustainable, low-carbon business models, as well as financing energy efficiency efforts or renewable energy projects and supporting sustainable innovation.

Furthermore, the commitment advances solutions in energy efficiency, renewable energy, sustainable transportation, resource efficiency, sustainable water and agriculture, as well as improved forestry and pollution control measures.

“Our commitment is global and will support client business activities around the world,” affirms Ms Sullivan. “As part of our focus on responsible growth, we have an intentional approach to deploying sustainable finance, which focuses on transforming markets and accelerating a global shift to a low-carbon, sustainable economy.

“This is a holistic approach, driven from the highest levels of our company, that brings together our corporate leadership and the deployment of capital to scale innovative deals to drive societal change,” she continues. “Across the bank, we are tackling global issues with the power of our people and processes that engage deeply with clients in the public and private sector, non-governmental organisations, not-for-profits and academia to create an economy that is sustainable for us all.”

The balance of BofA’s sustainability financing will target inclusive development, with a focus on scaling capital to advance community development, affordable housing, healthcare and education, as well as driving racial and gender equality. This will include investments in management development institutes and community development FIs, complemented by direct equity investments in minority and women entrepreneur-owned businesses and funds.

“In the immediate term, BofA is hoping to position itself so that companies see it as a potential financing source for their sustainability projects,” suggests Mr Manier. “In terms of the long-term impact, this initiative will give BofA the ability to trace its financing dollars to meaningful key performance indicators, such as renewable energy installed, gigatons of emissions reduced or avoided, units of affordable housing built, and reduce its Scope 3 emissions against a baseline.”

BofA, of course, is not alone in its desire for a better, more sustainable world. Other top-tier FIs, including Goldman Sachs and Citigroup, have also stepped up to the plate, developing frameworks that put climate transition and inclusive growth at the top of the agenda.

“BofA’s commitment is fairly consistent with other FIs, as they are all subject to the same drivers, such as Scope 3 emissions, investor and regulatory considerations and market positioning,” says Mr Manier. “However, because of this consistency, FIs are looking for ways to differentiate themselves and show leadership, which may lead to some innovation around sustainable finance offerings down the line.”

ESG in an age of COVID-19

While the coronavirus (COVID-19) pandemic has had a devastating impact on virtually everyone, there have been plus points, one of which is a renewed focus on the importance of accelerating the transition to a low-carbon, sustainable economy.

“The pandemic demonstrated that societies are capable of coming together to develop comprehensive and coordinated action to deal with a crisis,” explains Mr Manier. “For many, the takeaway is that collective action, including the dedication of resources and capital, can be applied to the climate crisis if there is sufficient will. ESG funds performed very well during the initial market downturn early in the pandemic, which gave the sector a lot of positive attention, and there continues to be large flows of capital into ESG funds.”

And while some feel that the pandemic-related momentum has stalled to an extent, with many economies remaining reliant on fossil fuels to drive the recovery, the general vibe from companies and investors is that ESG oversight is essential and is being taken increasingly seriously across the globe.

“We cannot continue to extract and impose on the natural world at the rate we are currently doing without causing ourselves significant problems,” warns Mr Brunert. “Moreover, there is a clear and powerful business case for stimulating a ‘green’ recovery from the economic damage of the pandemic.

“Key stakeholders are realising the importance of more-rounded understandings of risk mitigation and value creation in the context of the ongoing health crisis,” he continues. “ESG is definitely here to stay and as long as these sentiments are translated into real, practical action – by companies, investors and governments – the momentum will continue to accelerate.”

Benchmark for success

While the future holds unparalleled opportunities for companies that heal rather than hurt society, only time will tell whether today’s global green finance initiatives result in a more sustainable and prosperous future.

In Mr Manier’s view, as far as BofA and other FIs are concerned, the measure of success is the extent to which they integrate a climate lens into their financing activities overall. “Are they systematically tracking emissions associated with all their financing activities and working with their clients to help reduce their footprint? Are they integrating ESG metrics into their pricing models to create incentives to help their clients to improve? The answers to these questions will truly indicate whether green finance targets will be achieved by 2030,” he says.

For the moment, however, BofA’s initiatives, alongside those of their fellow FIs, to accelerate the global transition to a low-carbon, sustainable economy is a welcome move toward mobilising players across the entire financial system to increase the flow of capital and spur transformative change nationally and around the world.

“We have seen other FIs also commit significant funding to sustainable finance and this can only be a good thing,” concludes Ms Sullivan. “It is positive progress to see that the private sector accepts the key role we have to help ensure a low-carbon, sustainable economy. This issue is not about one organisation, it is about all of us working together to create a more sustainable roadmap for the future.”

© Financier Worldwide

BY

Fraser Tennant