Jason Channell believes that attitudes have changed beyond all recognition in the last twelve months: “Many people assumed that sustainability was a classic top of the market fad that would disappear once the chips were down - people would go back to traditional capital preservation and would worry about ‘saving the world’ another day. In fact, exactly the opposite has happened, and the pandemic has actually cemented ESG as a fundamental element of finance.”
Channell is confident that there is no going back and one of the biggest changes was that we saw the rise of ‘S’ — Social concerns — through the pandemic. “Historically, there has been a big focus on the environmental — the ‘E’ — for a variety of reasons, partly because climate change is a concept that people can get their heads around; you can count carbon, you can put a price on it. Many ‘S’ factors are harder to quantify in terms of economic effects.”
“The rise of ‘S’ factors has partly been driven by increased awareness of the implications of the pandemic for global poverty, inequality and the huge consequences for education globally. It has also, in the context of bail-outs, shone a light on corporate purpose & responsibilities as regards employee rights and fair pay as well as examining the duty of care companies and the state have to their employees, and citizens more broadly.”
“Sustainability goals have historically been considered laudable, but unaffordable. However, in a world where governments have directed around 15 trillion dollars in economic stimulus, with more to come, when supporting economies through the pandemic, it’s difficult to justify these old arguments any longer. Clearly, balance sheet expansion cannot go on forever, but it really does show that if we really need to find the money to tackle systemic risks, we can. Also, this pandemic response shows us that it’s a lot cheaper to deal with these things in advance than afterwards.”
The changes occurring in the corporate and governmental world have been present for some time, with assets under management that are ESG screened passing about 40 trillion dollars globally, and assets under management of institutions who have signed up to the UN Principles of Responsible Investment now north of 90 trillion dollars. Clearly ESG has moved squarely into the mainstream and anybody who still thinks this is a niche activity is very much living in the dark.
The pandemic has increased awareness on the effects and costs of systemic risk. Investors have moved from a backward looking approach or considering ESG scores as a box ticking exercise, to examining the materiality of forward-looking sustainability-related factors, and looking at corporate purpose, with a focus on long term returns rather than the short term myopia we have very much seen in financial markets in the past.
This has led to the proliferation of all sorts of instruments from environmental impact bonds to KPI-linked bonds, green equity, and other instruments linked to improving sustainability and reducing exposure to systemic risks, such as pandemics or climate change. As a result of that, we are seeing cheaper capital being allocated to lower risk, more sustainable businesses. Sustainability is now viewed as an opportunity and simply good business, rather than an unmerited cost.
The concept of sustainability has started to also reshape the world of supply chain finance, which could prove a meaningful development in achieving corporate sustainability goals. Using an example of Company A with a scope 3 net-zero emissions target, in order to achieve this goal, all Company A’s suppliers and all its distributors will also need to reach net zero emissions as well. Using incentivised financing terms with its supply chain companies when settling payments, Company A is able to persuade its supply chain to measure, disclose and improve emissions in line with Company A’s strategic corporate sustainability goals (or at the extreme, switch). In this way prices, volumes and margins can be directly impacted by sustainability performance.
In 2020, Citi launched its new 2025 Sustainable Progress Strategy, which builds on Citi's 20+ year sustainability track record and leadership in sustainable finance, and the 164 billion dollars in environmental finance the bank has supported between 2014 and 2019. At the core of the new strategy is a 250 billion dollars Environmental Finance Goal, representing a commitment two-and-a-half times larger than its predecessor, which Citi aims to achieve in half the time. This accelerated pace reflects the urgency we need to advance collectively to help beat back the tide of climate change, and to tackle other important sustainability challenges which will face us over the coming years.