Climate and environment will benefit as finance calculates risks
There’s a somewhat cynical finance industry saying that self interest beats compound interest every time. But it accurately reflects the reality that the environmental cause would only ever gain real momentum when the downside effects of climate change and ecosystem degradation and loss started hitting hip pockets.
The Insurance Council of Australia commissioned the McKell Institute to investigate the annual cost of natural disasters to households. McKell’s report ‘The Cost of Extreme Weather’ was published in 2022, revealing the costs averaged $1,532 over the 2021-22 financial year, up from $888 ten years earlier. It went on to project that this would rise to $2,500 per household by 2050 – coincidentally the year targeted for net zero emissions. McKell attributed this to every Australian shouldering recovery costs in terms of government expenses paid for through taxes, insurance costs, uninsured damage and increased prices due to supply chain shortages.
I provide communications consultancy to financial services organisations across investment, superannuation and financial planning. Much of this is focused on writing thought leadership pieces for various consumer and trade publications. I have been doing it for more than 20 years. For a large number of those years for many investment houses, ESG (Environment/Social/Governance) screening was largely a point of differentiation. To apply a Paul Keating line to some fund ESG claims “all tip and no iceberg”.
This is not over. There has been substantial media coverage of ASIC’s crackdown on a major super fund, which the regulator alleges claimed to “exclude investments in companies involved in carbon-intensive fossil fuels, alcohol production and gambling”, but was invested in nearly 50 oil, coal, beer and wine, and gambling companies, including AGL, BHP, Whitehaven Coal, Treasury Wine Estates, Crown Resorts and Tabcorp.
The regulatory crackdown has led to several substantial funds removing their responsible investment reports and disclosures from websites having found “anomalies”. The bottom line is that the industry is not there yet.
However, I get a sense that change is occurring and ASIC’s current push will only accelerate it. There is a noticeable shift in the conversation. I am writing much more about investor perspectives on sustainability, the risks associated with climate change, energy consumption, degradation of ecosystems and biodiversity loss. The penny, or more appropriately the millions, appears to be finally dropping.
Those advocating from the heart on environmental issues have been doing it for years, with limited resources. Researchers have spent much of their time looking for funding rather than evidence. The everyday need to earn a living and nurture families have made the environmental crusade a part-time affair for volunteer campaigners.
We should therefore embrace the potential firepower that the finance industry’s focus on risk will bring to the call to action on climate, environment and sustainability, as they are welded onto the core risk assessments being made by most responsible investment managers.
There will always be outliers and we can certainly debate the answers that some of those assessments produce, as evidence by the current ASIC crackdown but, having worked within the system for some time, I can assert that integration into risk matrices is happening and is a substantial step forward.
So what do I see as the benefits of the full engagement of the finance sector in climate and environmental risk assessment? Consider the following:
1. Self-interest
This is not just on the part of the industry, but its clients. The best investors understand risk as well as returns. Their assessments are made on the basis of expected ‘risk adjusted returns’ rather than absolute returns. They want to understand how risks can be managed or removed. Environmental stewardship is now high on the list for a growing number of industries wanting to maintain or attract on-going investor support.
2. Good at maths
Finance runs on mathematics. The industry can afford to attract the best and brightest and does so. So a lot of really smart people’s job roles now include building models for assessment of climate and environmental risks. This ultimately translates into powerful advocacy to government, economists, investors and consumers on the need for climate action and the protection of biodiversity. I have just worked on a piece informing investors of the risks associated with unsustainable agricultural and the need to support a shift to regenerative and target agricultural practice.
3. Moving money
The power to move money will be an important influencer in the ways companies take responsibility for their environmental footprint, which will need to reduce. Financial institutions, led in Australia by the industry super funds, are demonstrating their capacity and willingness to do this. It is a global trend.
4. Influence
Arguably outside of the pharmaceutical industry, there are no more powerful lobbyists than those deployed by the finance sector. Banking, superannuation, financial planning and various investor and shareholder groups have the access and influence at national and state level that others can only dream about. If finance wants to move the dial on climate action and environment, it will add great weight to the efforts of those who have been advocating on those fronts for decades.
5. Demographic change
Boomers like me are locked into the outgoing tide. It’s happening within the finance sector as it is everywhere else. The evidence of recent elections shows the emerging power, influence, culture and priorities of Generations X, Y and Z. They are laser focused on the impacts climate change and environment will have within their lifetime. Most of the end users of my services a now run by these generations. It is refreshing and optimistic to see them hitting the refresh button on sustainable business.
From the perspective of organisations advocating for action on environment and climate, on ecosystem protection and sustainable living, there is potential for new partnerships with an expanding array of major commercial players that have recognised that their future growth and sustainability is linked to a thriving global ecosystem.