Sustainable finance – the future of banking
Nordeas Chief Analyst, Thina Margrethe Saltvedt, was the final speaker at this year’s Nordea Talks. Thina made the point that sustainability has always had an influence on corporations’ reputational risk but is now also influencing the financial risk. This combination of risks makes sustainability a more important point on the agenda than ever before.
Thina said that she is frequently asked why did you change focus after having worked as an oil analyst for 10 years and, at a time when oil prices were increasing, why then switch to address the importance of sustainability? Her logical response was that we need the capital markets with us to be able to do the transformation and eventually reach the Paris Agreement.
Nordea has worked for more than 10 years on sustainability, but it has been closely linked to the investment side and we are now seeing more areas of the bank and every product or service provided is regarded from a sustainability perspective.
As sustainability is getting more awareness through media and public reactions to climate change it is important to not lose track of what sustainability aims to achieve. For that reason, we go back to the very definition of sustainable development that was defined in 1987 by Bruntlands Commission and reads: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.
Sustainability in finance – ESG
With that in mind, Thina shared her view that larger corporations are embracing and evaluating their business from set goals of sustainability, whilst mid-size and smaller companies are lagging. The rationale behind this is that is resource intensive and larger companies have the benefit of being able to allocate necessary resources. Thina called upon Nordea and our peers, with their collective experience and resources take a larger responsibility to provide sustainable services and also give advice and encouragement to all our customers to move in the right direction of further embracing sustainability.
When we talk about sustainability in finance, we often refer to ESG (Environmental Social Governance) as measures of how we achieve sustainability. “At Nordea, we are measuring all companies we invest in or lend capital to against their ESG-rating,” she said. “The challenge for us as a bank is to get access to reliable data to ensure measurement is correct.”
Thina called upon our banking peers to collaborate to improve the standards so data is transparent to us, our owners and our customers.
The new generation
It has been an interesting year for everyone involved in sustainability development as the younger generation has been very vocal about their concerns for the future Thina said, referencing 16-year old Swedish protester Greta Thunberg, and her mission to get world leaders to act on climate. “In 2-3 years, this generation will be voting, starting to embark on their careers and it will essential for companies to be able to attract this generation,” Thina said. “With their strong commitment to climate issues, who can really afford not to invest in sustainability?”
How are we doing on a global scale?
With the outset of the UN IPCC 1.5 Degree scenario (United Nations Intergovernmental Panel on Climate Change) that looks at the global energy demand split by fossil fuel demand and the transition towards renewable energy sources, we clearly see that we are not moving fast enough. The report that was issued October last year suggests that already next year we should have reached the top of our oil consumption but investment in oil is increasing as the oil price increases.
These investment decisions is not only bad for the climate, but Thina also cautioned that “if the right decision are not made now, we are likely to force politicians to make those decisions in 5-10 years’ time”. That could create a situation where large capital flows moving unexpectedly and fast could lead to financial institutions ending up with stranded assets. Thus, we need to make the right decisions now with sustainability in mind to avoid large, rapid capital movements in the future.
How are we doing on the renewable side, Thina asked, clarifying that Investment in renewable energy sources has been flat in the last three years, but the cost of producing solar power has fallen the last nine years by approximately 80%. But, she said, even if the number itself is impressive, it is still not enough and needs to fall further to compete with natural gas or coal power.
Act now or pay later
On a final note, Thina emphasized that capital is a powerful tool for driving change and the financial industry needs an accurate price on sustainability and climate risk to be able to avoid misallocation of capital. Pricing of climate risk (or sustainable risk) will affect the direction in which capital moves. In the future, a large environmental, social or governance impact could give lower credit rating, more expensive loans and limited or no access to capital. On the other hand, companies minimizing their climate footprint will benefit new products such as green, social and sustainable bonds.
With that final inspirational note, the Nordea Talks 2019 closed. Nordea wishes to thank all the speakers and attendees and looks forward to welcoming all back next year.
If you are working in the financial industry and feel a need to act on climate change, we encourage you to have look at Bankers for Climate.
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