Sustainable finance, an oxymoron?

Last week the financial sector and the international development sector gathered in Geneva to discuss how asset managers, asset owners and banks can contribute to achieving the UN’s Sustainable Development Goals. Here is why one should resist the temptation of cynicism.

Last week Geneva hosted the Building Bridges Week. This event, organised by the financial community, the International Geneva community and the federal, cantonal and municipal authorities, was a first step towards “fostering new conversations and collaborations that will accelerate the finance industry’s contribution to the achievement of the UN’s 17 Sustainable Development Goals (SDGs)”. Delegations from thirty members of the International Network of Financial Centres for Sustainability came to the Swiss city to “build bridges” between the financial sector, historically residing on the left bank of Lake Geneva, and the international development sector, UN agencies and NGOs, almost exclusively located on the right bank. The week culminated with the Building Bridges Summit – which took part in a building appropriately situated in the middle of the Rhône river –, of which QUAERO CAPITAL, alongside other local financial actors, was a sponsor.

This phenomenon is overall a positive trend

A year after the world was taken over by climate strikes and after ESG became the talk of the financial industry, this event appeared very timely. Of course, inevitably, we got our share of well-sounding empty speeches, polite debates and conveniently vague commitments. Anyone with a slight critical sense and intellectual honesty must have felt a little suspicious of the sudden adoption by the financial community of the sustainable or responsible investing mantra. However, we should recognise this new phenomenon as overall a positive trend, for several reasons.

First, unlike what is broadly perceived, including by harsh critics of capitalism, the financial sector doesn’t work like a cold, profit-obsessed, hyper-rational machine. In reality, financial markets are driven by a mixture of analytical and emotional factors. They run on narratives and these narratives are formulated, disseminated and acted upon by a relatively homogenous group of people, who are, still today, predominantly upper-class middle-aged white men who think and speak in English and have spent most, if not all their life, in high income countries. Obviously, this creates an enormous cultural bias that, more often than not, leads to large misallocations of capital, favouring familiar, trending themes and neglecting out-of-favour, unfamiliar investment opportunities. In that context, the gradual integration of ESG analysis into investment processes and hiring of people from different backgrounds and using different lenses to look at the world can only help to make the financial sector better at playing its role. It was quite striking to note, when looking at both panellists and the attending crowd, that this was not the typical financial conference and that the development community was definitely bringing diversity.

Financial markets also create their own self-fulfilling prophecies

Second, unlike what is normally expected by the layperson, financial experts are not directing flows of capital on the basis of an accurate prediction of the future state of the world. This is not so much because they are incompetent – although some undoubtedly are – but because the future is not the outcome of purely exogenous variables. To some extent financial markets create their own self-fulfilling prophecies: by bringing down the cost of capital for trending projects they make them more likely to be successful; conversely, by shunning companies, sectors – or for that matter, countries – that are perceived as dangerous or unappealing, they sometimes precipitate their downfall. Hence, the current trend for the sustainable investment theme is actually likely to contribute to the development of a more sustainable economy. Yes, indeed.

When we mix technocratic expertise, political expectations and the natural complexity of the world, we are bound to create some confusion

Finally, the current debate on sustainable investing, responsible investing, impact investing, engagement and ESG integration is still very confused. The commitment from the financial sector to engage with these issues, even if partially driven by commercial interests, will for sure help to clarify the debate. In my opinion, one reason for that confusion, which sometimes leads to distrust or cynicism, is that we are entangling elements that are sometimes descriptive (what is), sometimes normative (what should be) and sometimes prescriptive (what should be done). By the way, this is typical of many other debates on the economy and more generally on our societies: when we mix technocratic expertise, political expectations and the natural complexity of the world, we are bound to create, at least at first, some confusion.

In any case, the current focus on sustainable finance is definitely helping to get more data and transparency on the way businesses, and more generally the global value chain, operate. We are getting a better description of our economy. Who can complain about that? Regarding normative aspects, the Sustainable Developments Goals represent a common framework, but everyone recognises that it remains pretty vague, especially with respect to prioritisation and trade-offs. This is to be expected: here we are entering the realm of politics and moral values. Asset allocators and asset managers who are expecting others to tell them what is “good” and what is “evil”, are being too lazy or naïve; unless we wish to live in a theocracy or a one-party system, we have to rely on ourselves – and for institutions, on clear statutes  –  to decide what is right or wrong. No-one else can do it for us. Finally, when it comes to prescriptions, here again there will be a divergence of opinions, and this is a good thing; markets are exactly meant to help us collectively find our way in the dark, sometimes hitting dead ends, sometimes uncovering several routes to our destination. It would be wrong and dangerous to impose a top-down solution in order to achieve a “great leap forward”.

It’s time to encourage the momentum, not to wallow in lazy cynicism

So, ultimately, in the context of finance, what matters most in order to foster sustainable and inclusive economic development, is enough information and transparency so end investors know under what guiding principles their savings are contributing to capital formation. However, let’s not kid ourselves here, to reach the UN SDGs it will not be enough to rely on the benevolence and good intentions of the winners of an unsustainable and extremely unequal economy. Beyond looking at the financial sector, we will need to change the legislative, regulatory and fiscal framework that constrains the way companies operate and that determines how the product of our economy is allocated. This will undoubtedly be more contentious, but for the moment let’s not spoil the mood; whilst keeping a critical mind, it’s time to encourage the momentum, not to wallow in lazy cynicism.


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