By Amanda Gray, Partner, Addleshaw Goddard
Since the adoption of the Paris Agreement, we’ve seen many regulatory and policy changes from governments and industry groups in a bid to help businesses set and hit net zero targets. But the finance sector has a crucial role to play in meeting the 2050 deadline. The pressure is on for financiers to align their portfolios with a net zero economy, and companies are realising that they must make sustainability a priority if they want to secure funding for the future.
With some financial institutions facing criticism for funding carbon-intensive businesses, they are unlikely to be the first group that springs to mind when thinking of climate activists. But a survey by Addleshaw Goddard – conducted among 1000 European business leaders, funders, investors and insurers – reveals that the sector is taking major strides to drive long-term behavioural change.
The research shows that almost half (45%) of financiers say that sustainability is one of their top two priorities, and that percentage is set to rise by 2025. And their customers are taking notice: a striking 92% of business leaders say that banks have been significant in influencing their organisation to act more sustainably. In fact, banks were revealed to wield more power than regulators, the media and businesses’ own employees.
As we approach COP26, banks are making a public commitment to sustainable financing. The formation of the Glasgow Financial Alliance for Net Zero (GFANZ), chaired by Mark Carney, saw 160 leading global firms with collective assets of over $70 trillion pledge their commitment to cutting their greenhouse gas emissions by 2030, with an overall goal of reaching net zero by 2050.
Reducing ‘financed emissions’ – the emissions enabled by an organisation’s loan and investment activities – is a big task. We are already seeing financiers taking steps to redirect finance towards those businesses pursuing a strategy to transition to a more sustainable future. Almost two-thirds (65%) say they always formally assess organisations on ESG or sustainability criteria, and many offer favourable terms to firms who can demonstrate that they are setting and meeting targets. But the figures show that they are planning to take more extreme action, withdrawing funding entirely for businesses that aren’t prepared to evolve.
One hundred per cent of financiers surveyed plan to turn off the tap to unsustainable businesses in at least two sectors within the next four years. And by 2030, almost all finance providers anticipate that they will stop lending to any business that has failed to adequately address this. For the half of companies that don’t currently have a plan in place, this is a serious call to action.
This ultimatum will be more daunting for some businesses than others. Large corporates may have the resources to drive rapid change, and smaller, more agile start-ups can build in a focus on sustainability from the beginning. But for many businesses, this sort of repositioning will require a great amount of effort and resources – resources which are already stretched in response to Brexit, a global pandemic and a worldwide economic downturn. With time running out, those that fail to make sustainability a priority risk finding themselves struggling to source the affordable funding they need to transition to a more sustainable economy.
But the report delivers a heartening message: implementing a transition strategy doesn’t have to be a drain on resources. Ninety-five per cent of all business leaders surveyed said that their sustainability initiatives were either a net gain or cost neutral in 2020, and 98% believe these initiatives will be profitable by 2025. And with 81% of leaders believing that a focus on sustainability gives business a competitive edge, acting now is not purely defensive – it is also an opportunity to thrive in a post-COVID economy.
Once businesses have a sustainability strategy in place, it is important that they shout about it. Eighty-six per cent of finance providers say that the sustainability strategy communicated by a company’s CEO is critically important to access their services, but only 7% of businesses proactively communicate their strategy externally. Hopefully the government’s recent white paper on audit, which includes demands for companies to make mandatory climate change disclosures, will help to change this pattern.
Implementing sustainability strategies is no longer just a tick box exercise. In 2019, Morgan Stanley CEO James Gorman stated that “if we don’t have a planet, we’re not going to have a very good financial system.” Financiers are putting sustainability at the heart of their strategies and, by ceasing to fund companies that don’t show they are making real efforts to embrace a sustainable future, they are really putting their money where their mouth is.
But with this newfound sustainability activism comes a responsibility to educate businesses. On top of the necessary funding, financiers could help to provide the guidance their customers need to effectively embed their sustainability strategy and deliver on it.