At the 16th Wall Street Green Summit in New York in March, I heard from 100 sustainability leaders, as well as financiers, lawyers and government leaders such as Catherine McKenna, Canada’s Minister of Environment and Climate Change, about the latest trends in sustainable finance and policy-making.
At the summit, I once again noticed the trend that every sustainability-focused conference must attract at least two members of the Erb community. In this case, Gabriel Thoumi, a member of the class of 2008, was present, while the conference itself was produced and run by Peter Fusaro, a prior member of the Erb Institute External Advisory Board. Clearly, I was in good company.
Speakers highlighted topics such as how sustainability performance drives improved corporate financial returns. Here are three of the key takeaways from my time at the conference.
Focusing on Material Issues
Kristen Sullivan, a partner at Deloitte, presented a summary of recent trends in developing guidance for the Sustainability Accounting Standards Board. She noted how firms that have good performance on material sustainability issues and poor performance on immaterial sustainability issues enjoy the strongest financial returns—an increase of 6 percent above a baseline. At the same time, 80 percent of firms’ disclosures are immaterial to financial performance.
Takeaway: Firms that can perform well on material sustainability issues while avoiding immaterial factors earn improved financial returns.
Securitizing Debt
Ronald Borod, a partner at DLA Piper, provided context on how renewable energy can be scaled to meet the Paris Agreement’s 2° C goal. Citigroup has estimated that more than $22 trillion of investments are needed to meet carbon reduction goals over the next 20 years. $13.5 trillion is needed for energy efficiency investments in developed markets, while $8.8 trillion is needed to drive renewable energy investments in emerging markets. This number might seem impossibly large, but it needn’t be. Many investors with sustainability goals have assets larger than this target amount. For example, members of the Institutional Investors Group for Climate Change have nearly €18 trillion in assets under management. The problem isn’t the size of the investment needed—it’s the lack of debt securities that meet the investment-grade criteria for internationally recognized rating agencies.
Takeaway: Securitizing renewable energy project debt will allow institutional investors to lower the cost of capital for these projects and provide the necessary financing to accelerate renewable energy growth.
Sustainability Rankings
Ian Monroe, President of Etho Capital, an impact investing firm, discussed trends in corporate sustainability rankings. Historically, many sustainability reporting firms have ranked companies’ sustainability by the sheer volume of CSR reports issued. Etho discussed how it grades companies by measuring CO2 emitted per dollar of revenue. The firm has shown that companies in its Etho Climate Leadership Index ETF, selected due to their ratings on Etho Capital’s sustainability metrics, produce superior returns than a broad portfolio of companies. The company has launched a crowdsourcing sustainability initiative called Oroeco to help parse data on corporate performance.
Takeaway: Sustainability performance drives financial returns.
Overall, speakers at the conference discussed the biggest trends in sustainable finance and some of the challenges facing companies and the industry. While the space remains challenging, there are bright spots and opportunities that sustainability leaders can use to produce triple-bottom-line returns.