How is sustainable finance faring amidst policy uncertainty and the anti-ESG movement?

The UN has described the 2020s as a critical decade for climate action and the delivery of the broader Sustainable Development Goals Agenda.

Progress hinges on the effectiveness of global financial systems. While public finance is key, the general consensus is that private finance will need to do the heavy lifting to close a multi-trillion-dollar gap.

Multiple analyses exist proving that private financiers, globally, are not anywhere close to being collectively aligned with this vision. Private equity firms are still investing more in coal than renewables. Most large financiers have lax deforestation policies. And almost nine in ten financial institutions are not identifying and assessing human rights in financing activities.

And while firms are making some moves, they are criticised for doing so incrementally at a time that demands bold change. This was the case when Barclays, a major fossil fuel financier, pledged to halt direct funding for oil and gas expansion earlier this month.

edie asks sustainable finance expert Rishi Madlani, head of sustainability for the UK at Investec, for his views on what needs to happen to spur progress from the UK’s private finance sector.

Green finance taxonomies

Madlani emphasises that the UK finance sector has made considerable advancements in driving global conversations and progress toward sustainable action in recent years.

It has advocated for Britain’s world-first implementation of financial risk disclosures aligned with the Taskforce on Climate-Related Disclosures (TCFD), for example, and is now preparing for a net-zero transition planning mandate.

But a key domestic framework is still outstanding. “We have all been waiting for UK’s Taxonomy for so long now. It is a really key piece of legislation…that will help us have more certainty and help us mitigate the risks of greenwashing,” says Madlani.

Green finance taxonomies delineate the types of investments that national or regional governments classify as ‘green’ and those they do not.

These frameworks may incorporate compulsory targets to augment the proportion of ‘green’ finance or merely incentivise investors to voluntarily instigate changes. In both scenarios, the objective is to invigorate the market and unleash a greater influx of private capital towards activities aimed at emission reduction and nature restoration.

The UK first promised such a taxonomy in 2021 and the need for one has become increasingly clear since the EU has launched its own version.

Nonetheless, there currently exists no newly established deadline for the UK to conclude its green taxonomy.

Navigating ESG backlash

A taxonomy, Madlani notes, could help the UK set itself firmly apart from a backlash against environmental, social, and governance (ESG) considerations in finance – predominantly in the USA. It would show a long-term direction of travel.

Across the Atlantic, Republican politicians have been vocal critics of ESG, portraying thematic funds and tweaks in business’s top-line strategies as threats to everything from profitability to conservative ideology and family values.

Some states have enacted initiatives such as blacklisting financial groups perceived as supportive of ESG principles, or limiting the level of consideration they can give to certain sustainability issues in decision-making. and enacting laws to limit the consideration of ESG factors in investment decisions.

The debate is fierce and very much live. The repercussions of the backlash extend beyond North America, as Madlani elucidates concerns among investors in the UK regarding its impact. Investec has a presence in South Africa and several European and Asian markets, beyond its UK operations.

Madlani says: “There is a differential between how progress is working in different jurisdictions. We as a firm still remain deeply committed. However, our investors are asking us questions on this [ESG backlash], so it’s not going away.”

He characterises the ESG backlash as “turbulence along the flight path,” emphasising the cyclical nature of progress in this area.

He says: “As someone who has worked in this space for quite a long time now, I find that we often go two steps forward and one step back. We have to not be distracted by noise and know that the progress and direction we’re heading in is the most important thing.”

Shortly after we speak with Madlani, news arrives that State Street Global Advisors and JPMorgan Asset Management withdrew from Climate Action 100+, an initiative aimed at pressuring high-emission companies to improve their climate efforts, with BlackRock significantly reducing its involvement as well.

Despite this, more than 700 investors remain committed to managing climate risk and preserving shareholder value through their continued participation in the initiative.

Driving systemic change

To continue progressing in the correct direction, despite short-term headwinds, Madlani underscores the importance of collaboration to drive systemic change. He emphasises the significance of private financiers engaging with governments and collaborating with clients to develop and implement sustainable policies and practices.

This is particularly crucial in an election year. Half of the global adult population will have a chance to partake in a national election between January 2024 and March 2025, including Brits.

Amidst the recent policy uncertainties and the approaching election year, Madlani stresses the importance of transparent government plans aligned with achieving net-zero emissions and the provision of necessary public finance to catalyse the crowding in of private capital.

Last week, the Labour Party confirmed that it will not include a commitment to £28bn of public spending on low-carbon industries and nature in its manifesto for the next general election.

The announcement follows the Conservative party’s rollback on the UK’s key net-zero commitments last year.

This has sparked skepticism from the green economy regarding the mobilisation of sustainable finance, placing pressure on the private finance sector to enhance its efforts.

Madlani suggests that financial institutions can play a pivotal role in addressing these challenges by engaging with governments to advocate for policies conducive to green finance. This includes promoting transparency in policymaking and pushing for ambitious plans to achieve net-zero emissions.

He says: “The recent couple of years have provided so much uncertainty. It’s not been a great environment and running to election year is never an ideal year to be setting an ambitious plan.

“What we want from governments across the jurisdictions we’re working in is transparency over net-zero, and then credible plans to help achieve it and how we can provide the required finance.”

With this in mind, he emphasises the importance of collaboration within the financial sector, advocating for collective action through trade bodies and other platforms to present a unified voice to governments.

A key message, he says, should be around the significant growth opportunity in financing the transition to a more sustainable future. While the UK’s two largest political parties row over where the burden of the net-zero transition should be placed, the Net-Zero Review called early and joined-up action an “historic opportunity” to grow the economy and safeguard against future risks to the economic system.

Furthermore, Madlani suggests that financial institutions can lead by example by reducing their own carbon footprint and implementing sustainable practices within their operations, but adds that by far its largest impact is through Scope 3 financed emissions.

By doing so, they can inspire their clients and stakeholders to adopt similar approaches, driving systemic change toward a more environmentally sustainable economy.

Madlani concludes: “If we can go farther and faster ourselves, the more we can do with our clients, which is where we can make the biggest impact on emissions.”

HEAR FROM INVESTEC AT EDIE 24

Rishi Madlani, head of sustainability for the UK at Investec is speaking at edie 24 on 20 March.

He will present top tips on how businesses can unlock finance to support their environmental initiatives, alongside experts from CDP. This session will be followed by an interactive Q&A, giving you the opportunity to have your most pressing questions answered directly.

edie 24 is the brand’s largest face-to-face event of the year and will convene hundreds of sustainability and energy leaders in central London on 20-21 March 2024 for two monumental days of keynote speeches, panel debates, unparallelled networking opportunities, interactive workshops and more.

Experts speaking alongside Madlani on this year’s packed agenda include:

• Chris Packham, renowned naturalist and presenter
• Chris Skidmore MP, author of the Net-Zero Review
• Claire O’Neill, chair of the WBCSD and former UK Minister for Business, Energy & Industrial Strategy
• Chris Stark, CEO of the Climate Change Committee
• Hannah Cornick, head of sustainability and social innovation at Danone
• Natalie Belu, co-CEO of Belu and independent candidate for London’s Mayoral Elections

Tickets for the event are available now on an individual, group and sharing basis, with a full price list available here.

With places limited, edie users are encouraged to book edie 24 tickets now. You can secure your place here.