Transforming the financial system and financing the transformation

September 23, 2021

With thanks to author Bruce Kohn.

Actions, not words, are now needed to advance sustainable investment if New Zealand is to get on board with it as a major tool in dealing with climate change.

The scene-setter for this was the Responsible Investment Benchmark Report of the Responsible Investment Association of Australasia that re-emphasised the requirement for a Government accepted roadmap that sets objectives and a programme for achieving them.

It is an area in which FinTech has a major role to play through interaction with Climate Change Minister James Shaw and all political parties to win their acceptance of the part Government can play in supporting efforts by the investor community to respond to society’s needs.

Essentially the country seems at a stage where there is widespread acceptance of the role ESG can play. Professional advisory firms are working through the metrics of reporting on company requirements. The External Reporting Board, under the Climate Change legislation, will have a major role to play in formulating guidelines.

But turning acceptance into enthusiasm for sustainable investing beyond the first-mover stage takes a good deal of hard work through clear definitions for enterprises to follow; and consistent and visible messaging and advocacy that highlights it as one of the key paths for society to adopt in combatting climate change.

The public service has a big role to play in setting the parameters for action by industrial, commercial, and agricultural enterprises. The FinTech responsibility, along with that of professional, trade and agricultural representative groups, is to ensure that these parameters are practically sound from a coal-face operating perspective and reflect the realities of their members’ working environments. Too often regulatory reforms fall short of optimal delivery because Ministries and Departments have not fully grasped the complexities of the sectors they deal with.

The messaging for investors and the public needs clarity, consistency and persistent demonstration of the benefits accruing both to investors and society, with a “feel good” factor that encompasses quality returns on investment with the assurance of contributing to a community goal.

The Sustainable Finance Forum’s focus has been to advance the financial sector’s role in this global and domestic shift and reshape its regulatory and financial policy for long-term economic prosperity and sustainable development. Three themes come through from their Roadmap.

These are:

1. Changing mindsets:

  • Responsibility – explicitly require financial systems actors to consider, manage and account for environmental and social risks and opportunities and real-world impacts.
  • Capability – raise capability in sustainable finance through education and training.
  • Governance – improve public and private sector governance for sustainability.

2. Transforming the financial system:

  • Improve data and information quality, including with FinTech.
  • Disclosure – improve and extend external reporting and disclosures.
  • Coordination – fund a (mandated) agile and independent Centre for Sustainable Finance to oversee and coordinate the implementation of the roadmap.
  • Value – integrate environmental, social, and cultural outcomes into investment decisions to ensure we operate within planetary and societal boundaries.
  • Inclusiveness – recognise that financial services and products are a utility and create an inclusive financial system.
  • Government leadership – develop a “whole of Government” strategy for sustainable finance.

3. Financing the transformation:

  • Resiliency – improve prudential regulation over environmental risks.
  • Standards and pathways – develop standards and pathways that encourage investments that deliver positive environmental, social, and economic outcomes.

The path ahead is fraught with complex decisions, tinged with scope for political wrangles among affected sectors.

The Aotearoa Circle’s Sustainable Agriculture Finance Initiative’s work towards developing a specific taxonomy aligned with the EU taxonomy and Climate Bonds Standard, for the finance sector when considering agriculture lending and investment is one of these.

Another will be the Climate Change Commission’s final recommendations to the Government covering a significant role for finance in helping deliver low emissions investment across the New Zealand economy.

Leadership to navigate through these discussions and secure agreements of all sectors that final decisions are both workable and acceptable within an overall framework of amelioration of the impact of climate change will be a vital factor.

The various sectors impacted will almost certainly look to FinTech to provide some of the answers. Evidence suggests that the range of tools and experience that FinTech has accumulated in grappling with these questions will be valuable in the coming debates.

Assurance that investments can be aligned with values.