The government must prove it is serious about ESG and sustainable investing, so companies and investors know they are safe to follow through, writes James Alexander
After riding a high for a number of years, there has been a growing wave of negativity and resistance towards making investment and business decisions based, in part, on Environmental, Social and Governance (ESG) considerations.
Some critics raise valid worries. Greenwashing, as companies seek to exaggerate their ESG efforts to gain greater favour from consumers and investors, is real. Increased interest in ESG investing has attracted less conscientious actors, who aim cynically to profit from the trend.
But all too often those criticising sustainable investment have ulterior motives, representing industries with high emissions, poor working conditions, or questionable governance – issues investors consider increasingly risky in the longer term. This self-serving agenda is undermining the essential transition to the sustainable future that we must embrace if we are to reach our climate change goals while at the same time making the UK a global leader in green finance.
Sustainable investment, if done right, can revolutionise the way we create wealth, driving capital towards the innovative economies of the future, and helping make the UK not just a global leader in green finance, but in all sorts of low-carbon sectors as we reap the benefits of those investments. It is about knowing that your investment is in a company that is well run, works hard to reduce its impact on the environment, and will be a positive force for the communities where it works. That virtuous circle will create the jobs and skills in the future sectors that the UK needs to develop to stay competitive in a changing world.
Equally importantly from an investor perspective, actively considering sustainability factors in investment is a key element of risk mitigation and management. How engaged the UK’s investors are in sustainability will be a core determinant of how successful both the UK economy, and a huge range of investment products, are in the longer term.
The government must be much more ambitious if it is to realise the vision it set out in its Green Finance Strategy. The plan is sound but implementation is far too slow. When the government looks committed on climate change, investors and corporates follow; when the government appears to be lukewarm, companies take the same direction. We need to be much more confident in the UK’s potential as a global sustainable finance powerhouse, and how that can be a key economic gain to the country from the global transition to net zero.
Realistically, issues of benchmarking and standardisation are to be expected, as this is just the start of the journey. Having a moment of uncertainty in the sector is no bad thing, especially if it means there is a fresh look at how sustainable funds function and are measured. However, without government action across the sector to establish clear standards, such as the creation of a credible, science-based Green Taxonomy, or corporate sustainability disclosures, the ability of the financial sector to support positive change in the UK, whilst supporting the UK economy’s advancement towards a prosperous, sustainable future, risks being undermined.
Time is not on our side. There are probably six parliaments left between now and 2050, in which successive governments will need to ensure they have made continuous progress on our journey to net zero. With a raft of worrying signs the UK is falling behind both in its achievements and commitments to climate change, I implore the government and the opposition to look at the potential for green finance to transform this area, and prevent it being an industry which falls by the wayside.