What Are 5 Things From Financial Systems That We Need?

Efficiency, Effectiveness and Resilience Among What Is Now Required

As we have long argued in our books on Sustainable Investing and in the Value Driver Model body of work we performed in 2013, positive sustainability strategy is the best way forward for shareholder returns while at the same time fixing society's problems.

There is increasing evidence that investors who take sustainability challenges into account in their investment strategies will outperform, leaving traditional investors behind who choose to ignore society's challenges.

 

Here's why:

1. The Global Goals for Sustainable Development were launched a few weeks back with great fanfare.  

These 17 goals, now committed to by world leaders through the UN General Assembly, seek to do 3 main things over the next 15 years, including: a) end extreme poverty, b) fight inequality & injustice, and c) fix climate change. 

We previously discussed implications for investors here, as well as how the upcoming Paris Climate negotiations will also play into future investment success.

2. But what about financial systems and what they require?   As Aviva said during the Global Goals launch in late September, mobilizing finance is also required.  

This means capital moving at scale, and so if you don't pay attention to this new megatrend, you may get caught out as an individual investor as well.  

Companies specializing in green infrastructure have a great opportunity to increase revenue from what is expected to be Trillions of dollars of new spending for just one example.

GE, for example, continues to spin off non-core assets, and is arguably positioning itself for just this scenario.

Financial system developments are also well worth watching.

3. It is being recognized that financial systems around the world are off kilter and heading us down a dangerous path which will be corrected for.

 If you aren't careful you could get caught up in this potential sea change as well.  

For one major example, last week at the World Bank/IMF annual meetings in Lima, Peru, the UNEP Inquiry for the Design of a Sustainable Financial System launched its final report entitled:

"The Financial System We Need."

This report discusses, among much else, how effectiveness, efficiency and resilience start to become measurable financial system goals, from which gaps have emerged that require remedy.

This UNEP Inquiry has been co-led by Network for Sustainable Financial Markets (SFM) Participant Nick Robins and has been contributed to by other SFM Participants, and explores how changes in financial system design can bring the environment more effectively into financial decision-making.

The Inquiry's research is reflected in what is now over fifty research papers, and has developed three key messages:

  • Financing for sustainable development can be delivered through action within the financial system
  • Policy innovation from developing and developed countries demonstrate how the financial system can be better aligned with sustainable development
  • Systematic national action can now be taken to shape a sustainable financial system, complemented by international cooperation

    Country by country, financial systems can be designed to fix for inequality and climate change among other challenges currently being ignored, and much is already starting to happen on the ground and in high level conversations.  See the Inquiry's reports for more information.

    Inequality issues are arguably also now leading to the rise of alternative political candidates such as Bernie Sanders and Donald Trump in the US, as well as Jeremy Corbyn in the UK, so there are many implications not just for investing.  

    4. Financial system redesign strategies could also catch you by surprise, such as the implementation of a global price on carbon, increasingly seen as necessary to level the playing field on fossil fuel based energy production and consumption, by far the largest cause of climate change.

    Even the Bank of England's Mark Carney, previously heralded for his work  strengthening the Canadian economy, has become a voice of reason on future financial Climate Risk in this much watch short video.

    5. Last but not least, another trend to not ignore is the fact that positive solutions to sustainability are arguably one of if not the main ways to outperform financially.  

    Another must watch video on this is this recent interview with Al Gore on sustainable investing.  

    His fund managing institution Generation Investment Management has now been around 10 years, and they have outperformed benchmarks significantly during that time and we previously noted Gore's success as an outstanding investor.  

    We also noted significant positive financial performance for companies becoming more sustainable from 2010 through the end of 2014. Such companies increased their sustainability-advantaged revenue, as well as maximizing their energy efficiency savings while also better managing their risks.

    If you hung on to US coal companies over that last period of time, you lost 10-50 the value of your investment.  

    There is also now the complete failure of Volkswagen as another case of intentionally choosing the wrong strategy on climate change leading directly to dramatic value degradation (BP previously another case), with VW now down as much as 50% as a result.

    You wonder if the likes of Warren Buffett and Bill Gates get this.  Strange that they just don't seem to, as they invest in companies such as Petrobras with easy to see corruption problems or Buffett previously in Petrochina.

    It is a bit of a revolutionary concept one supposes, but all good things come with time, and markets require winners and losers as we argued at the conclusion of our first book on this subject, and that is what has transpired since.

    Whether you are interested in financial returns or improving the conditions of your community or global society, positive sustainable investing is the key way forward for the problems above and your wallet.