Simon Zadek is Co-Director of the UNEP Inquiry into the Design of a Sustainable Financial System. More information about the Inquiry and related publications is available on the Inquiry’s website.
New York, London, Hong Kong and Singapore are the world’s top four financial centers, according to the Long Finance’s Global Financial Centers Index. The index looks at factors such as political stability, regulatory environment and the state of transport and communications networks, and surveys thousands of financial market participants for their views. Sustainability, that is how financial centers are impacted by, environmental, social and also economic outcomes, is not currently a direct part of this index.
Yet sustainability is increasingly seen as both as an outcome and as a driver of economic vitality and competitiveness. Environmental and social factors are increasingly included in assessments of national economic competitiveness, such as The World Economic Forum’s Global Competitiveness Index. The dynamism and underling health of cities is also increasingly assessed using sustainability measures such as the quality of public transport, equity and access to employment opportunities and overall environmental footprint.
Financial institutions themselves are recognizing that sustainability matters for their health. Environmental, social and governance factors effect asset risks, and can impact on the reputation of financial institutions, which is all-important in accessing capital and talent, and engaging with governments, regulators and other stakeholders. Initiatives such as the UN Principles of Responsible Investment and the equivalent UN Principles of Sustainable Insurance have garnered considerable support from financial institutions, which have adopted commitments, policies and associated risk management and valuation approaches. Sustainability-focused, activist groups of investors such as CERES in the USA have become increasingly important, just as specialist fund managers such as Generation Investment Management have provided clear evidence of the profitability of taking sustainability into account.
Growing numbers of enabling institutions have also taken on the challenge of integrating sustainability to support orderly and effective, and ultimately successful financial centers. Many of the world’s major stock exchanges belong to the Sustainable Stock Exchange Initiative, for example, and have built sustainability into market conditions, from Brazil’s BOVESPA governance scoring through to the London Stock Exchange’s requirement to listed companies to publish information on social and environmental risks. S&P Rating Services has released its first analysis of how climate change impacts sovereign risk analysis, the China Banking Regulatory Commission has imposed green credit risk reporting requirements on licensed banking institutions, and Lebanon’s central bank has established lower reserve requirements for energy efficiency investments.
The question of whether, and if so how, sustainability impacts the competitiveness of financial centers is gaining increasing attention, but remains unresolved. Centers leading in the issuance of new products, such as green bonds, should certainly benefit from their growing importance, just as those will that attract new generations of businesses seeking capital to finance their success in advancing low-carbon, natural resource-light products and services. Similarly, financial centers will benefit that are most effective in managing an orderly transition away from investments in natural resource and carbon intensive assets that will become stranded over time.
At the same time, today’s financial actors place considerable value on less rather than more regulation, even in the face of evidence of the damage caused by unfettered short-termism and market instabilities driven by perverse incentives and herding behavior. Policy efforts to reduce short-termism, such as the financial transactions tax were pushed back, particularly in New York and London, arguing that such measures would damage competitiveness. Indeed, the Global Financial Competitiveness Index reveals that there has been a fall in the perceived competitiveness of financial centers that have imposed enhanced governance and reporting and other regulatory measures to reduce investor risk and enhance overall market resilience.
Today, actors that dominate most financial centers, as practitioners and policy influencers, still profit from investing in yesterday`s dirty economy. Because of this, financial centers are trapped in the wrong kind of competitive battle, supporting the continued exploitation of economically-decaying financial assets, and so damaging tomorrow’s economy and investment opportunities. Financial policy-makers, regulators and standard-setters should take note, however, that rewarding this backward-looking profit-taking will undermine the very competitiveness of the centers that they seek to protect and nurture.
Tomorrow’s successful financial centers will deliver the capital effectively and efficiently needed to drive forward the health and dynamism of sustainable and prosperous businesses and economies, which will be those that rapidly reduce their environmental footprint, while serving more people. Smart stewards of today’s financial centers should see the potential from moving first in creating tomorrow’s most competitive, sustainable financial centers.