The growth of Sustainable Finance

Mid-January 2020, CEOs all over the world have found on their desk a letter. The sender of the letter was Larry Fink, CEO of Blackrock [1], the biggest investment company in the world. This company manages 7800 billion dollars of assets: just to give a rough ideas of the size, this is a value that is three times higher than the Italian public debt [2]. In this declaration it was clearly explained that the future of financial investments would take the sustainability route.

The need and urgency are clearly starting to emerge, to put in place actions and adopt tool that avoid the spread of practices that are dangerous for the social and for the environment We can say that the branch of economy know as sustainable finance has finally reached its maturity.

To provide an initial general picture of what does this term mean and what are its main objectives, we can use the terminology used in 2013 from the Forum for Sustainable Finance's Working Group for the Definition of Sustainable and Responsible Investment [3]:

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Sustainable and Responsible Investment aims at creating value for the investor and for society as a whole through a mid/long-term development strategy. Such strategy, while assessing enterprises and institutions, integrates financial analysis with environmental, social and good government analysis.

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It is a segment that is growing increasingly, and it is important to analyze and understand this growth in order to define the boundaries of this phenomenon.

The data that follows has been collected and published in the 2019 report of the Global Sustainable Investment Alliance [4], an association that was created by the merging of different national and international fora, such as for example Eurosif and US SIF. The mentioned report includes a detailed analysis of the progress obtained in the field of sustainable finance in the two-year period 2016-2018. The first number that catches the eye is the growth of sustainable investments, that have seen a 34% increase in 2 years. In absolute terms, current investments amount to 30,7 billion dollars.

Again in absolute terms investments have increased in all countries considered. A more interesting and relevant figure, compared to the analysis of pure numbers, is the market share, that in this case corresponds to the number of sustainable investments compared to the total amount of investments made. This figure is growing in every country analyzed, except for Europe, and it reaches for countries such as Australia and New Zealand a 63%.

Only looking at numbers, one might conclude that there has been a decrease from the European Union side in the commitment to sustainability, however this is not the case. In the same report, reference is made to a fundamental difference between the European legislation and those in other countries: the regulation. The European Commission (EC) has in fact committed to define clearly what can be considered a "sustainable investment". The ultimate goal of this efforts of legislative clarification is to overcome and prevent the spread of practices such as the greenwashing,  communication strategy aimed at constantly using positive references to the environment to actually hide or minimize the real negative impacts of one's actions.

The path that led to an articulate structure of this concept started in 2018, when the EC nominated a group of technicians, the TEG (Technical Expert Group), that comprised of academics and professionals in sustainability and financial sector and aimed at defining a set of rules. This group has also collaborated to several other projects, such as the creation of standards for the EU Green Bond [5].

After two years of work, the legislation was completed and published in March 2020 as the “TEG Final Report on the EU Taxonomy”. This document includes detailed instructions in regard to the analysis of economic activities and investments. An article published by the Harvard Law School Forum on Corporate Governance [6] has stressed how through this Report, the European Union has taken on the role of a guide in this topic, with effects also in the US. In fact, even though the norms set are not binding for non-European companies and institutions, US investors will be able to new European standards as a benchmark in their own decisions. This report though is just a starting point to continue and implement and update the current regulations.

Sustainable Finance is making huge progress and does not seem to slow down, as shown by the data presented above. In the case of the European Union, the authorities aim at preventing the use of sustainability as a tool for advertising and propaganda.