Paradigm Shift: The World Simply Can't Afford To Make Unsustainable Investments Anymore There is an increasing relevance in sustainable investments amid climate change risks, with many aspects aligning with good business practices.

By Christopher Greenwald

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Robust risk management is universally accepted as a cornerstone of sound investment practice. So, given the mounting evidence that climate change will eventually result in the devaluation of certain assets, those unfamiliar with the debate could be forgiven for questioning why sustainable investing has been met with controversy.

The prevailing focus on short-term gains has led investors to overlook the potential long-term risks of their investments. Climate change has the capability to strand assets and render certain business models obsolete- those who bury their heads in the sand and fail to account for the environmental impact of their investments may ultimately suffer financial consequences.

Moreover, in an era where sustainability is gaining ground, opportunities that address humanity's challenges are likely to increase in value. The demand for solutions to global issues like climate change, resource scarcity, and social inequality is rising. Companies and projects that address these challenges can not only make a positive impact, but also generate substantial financial returns for investors.

Yet, the reality is that sustainable investing has run into ideological and political roadblocks, largely due to a perception that it undermines investors' fiduciary duty to maximize returns. Critically, there is a pervasive lack of confidence in current disclosures, leading to concerns that financial institutions are overstating their positive environmental impact, or "greenwashing". And ultimately, the absence of international consensus and standardisation remains a challenge for the more fundamental adoption of environment, social, and governance (ESG) investing.

It is important to recognize that many aspects of sustainable investment align with good business practices. In many cases, companies find that addressing ESG factors enhances efficiency, and aligns decision-making with their business strategy. For investors, additional information on how ESG adds value aids in understanding companies and assessing the quality of future earnings and value. As such, to account for climate risk effectively, it is essential that the financial system works towards the establishment of a comprehensive framework for evaluating the broader factors and external impacts beyond a company's immediate operations.

Related: Sustainable Finance: Here's How Startups Can Excel In The Emerging Green Economy Of The UAE And The GCC Region

As the financial sector shifts its focus towards measurable outcomes, the development of standards to evaluate these factors has gained traction, although there remains significant progress to be made before international agreement is achieved. In recent years, the landscape of international accounting standards has undergone a notable shift, with industry-led initiatives, such as the Partnership for Carbon Accounting Financials (PCAF), gaining traction in their aim to standardize methods to measure the carbon emissions in financial strategies.

Increasingly, stakeholders are demanding comprehensive frameworks to assess and mitigate climate risks. The rise of initiatives like PCAF and the International Sustainability Standards Board (ISSB) are emblematic of this shift, signaling a collective commitment to developing and adhering to standardized measures that extend beyond conventional financial metrics.

The European Union (EU) has emerged as a key player in shaping the landscape of international accounting standards, particularly in the context of sustainability. The EU is implementing stringent regulations that will compel companies to adhere to sustainable practices and disclose their ESG performance. These regulations aim to create a level playing field, ensuring that businesses integrate sustainability considerations into their core operations. The EU's approach underscores the growing recognition that governments and regulators play a pivotal role in fostering the development of sustainable investing– and this is likely to play out in regions including the Middle East, where those financial institutions developing sustainable investment strategies stand to gain a competitive advantage.

The need for active government and regulatory support is becoming increasingly evident. Governments are instrumental in setting the tone for sustainability initiatives, providing a regulatory framework that encourages and enforces responsible financial practices. By supporting the development of international accounting standards and embracing regulations that prioritize sustainability, governments can catalyze a paradigm shift towards a more environmentally conscious and socially responsible financial sector. This, in turn, fosters the integration of sustainable investing practices, aligning financial interests with the long-term well-being of the planet.

From an investor's standpoint, sound climate risk management provides a deeper understanding of companies, helping the assessment of future earnings as well as the quality of investments. For both boards and investors, viewing sustainability is fundamental to sound risk management should be non-negotiable. The "sustainable investing" label, as distinct from "mainstream investing" is, in many ways, misleading. The reality is that the world simply can't afford to make unsustainable investments, and incoming regulations will shape a future where all investment is sustainable.

Related: Incorporating Sustainability Principles As Entrepreneurs: The How-To

Christopher Greenwald

Head of Sustainable Investment, LGT

Christopher Greenwald is the Head of Sustainable Investment at the world’s largest private bank, LGT.

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