Paying for decarbonization: What are financial institutions and global corporations doing to accelerate the process?

Despite geopolitical tensions, 2022 has shown that there’s undeniable momentum from financial institutions and global corporations to do their part to “green” the economy. Multiple stakeholders - including governments and regulatory bodies, consumers and financial institutions themselves - have begun to apply necessary pressures that make sustainable investing not just a goal, but a need.

 

Solving a problem begins with awareness of that problem and a mutual agreement to act. Interested parties around the world have reached that first critical step. But now that we’ve collectively agreed to decarbonize the world, the debate turns to two critical questions: who will pay for it - and how?

Asset management organizations have felt growing pressure to pay for decarbonization through the provision of funds that invest in organizations with sustainable credentials. Additionally, investment banking will drive momentum in financing massive infrastructure projects globally that can accelerate the decarbonization of the economy.

 

Ultimately, the capital needed to finance a greener environment will derive from multiple sources, including taxes, corporate profits, and lending from various financial vehicles.

 

The good news? Sustainable funds are already seeing material growth, particularly when compared to more established fund types. This makes sense: activist shareholders and consumers are increasingly aligning their investments with their values. People are reinvesting their pensions, moving out of fossil fuels and into renewable energy. As a younger generation of investors matures, they’re demonstrating that they are more willing to accept greater risk to financial returns if it means they can invest in a company whose mission and values they believe in.

 

Indeed, according to a 2021 CNBC article, approximately a third of millennial investors “often” or “exclusively” make investments into companies that value environmental, social, and governance (ESG) initiatives. This is compared with 16% of Gen X and just 2% of baby boomers.

 

As ESG awareness becomes more widespread, however, those numbers are beginning to grow across all age groups. As CNBC noted, “Millennials spurred the growth of sustainable investing throughout the 2010s…Now, every generation wants in.”

 

Morningstar’s latest Global Sustainable Fund Flows report evidences this by highlighting the resilience of sustainable funds, noting that “amid investor concerns over inflationary pressures and the war in Ukraine, sustainable funds still held up better than the broader market.” New product launches also continued with 227 new sustainable funds in Q1 2022 alongside repurposing and rebranding of existing products into sustainable offerings.

Much of this growth has been driven by new ESG disclosure rules in accordance with the EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021. This regulation requires that funds add new ESG-related language to their prospectuses, which in turn is reducing the risk of “greenwashing,” the practice of positioning products as more environmentally-friendly than they really are.

 

The SFDR regulation offers a glimpse of a fast-arriving future for funds that strive to be considered truly sustainable. In the coming years, we will witness increased ESG reporting requirements, from both governments and global standards bodies. While reporting that aligns with governmental regulations will become a requirement, voluntary designations from standards organizations will become equally important as the arms race to be as sustainable as possible accelerates.

 

This is both exciting and daunting - the growth of reporting requirements will provide the transparency stakeholders need and deserve and will discourage companies from overstating their green credentials in statements and communications. It will also, however, burden already hyperextended financial institutions with complex language requirements across multiple locales, regulatory bodies, and languages. That’s where we come in.

RWS has the experience, language capability and global capacity to support financial institutions as they make their required and voluntary ESG disclosures in multiple countries and languages. Our combination of advanced language technology and comprehensive language services allow us to help clients translate their financial content quickly and accurately, so they can continue to gain customer trust as they tackle the critical challenges that lie ahead.

 

Let us be your partner as you strive to achieve the kind of transparency that will become ever-more necessary in a world that embraces ESG. It’s no longer enough for firms to share general, far-off plans; rather, governments and consumers alike are demanding they put their words into action now and disclose those actions to all stakeholders.

 

We can help you share your accomplishments and goals with all current and prospective investors, no matter what language they speak. Reach out today for a conversation about your firm’s needs and to learn more about how RWS can help, or drop by and meet the team if you're attending TSAM East Coast 2022!