Expert: John Southern, HBS Group Southern. Facilitator: Mandy Kirby, City Hive
- Business is grappling with the extent of its responsibilities on sustainable finance and whether customers genuinely want the change
- Regulatory uncertainty is almost paralysing for business due to concerns over making a costly mistake
- Nothing is in isolation, technology changes, stakeholder viewpoints, consumer knowledge are all moving fast
The pandemic has accelerated public conversations about the purpose of the corporation, and many businesses accept the need to demonstrate to stakeholders their position on sustainability and sustainable finance.
Yet despite the groundswell of discussion and acceptance of the need to act on sustainable finance, there are a number of practical barriers for business that need to be addressed to remove limits to progress.
Change and compliance will bring costs as well as potential opportunities. The government is looking to the private sector and particularly finance to come up with capital to help meet net zero targets, and there is an expectation that there will be more announced in terms of regulation at COP26.
Business knows that changes in regulation will lead to stranded assets (where assets become devalued or liabilities) and products that become more expensive and obsolete. They just aren’t sure of the extent of the changes. That goes alongside a lack of certainty that consumers really care – enough to accept that it might cost them to commit to sustainable products and services.
Business broadly accepts the inevitable necessity to act on climate and sustainability, and a degree of responsibility to do so, but is facing a range of barriers from the practical to the philosophical. What is the extent of action expected, and who is it for? Finance has asked to consider big questions about access to finance and whether the right companies and people are getting it.
For many, ESG considerations and sustainability are still a side of desk task that has the potential to mushroom to a more substantial area that many feel under-equipped to tackle or overwhelming to contemplate.
Even while the mainstream conversation turned to topics around sustainability and community during the pandemic, the direct impact on companies was often a highly conservative focus on the protection of the core business. Often sustainability considerations were put to the side as a non-essential activity, or because it seemed like a good opportunity to cut costs.
Regulation has emerged as a key barrier in several respects. The government has been in a deregulatory environment, which is changing somewhat on the environment and climate side as the UK continues to try and position itself as a global leader on sustainable finance, but is still lagging on social and governance fronts.
Where regulation exists, it is not always fit for purpose. Key pieces of regulation that provide for green products are already trailing in sophistication in comparison to the market. In other areas, for example, green mortgages, the cost of products means they don’t present good value to consumers.
A lack of regulatory insistence has left the onus on companies to act, but many feel ill-equipped. There is an expectation of new regulation and costs in the form of carbon taxes, for example. But uncertainty on the scope impacts risk assessment. Firms are afraid of making a mistake and concerned that they would struggle to deal with the fallout, which is limiting potential first-mover advantages.
And even where conventions around disclosure and transparency in this area have shifted, the final arbiter of quality is not always clear. Who judges how well a company is performing and the impact of their actions, when there is a raft of ratings that might apply?
Determining Values and Costs
Customer appetite has changed over the last 18 months in particular previously there was a cynicism that firms may be simply box ticking and focusing on marketing over concrete actions. But companies have also struggled to ascertain to what extent and depth customers really care about the topic, or whether they are simply price driven, recoiling from the idea that this could result in lower returns or higher costs.
Elsewhere, customers may not feel adequately engaged on the topic, and may not be being asked the right questions – for example, if they are relying on an advisor community that is less up to speed on ESG and sustainability topics. And what if businesses don’t ask customers about what they value, such as employee wages or supply chain issues such as modern slavery?
These are important questions to determine the level of turnaround investment needed.
For companies that were not set up with sustainability consideration, change can be complex and slow even when the will is strong. Costs include having legacy systems and infrastructure, in addition to training and knowledge acquisition, or changes to products and models. Some services require printed materials. In other areas, there may be competing requirements or pre-existing commitments, such as ensuring financial inclusion and servicing of all customers.
We’re moving at speed and culture needs to change.
Companies remain certain that if they fail to act they will not thrive in the long-term. The market is moving quickly, consumers share information more quickly than ever, and there are rapid changes to technology that affect how people consume and access products and services.
The first practical step can be creating an action plan that scales the nebulous topic of sustainability into practical areas that relate specifically to the individual firm. Then the firm must focus on measurement and outcomes to be able to demonstrate credibly where they have committed and what the impact has been.
To embed this and see it cascade through organisations, company culture must change, and embrace future change.