The concept of sustainable finance, including ESG and SRI, has gained considerable traction in Asia in the last couple of years in line with global trends.
The concept of sustainable finance, including ESG and SRI, has gained considerable traction in Asia in the last couple of years in line with global trends.
The value of global assets invested considering ESG factors increased by 34 per cent in two years to $30 trillion (Bt913.1 trillion) in 2018.
Japan has witnessed phenomenal growth in sustainable finance, making it the third largest hub after Europe and the United States. Policy action on sustainable finance among Asian countries has seen a steady rise, with guidelines, reporting frameworks and listing obligations for businesses coming up in many Asian countries.
The recent Osaka G20 leaders’ declaration acknowledged the importance of sustainable finance for global growth in the context of increasing vulnerabilities, emerging risks and financial stability. The Asian Infrastructure Investment Bank (AIIB) recently announced the launch of a $500-million AIIB Asia ESG Enhanced Credit Managed Portfolio with the view of “achieving long-term sustainable development goals”. Many large Indian mutual fund houses have launched ESG funds including an announcement to launch a $1-billion fund.
These are strong signals suggesting a sustainable finance tipping point in Asia in the near future. However, translating this keen interest among Asian investors and financial institutions (FIs) to adopt sustainable finance strategies for long-term impact may not be as easy. A very fundamental shortcoming of many sustainable finance frameworks is the application of standard global financial risk assessment models to understand and assess ESG risks. These shortcomings are particularly stark in the context of Asia’s unique socio-economic characteristics.
I highlight five ways in which Asian investors can transform standard sustainable finance approaches to create long-term impact.
Choosing impact over opportunity: The rising sustainable finance trend is creating a new and lucrative market opportunity for investors and financial institutions. This creates the syndrome of we-should-also-do-sustainable-finance without internalizing the conceptual framework. It is very unlikely that a sustainable finance product can create significant long-term impact if it is not designed with such a clear vision. Investors and FIs developing a sustainable framework must start by assessing their existing and potential impact on the environment and society at large. Such an assessment must cover its direct operational impact and indirect impact caused or contributed through its investments or lending. A long-term sustainable finance vision based on an objective and participatory assessment will help distinguish leaders and followers.
Adopting the leaving-no-one-behind principle: Inclusion and sustainable development have become buzzwords and commonly used across government, companies and civil society. The UN Sustainable Development Goals provide a comprehensive framework for sustainable development. The principle of “Leaving no one behind” is at the heart of the SDGs. Truly inclusive and sustainable growth means that the most excluded and marginalized must be better off from where they currently are. A sustainable finance framework developed in a participatory manner with meaningful consultations with diverse stakeholders including the most excluded and marginalized can create significantly higher impact in the long term.
Taking the informal sector perspective: The informal sector is a strong characteristic of the Asian economy. With more than 90 per cent of the Asian workforce employed in the informal sector, any metric that does not take this into account can be very inadequate. Many of the sustainable finance frameworks do not factor challenges outside formal workspaces and attribute risks arising from the supply chain and informal sector as externalities. Businesses can cause, contribute and be directly linked to issues in the informal sector. For a sustainable finance framework to be effective in Asia, it must include factors and challenges faced by people working in the informal sector. This sector is not homogenous in nature and is very complex. To factor in issues affecting the informal sector, a framework must be able to look beyond obvious surface level issues and understand underlying causes.
Applying a meaningful gender lens: The existing global gender gap is huge and a projection of current trends shows that it will take more than 200 years for the world to close the gender gap in the area of economic empowerment. The sheer magnitude of the gap shows that a business-as-usual approach is bound to fail. Many sustainable finance frameworks are not equipped to look beyond gender diversity and workplace safety. A gender lens in sustainable finance must be approached from a more fundamental and cross-cutting perspective. A gender lens sustainable finance framework should be designed to help achieve substantive equality in line with CEDAW and address systemic constraints such as adverse social norms, discriminatory laws, failure to recognize, reduce and redistribute unpaid work and the gender gap over access to digital, financial and property assets. An effective gender lens in sustainable finance must include all gender identities, cover intersectionality, collect sex-disaggregated data and ensure meaningful participation in planning and assessment.
Strengthening human rights principles, institutions and mechanisms: Several countries in Asia, including Thailand, Indonesia, India, Japan and Malaysia, are developing national action plans on business and human rights. This presents an opportunity for investors and FIs to strengthen the NAPs and align sustainable finance frameworks with the UN Guiding Principles on Business and Human Rights (UNGP). Professor John Ruggie, in his response to a Thun Group statement in 2017, has clearly articulated the implications of UNGPs for investors and FIs. The absence of strong human rights principles, institutions and mechanisms can substantially limit the potential of creating a long-term positive impact through sustainable finance.
Environmental and social issues are systemic in nature and thus require a systems approach to address them. Investors have a very important role to ensure that the economic model is equipped to address these issues rather than aggravating them. The 21st century is projected to be the Asian century, with the dominance of the Asian economy, demography and politics. Trends suggest that Asian investors and FIs have the potential to catalyze the sustainable finance space. It is a make-or-break opportunity to leverage the influence of the financial sector in creating a truly inclusive and sustainable society.
——————————
Namit Agarwal works as lead specialist – Private Sector Engagement at Oxfam India. He leads Oxfam India’s engagement with the private sector on issues of business & human rights, responsible supply chains and responsible finance.