Virtual Ethical Finance Round Table: the Role of Ethical Finance in Rebuilding the Economy after Covid-19

In response to the coronavirus pandemic, on 21st May 2020 the GEFI team hosted its first virtual Ethical Finance Round Table to explore the potential role of ethical finance in rebuilding the economy post Covid-19.

The coronavirus pandemic has impacted financial markets with unprecedented speed and ferocity. It has led to a re-evaluation of many assumptions about the global economy, with health security now joining the climate emergency as the most pressing challenges of our generation. This session provided an opportunity to hear from leading global experts on how the macro-economic impact of Covid-19 might catalyse financial institutions and economic systems to better serve people and the planet.

The session opened with an update from Rupert Watson, Head of Asset Allocation at Mercer. With their AUM totalling $304.5 billion and advising on a further $15 trillion in assets Rupert was able to provide a unique insight into Mercer’s economic and market outlook. Mercer has identified three interdependent high level economic impacts of the coronavirus crisis:

  1. Direct impact – what we see with our own eyes resulting from the enforced temporary shut down of the economy
  2. Indirect impact – businesses in a vulnerable financial position are placed under additional stress, often requiring increased borrowing as consumers become more cautious due to the economic shock and threat of job losses
  3. Policy impact – unprecedented financial support from Government and central banks has attempted to freeze the economic picture and restart it three (or more) months later.

Despite the high levels of discretionary fiscal easing, unemployment in the US will jump to its highest level since the depression. Although global GDP and corporate profits will undoubtedly plunge in Q2 Rupert nevertheless expects the recovery to begin in Q3 as activities start returning to normal. The US is likely to experience a slower recovery than the UK due in part to the job retention scheme helping to sustain UK employment and consumer spending power.

In terms of the recovery, Rupert suggested that not only what consumers are allowed to do as the lockdown eases but what they are willing to do would be of significance. The speed of the rebound will therefore depend on reaching the point where the population’s fear of Covid-19 infection is substantially diminished. A critical success factor is the availability of an effective vaccine and this is not something Rupert expects this calendar year.

Michael Moe, CEO of Silicon Valley-based GSV Asset Management and one of the world's pre-eminent authorities on growth investing, followed Rupert with his views on the response from asset managers. Adam Smith’s "The Wealth of Nations" marked the birth of modern free market capitalism which, according to Michael, has created unprecedented prosperity and inequality.

Although as many people will have died over the period of the lockdown through lack of access to clean water as have died from Covid-19, the fact that virtually the entire planet been impacted by the pandemic has led to an almost immediate global response. Covid-19 is a ‘game changer’, a mind-altering event similar to Hiroshima and 9/11 that will result in permanent global change. Michael distinguishes this paradigm change as BC (Before Coronavirus) and AD (After the Disease).

Michael highlighted that BC the venture capitalist mindset of optimising shareholder value was already under attack and in his view as we enter AD there will be a surge in recognition that the best businesses will generate a profit (as required by shareholders and for sustainability) with purpose (serving the needs of employees, communities, customers and the environment). This is not a purely philosophical idea: it is here and now. The best companies will combine the drive of for profit with the heart of a not-for-profit.

For Michael, expediting and accelerating important trends (such as the overnight shift from physical to digital and to profit with purpose) is an exciting outcome of the coronavirus pandemic.

The final speaker was Liz Grant, Professor of Global Health and Development at the University of Edinburgh who presented on the role of well-being and compassion in the new economic paradigm. Messages around compassion and well-being have gained prominence during the coronavirus pandemic.

According to Professor Grant the concept of compassion is best articulated by a quote from CS Lewis’ commemorative stone in Westminster Abbey: “I believe in Christianity as I believe that the sun has risen, not only because I see it but because by it I see everything else.”

The coronavirus pandemic has turned humanity upside down, shining a light on an economic system that increases rather than reduces inequality. Although mortality rates for malnutrition, malaria and HIV are far higher, due to its global proliferation, the response to Covid-19 has been unprecedented in terms of the speed and range of health, social and economic measures taken.

As we look to the future the SDGs provide a blueprint and ‘meta-narrative’ for a new and better society. The Global Goals are underpinned by planetary health through a recognition that the health of humans is interconnected with the health of the environment. Professor Grant offered a sobering reflection by challenging the notion that we have mortgaged the health of future generations for economic gains in the present by suggesting that we have in fact now entered the territory where we are suffering today.

Compassion is not merely about acts of kindness or goodness; it is about seeing the world through someone else’s viewpoint. Professor Grant suggested a 4 step process for demonstrating compassion:

  1. Notice
  2. Interpret
  3. Empathise
  4. Alleviate

Professor Grant then pointed to the legacy of Francis Hutcheson, a major exponent of the theory of the existence of a moral sense through which man can achieve right action.

As we look beyond the pandemic Professor Grant argued that, as a global family, we must both care for ourselves and use compassion to awaken and drive action to reduce the suffering of others. Although the SDGs set out the end game they do not define our individual and collective roles. Embracing compassion can therefore be a transformative strategy and a mechanism to shape the way we see the world and provide motivation to do things differently.

The session concluded with an engaging question and answer session of which these were some of the key points emerging:

  • Timescale for economic recovery (Rupert)
    • Near term – watch the speed of the lockdown unwinding
    • Income maintenance – Governments making up shortfall so preserving capacity for people to spend when lockdown eases
    • Little desire for immediate period of austerity
    • Policy approach is to grow out of crisis (higher inflation) and reduce the level of Government debt (cf. post WW2)
    • Some possibility of severe austerity of up to 10 -15 years but reasonably confident that economy will come back quickly
  • Resilience of asset managers (Rupert)
    • Trying to avoid moving client and investor money too frequently
    • Positioning clients so they are reasonably protected across all eventualities
    • Stress test – imagine what might go wrong, test and do not panic!
  • Resilience of asset managers (Michael)
    • Difficult to know what will happen in the market so focus on fundamentals of business
    • Level of fear has created opportunities for those who can take a long term perspective
    • Challenging and exciting times for growth investors as ‘future accelerated to the present’
  • Shifting towards action in the finance sector (Professor Grant)
    • Individuals
      • Define their inward motivation (what is it that each of us find meaning in life / why are we doing what we are doing?)
      • Identify their inner journey (does it matter that there is inequality, injustice etc and do I see my connection to that?)
    • Institutions and organisations
      • Recognition that there has to be a different way of being
      • Model of compassion - not just about employees but about the practice of work
      • How important is profit and should it be at the expense of someone else / is it destructive?
      • Proactively embed a culture of compassion as compassion fundamental to sustainability
  • Shifting towards action in the finance sector (Michael)
    • Introduction of B-Corp is well-intended but does not go far enough
    • Need to incorporate approaches that can be embedded into how businesses operate
  • Impact on Europe (Rupert)
    • Lingering worry that EU may be pulling apart but Italy withdrawing would be devastating for the country and the EU
    • Publication of joint statement by France and Germany on supporting the broader region (health strategy, recovery fund, green / digital transitions and single market resilience) is a positive development and critical for Italy to achieve economic growth for living standards, employment, welfare.
  • Human (Professor Grant)
    • Consider unintended consequences of intended good action – think collectively and ethically through a lens of compassion
  • One thing to lose post-coronavirus (All)
    • Business travel (Rupert)
    • Quarterly earnings reporting (Michael)
    • Replacing thinking about what we want and need with what others want and need (Professor Grant)

by GEFI

"One God, Many Paths" panel at the UKIFC 2019 London Summit

The "One God, Many Paths" panel was featured as part of UKIFC's 2019 London Summit on Islamic finance, which tackled innterfaith issues in finance, including the Edinburgh Finance Declaration. UKIFC is one of the founding partners of the Edinburgh Finance Declaration.

Taking part were moderator Habib Motani from hosts Clifford Chance with Rev. Fiona Stewart-Darling from the Canary Wharf Multifaith Chaplaincy, Church of Scotland elder and UKIFC board member Graham Burnside, former HSBC executive Dominic Gorton and Martin Palmer from FaithInvest.

The event included contributions from across the faiths on topics such as:

  • The overlap between Islamic values, the values of other faiths, and non-faith values
  • The Edinburgh Finance Declaration
  • The commanalities among the Abrahamic faiths
  • The concept of stewardship, and how this does not always resonate with those outside of the Abrahamic tradition
  • How culture is needed to create lasting change

Watch the session below:

by GEFI

Round Table: Path to COP26 - Financing a Green Future

The Ethical Finance Round Table ‘Path to COP26 – Financing a Green Future’ was held on Feb 27th at Baillie Gifford in Edinburgh. Following a short welcome, Omar Shaikh, GEFI Managing Director outlined GEFI’s plans for 2020:

This was followed by short presentations from Jonathan Taylor, former Vice President of the European Investment Bank for Environment and Climate Action, and Gary Lapthorn, Head of Sustainability & Responsible Business, Commercial Banking at Lloyds Banking Group.

Jonathan Taylor outlined the history of climate change action, through initial scientific warnings, to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) at the Earth Summit in Rio in 1992, and the first landmark international treaty agreed at COP3 in Kyoto (1997). Experts from the International Panel on Climate Change (IPCC) then warned that, despite the Kyoto Protocol, global warming was still set to worsen, leading to the all countries agreeing at COP21 in Paris (2015) to a global framework designed to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.

Coming 5 years after COP21 and the Paris Agreement, COP26 in Glasgow event offers an opportunity to take stock of progress since Paris and update the Agreement where necessary. In particular, countries will present their plans and progress beyond current declared intentions, which IPCC calculate will lead to 2.6°C – 3.2°C temperature rises.

More attention than ever is focused on the role financial services can play in the fight against climate change, acting as an enabler and transition mechanism for policy, risk management and liquidity. There has been optimism around the UK’s leadership on climate-related regulation in finance, particularly through the Bank of England’s Taskforce on Climate-related Finance Disclosures (TCFD). Ensuring Glasgow is a success will require the right template to be in place for all parties to work and agree upon, and this can only happen with significant bilateral diplomatic efforts. The Global Commission on the Economy and Climate calculates that, while a lack of progress poses huge risks to the world economy, bold climate action could deliver at least $26 trillion in economic benefits through 2030.

Gary Lapthorn next outlined Lloyds Banking Group’s commitment to supporting the UK’s transition to a low-carbon economy through leadership in financing sustainability in businesses, homes, vehicle fleets, pensions, insurance and green bonds. One issue found at Lloyds was lack of knowledge and education. Many experienced financial professionals are keen to act and support the transition, but lack confidence in their ability to lead on environmental issues. To address this, Lloyds partnered with the Cambridge Institute for Sustainability Leadership to provide training.

Lloyds is making concrete commitments in terms of both its own operating emissions and those associated with its loan book. It has pledged to halve emissions associated with its loan book by 2030 and to cut operating emissions by 60% over the same timeframe and is currently ahead of schedule. It has also pledged to move to its energy consumption to being 100% derived from renewables and its vehicle fleet to 100% electric. In addition, Lloyds provides financing for a number of environmentally beneficial projects, such as £273m of direct funding for the worlds biggest offshore windfarm, Hornsea Project One.

The presentations from the two speakers were followed by a lively audience discussion, in which participants and speakers explored the practicalities of combatting emissions through finance. The discussion centred on:

  • The extent to which financial institutions are making explicit trade-offs between profit and purpose – Lloyds are willing to accept slightly lower returns when companies agree to do the right thing
  • Whether looser capital requirements can be used to encourage climate-related lending
  • The role of innovation, and specifically financial innovation, in addressing environmental challenges
  • Executive renumeration, and the extent to which commitments are enshrined in incentives for decision-makers
  • Whether moves towards sustainability are making financial services an attractive career for graduates again, moving on from the “lost decade” experienced after the global financial crisis

by GEFI

COP26 – FINANCE SECTOR MEETS IN SCOTLAND TO BUILD GREENER ECONOMY

PRESS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE

EMBARGO: IMMEDIATE

COP26 – FINANCE SECTOR MEETS IN SCOTLAND TO BUILD GREENER ECONOMY

Leading financial institutions will come together in Edinburgh today (THU) for the start of a ‘Path to COP26’ campaign to build a greener global economy. A round table event will explore the role of the finance sector in the transition to a low-carbon and climate-resilient economy in the run-up to the global climate change summit in Glasgow in November.

To start the process of accelerating the combined efforts of the industry, the event will be addressed by Jonathan Taylor, former Vice President (Environment and Climate Action) at the European Investment Bank, and Gary Lapthorn, the head of sustainability and responsible business at Lloyds Banking Group Commercial Banking.The round table has been organised by the Edinburgh-based Global Ethical Finance Initiative (GEFI), which oversees, organises and coordinates a series of programmes to promote finance for positive change.

As part of the ‘Path to COP26’ campaign, GEFI will also host a series of events in the UK and beyond, ahead of the November summit. The campaign is designed to encourage banks, asset management firms and other financial companies to demonstrate their commitment to the climate agenda. According to the United Nations Environment Programme Finance Initiative, the climate transition will require additional investment of at least $60 trillion from now until 2050 – meaning private sector commitments are vital to tackling the climate crisis.
Bold climate action could deliver at least US$26 trillion in economic benefits through to 2030, compared with business-as-usual, a recent report from the Global Commission on the Economy and Climate found.

Gail Hurley, senior consultant to the Global Ethical Finance Initiative and former senior advisor to the UN, said:
“The eyes of the world will be focused on Scotland when senior politicians from across the globe convene at COP26 in Glasgow in November to negotiate the global response to tackling climate change.
“Climate change is a large, systemic financial risk that will change asset values as investment moves away from high carbon assets towards a low carbon economy.
“For financial institutions to become enablers and catalysts they must therefore understand the commercial risks and opportunities and know how to act on them.
“Finance can be a positive force for change, and we call upon organisations from across the globe to sign up to our Path to COP26 declaration to help us assist the financial sector to commit to practical efforts to tackle climate change.”

Jonathan Taylor, former Vice President (Environment and Climate Action) at the European Investment Bank, said:
“COP26 in Scotland will be a key milestone on the road to a successful conclusion to the fight against climate change.
“Expectations are high that countries should commit themselves to demanding targets to meet the agreed goal of the Paris Agreement to limit global warming to below 2 degrees above pre-industrial levels.
“So we should all think about what we can do to help ensure success, including financial institutions.
“The GEFI round table’s ‘Path to COP 26’ initiative makes an excellent contribution, and I am delighted to be part of it.”

 

Gary Lapthorn, head of sustainability and responsible business at Lloyds Banking Group, Commercial Banking, said:
“Lloyds Bank Commercial Banking is delighted to support the GEFI round table exploring the role financial institutions are playing in the transition to a low-carbon and climate-resilient economy.
“As part of the UK’s leading financial services group, Lloyds Banking Group, we can make a real difference to tackling climate change by helping to finance a greener future together.
“This will require new ways of living, working and investing for our business and our customers.
“That’s why we’re setting ourselves an ambitious goal to accelerate working with customers, government and the market to help reduce the carbon emissions we finance by more than 50 per cent by 2030, equivalent to removing the emissions produced by almost a quarter of UK homes.”

 

ENDS

NOTES TO EDITORS

More information is available at www.pathtocop26.com

Broadcast interview opportunities with GEFI are available.

A photo of Gail Hurley is available for download here.

A photo of Jonathan Taylor is avilable for download here.

What is the Global Ethical Finance Initiative?
The Global Ethical Finance Initiative (GEFI) oversees, organises and coordinates a series of programmes to promote finance for positive change. It brings together the world’s business, political, and social leaders to build a fairer finance system for people and the planet. The organisation is based in Edinburgh, and hosts the global ethical finance summit. More information is available at www.pathtocop26.com/ethical-finance-2020/

What is ethical finance?
A fairer system of financial management that combines profit with better outcomes for people and the planet. The full working definition of ethical finance: A system of financial management or investment that seeks qualitative outcomes other purely the management of returns. Outcomes sought may reflect ideas from faith, environmental and governance theories.

Why does ethical finance matter?
Although ethical finance is not a new concept the financial crisis has led to a growing interest in sustainability, climate change and social justice. This has seen a collective desire to create a fairer, more inclusive and responsible global financial system. Trust in banks is diminishing and today’s generation of consumers believes that investment decisions should reflect the issues they care about. Ethical finance in the UK is valued at around £40billion, creating thousands of sustainable job opportunities. Today, with the world facing a climate emergency there is a pressing need to develop environmentally sustainable financial solutions.

by GEFI

Round Table: Ethical Finance Market Update - Keynote Interviews

Baillie Gifford – EFH Roundtable

16 December 2019, 16:00 – 18:00

Ethical Finance Market Update, Market Trends

Interviewer: Gail Hurley

Panel Participants: Andrew Cave, Thom Kenrick

Summary:

In a change to the usual format this session, once again hosted by Baillie Gifford, comprised of two keynote interviews which provided reflections (from the investment and banking sector) on the evolution of the ethical finance market and how the market will adapt to on-going political, economic, social and environmental uncertainty.

The interviews were conducted by GEFI Senior Consultant Gail Hurley who has recently completed 10 years with the UN in New York as a Senior Advisor.

Gail framed the session within the context of growing interest in driving a fairer, more sustainable financial system and the fact that 2020 will be a significant year for climate issues in Scotland as it welcomes the world to Glasgow for COP26, the UN climate conference.

Andrew Cave, Head of Governance and Sustainability at Baillie Gifford, was first up and he argued that ethical investing has moved from niche to mainstream. While in the past companies would not put their best people and resources into it, today the situation is changing. According to Andrew the overall direction is positive and there is a lot of interest from institutional investors. Continuing challenges include: the complications in defining a positive impact (as the market is still in its early days) and the intractable debate over what constitutes positive social impact.

Andrew offered some fairly candid views on confusion around terminology highlighting the fundamental difference between ESG, which factors issues such as climate risk, data privacy issues and regulation into existing investment paradigms, and responsible investing, which is more directive and it aims to reach a particular outcome. It was suggested that clear rules need to be designed to avoid a risk of diverting money away from those who can make a positive contribution. Another challenge mentioned by Andrew was the lack of quality data on complex value chains. A full view of impact requires improvements in disclosure and standardisation of data, which enables more sophisticated discussions about potential transformations in transportation and production systems.

Thom Kenrick, from the RBS Sustainable Banking team, was next in line to be interviewed by Gail. Unsurprisingly, Thom began by highlighting the major changes that have taken place in the banking sector in recent years and how this has driven RBS’s journey of reform and restructure. The financial crisis fundamentally changed regulation as banks were placed under greater scrutiny by both regulators and wider stakeholders. Thom described the growing interest in ethical finance from RBS customers but pointed out that many still struggle with the lack of consistency in terminology and approaches. In relation to social finance Thom suggested that this means financial inclusion to one, diversity to another and divesting from a power station to someone else. Unlike environmental impact, there is not a right or wrong answer as so many different aspects of social life have no scientific base.

Thom felt that while international standards may help in providing consistency, he pointed out that while PRI (2005) and TCFD (2015) have been around for a number of years few signatories are genuinely delivering to the required standard. That said, according to Thom, the situation is changing as customers, investors and the public are increasingly scrutinising firms so whilst such standards are voluntary, the consequences of not following them risks deterring prospective / existing customers and investors.

Despite the challenges outlined throughout the session the discussion ended on a positive note. Younger generations are more conscious, and their demand is expected to drive ethical finance in the long term. Change takes time and previous developments in ethical finance, whether successful or not, will have played a part in shifting mind-sets and practices. Although nothing is yet set in stone leading market players, such as big Baillie Gifford and RBS, have established dedicated teams, products and services to raise awareness and drive finance for positive change.

by GEFI

The Faith in Finance Round Table, organised in partnership with UK Islamic Finance Council and the Church of Scotland

As part of Ethical Finance 2019 summit, on 9th October 2019, UKIFC and Church of Scotland organised a private Faith in Finance round table and dinner at St Andrew’s and St George’s West Church.

The event included contributions from across the faiths on topics such as:

  • Interfaith collaboration and the role of faith-based values in modern finance
    • Benefits of bringing different perspectives together
    • Identifying shared values – the Edinburgh Finance Declaration
    • Heritage role of the Church influencing the values of banks and what the current paradigm can take from this history
  • Faith groups sharing leading practice:
    • Engagement strategies
    • Creating a space for religious actors in formal governance models
    • Addressing the common global goals – role of faith traditions to address the SDGs

Participants included Lord John Alderdice, David Pitt-Watson, Shayk Ruzwan Mohammed, Prof. Mohamed Iqbal Asaria, Rev. Fiona Stewart-Darling, Datuk Noripah Kamso, Saker Nusseibeh and Peter Greengrass.

by GEFI

Round Table Explores Innovations in Social and Blended Finance

The 19th Round Table discussion continued the series of topics on the social impact sector and focused on recent developments in social impact investment and philanthropy. The underlying theme of the discussion was to understand how these can form part of blended finance supporting partnerships between investors and the public and third sectors addressing specific social needs.

Jonathan Flory (Director, Social Finance) started off by discussing the concept of social investment in the wider context of impact investing. Founded in 2007, Social Finance is a non-profit organisation working in the social impact arena, famously known for developing the first Social Impact Bond (SIB) in the UK. While the market for social investment is fluid, it forms part of a growing market of nearly USD 228 billion in impact assets and a larger movement in which governments, corporations, fund managers, investors and individuals are increasingly focusing their attention on achieving positive social outcomes by means of their investments. While social investment means different things to different people, unlike other investment approaches it focuses on addressing pressing social issues. As a UK term, it describes investments that intentionally target specific social objectives along with a financial return and measure the achievement of both.

While the Public Services (Social Value) Act 2012 clearly signalled the importance of social value in public procurement, a range of motivations continue to exist on the investor side. While international investment giants such as UBS support the “doing well by doing good” theory of impact investing, suggesting that financial returns do not have to be traded off against social objectives, they also recognise the need for softer, philanthropic capital. Given the spectrum of investors’ expectations, it is essential to align the interests of organisations with expectations of investors, but in many cases for a partnership to work there is a need for some element of soft capital in the overall funding structure.

Partnerships can play an important role in scaling up impact. A good example of this is the Positive Families Partnership, a London-based programme seeking to divert adolescents from entering the care system. The partnership brings together central government, local authorities, funders, and programme delivery partners. It applies the blended finance model and mixes grant and investment funding. Following a successful pilot by Essex County Council, the partnership model has been adopted by 5 other boroughs in London and now looks likely to be expanded to include all London boroughs.

The key challenge is putting the partnership together. For partnerships and blended finance to work, there must be a place where funders feel safe to partner. Potential solutions include building a new brand for the partnership, forming a joint venture or an innovative funding structure. The latter is particularly effective in bringing together investors with different financial needs and social objectives as the funding is often structured in tiers. An example is the Arts Impact Fund blending public, private and charitable funding in which the junior tier with first loss is provided by the Arts Council.

Social Finance is optimistic about future developments in social investment. It sees a lot of potential in improving financial inclusion by expanding affordable credit and social housing. In terms of partnership structures, more cross-developmental cooperation is on the way with funds pooled from separate budgets. There is a clear trend in themed funding, in which partners group around themes, which gives the partnership a clear focus.

Jonathan’s presentation was followed by a talk by Kenneth Ferguson, the Director of the Robertson Trust, and Christine Walker, their Head of Social Impact, who presented their innovative model of a public-third sector partnership. The Robertson Trust is a well-established organisation in Scotland with a 6o-year history of improving social outcomes for individuals and communities. It operates by means of providing grants to other charitable bodies and over the course of its history has awarded £250m to 467 organisations.

Back in 2012, the Robertson trust wrestled with the issues of sustainability and scalability of the impactful work charities were delivering. There were very few innovative financing models in Scotland. The Scottish government’s attempt to set up public-private partnerships (PPP) contained no obligation on the public sector to sustain a project while the Robertson Trust believed in the need for systemic change and moving away from high cost reactive services towards lower cost preventative models. They were eager to develop models that would expand impact to the national scale, achieving systems change on the one hand, and providing charities with much needed long-term funding on the other.

Their Social Bridging Finance concept aims to support this through the development of a contract with the public sector. The model has elements of both SIBs and PPPs, but is grant-funded. It is used to sustain projects that have already proved their effectiveness. The strength of its programme is its simplicity. The standard contract is only 10 pages long and contains a maximum of 3 success criteria. The crucial part of the process is defining the success criteria and making sure they are clear, measurable and meaningful. The success criteria are assessed at the outset by a third sector organisation in consultation with the public sector body, which creates a dynamic discussion between the two sides. TSDGe contract is signed, the Robertson Trust then fund the demonstration period, which usually lasts around 2 years. If the success criteria are met, the public body ensures the continuity of funding thereafter. This gives the charity the certainty of stable funding and for the public body it de-risks change. If the project is not successful, there is no obligation on anyone to pay back the funds. This way the Robertson Trust assumes the financial risk by providing the bridging finance to facilitate the switch to a low cost preventative model.

An example of the model is MCR Pathways, one of Scotland's biggest PPP agreements, which aims to widen opportunities for Glasgow’s most disadvantaged young people by offering a school-based mentoring and employability programme. The Robertson Trust initially supported the project by funding the demonstration period, but the premature success of the programme allowed it to expand quickly to include 200 schools across Scotland. Importantly, the model has brought in systemic change. “This model has allowed us to create a new approach which is now business as usual”, said Maureen McKenna, Executive Director of Education Services, Glasgow City Council.

A lively question and answer session followed, in which participants shared their impressions of the results achieved by the Robertson Trust. It is important to have an organisation which takes the initiative and brokers the connection between the third sector and public bodies. There was a shared concern that some investors in the impact investment landscape have high expectations in terms of the financial return, which was thought to be inappropriate in the context of funding public services. It is believed to be of the reasons why the SIB model was not fully embraced in Scotland due to some of the ethical considerations involved. Jonathan stressed that social impact requires thinking about how to support vulnerable groups of people. Impact investing is about creating value as opposed to extracting value, and it does not always imply cashable savings; rather is about spending money better and in a more productive way.

However, given the genuine interest among mainstream banks increasingly seeking to put money where it is most impactful, how can we capitalise on institutional capital in attaining compliance with the SDGs? Kenneth believes that achieving scale is not possible for any one organisation and there is a spectrum, in which every organisation involved can contribute in its unique way. The Robertson Trust currently assumes the “risk bit” and their role is to participate in the early stages of a project to demonstrate its effectiveness while capital markets can bring the project to scale. For the model to work, though, there should be more discussion about making sure philanthropic funds are available.

While both organisations attempt to scale impact, there are some differences in their approaches. While the Robertson Trust suggests that scale should be achieved in cooperation with the public sector, Social Finance aims to do so by bringing in new capital and new players. However, both organisations continue to share common aspirations to achieve social change and there are already some early examples of their models converging.

EFRT on Social and Blended Finance Slides - June 2019

by GEFI

GEFI Round Table Discusses Ethical Finance Approaches in the Debt Capital Markets

The Ethical Finance Roundtable was held on Feb 27th at Baillie Gifford in Edinburgh. Entitled "Ethical Finance Approaches in the Debt Capital Markets", the round table covered market developments in the $1.45 trn climate-aligned bonds market (such as green bonds) along with innovative trends in ESG and SDG bonds.

Following a welcome by Chair Omar Shaikh, Graham Smith (Director - Sustainable Finance Unit - Global Banking, HSBC) provided an update on HSBC's strategy to deploy $100bn in sustainable financing and investment by 2025, and an overview of the bank's SDG bond and how it has integrated the Green Loan Principles and Green Bond Principles into its financial products and instruments:

The $100bn is typically deployed through: 1) bonds 2) loans and 3) investments where HSBC maintains a focus on returns. The green agenda is being driven by regulation where some governments are taking measures that encourage responsible lending in the private sector. The Paris Agreement, which set out national contribution guidelines in the form of NDCs, prompted legislation such as the Clean Air Act in the UK. Furthermore, in France, the Government issued Law 173 in making investors disclose green assets from brown banks are obliged to rebalance their assets with a higher ratio of green to brown.

HSBC is a leader in green finance and is committed to investing in green assets that drive the market forward. With the examples of Clean tech growing by 4% to 5% Graham suggested that investors should be interested in the space green or not.

In March 2018 the Green Loan Principles were published. Graham explained that this important development, with a similar rationale to the Green Bond Principles, applies to broader sections of business and society and has now become the “gold standard” for green loans. Banks can now offer products that they understand.

Graham explained the emergence of products (such as green, social, sustainability bonds and loans to transition loans) and that the Loan Association is likely to provide a much-needed definition for ESG loans in March this year.

With ESG products positioning businesses as good corporate citizens and green products highlighting a commitment to the environment there are PR benefits to be derived from businesses engaged in sustainable finance. In terms of pricing, there is no financial penalty for investing in green bonds but they still prove costly for issuers.

HSBC launched the world’s first bond that directly supports the SDGs and the Paris Agreement. The US$1 billion raised through the bond finances projects that benefit communities and the environment, including hospitals, schools, small-scale renewable power plants and public rail systems.

The key message is that regulations are driving the development of the market, leading to change at the commercial level. A prime example is the Task Force on Climate Related Financial Disclosure (TCFD).

Caspar Cook (Head of Analysis, Cameron Hume) then outlined Cameron Hume's client-led approach to ESG, which focuses on a combination of values-based and returns-based strategies, and how this has evolved to successfully grow the Global Fixed Income ESG Fund.

Cameron Hume, an active fixed income specialist, is a signatory to UN PRI. Caspar started by explaining the considerations of applying an ESG approach to fixed income, which differs from its integration into equity investments. There remains a lot of confusion as to the definition of ESG so Cameron Hume has divided its approaches into two categories: returns-driven (ESG factors that are material to performance) vs values-driven (implement ethical social and environmental objectives of different investors). Cameron Hume focuses on returns-driven investment and only practices values-driven investing in segregated accounts that mandate it.

Caspar believes that ESG is a good risk indicator and cited the example of PG&E, a prolific bond issuer known as the cleanest provider of energy in USA. Carbon conscious investors would have found this an interesting play but they filed for bankruptcy following their link to the California wild fires. ESG analysis, using MSCI, would have highlighted risks relating to its poor land use and diversification thereby discouraging investment.

A further example was shared by Caspar. Equifax, the biggest US credit scoring company, had a substantial data breach recently that severely impacted its shares and bonds. MSCI had ranked Equifax 1 out of 10 in data security and flagged this as a material risk. These factors do not typically appear in annual accounts or financial ratios that many investors focus on.

ESG factors help investors focus on neglected risk that leads to more sustainable long-term investing. Cameron Hume’s Global Fixed Income ESG Fund uses responsible investing to bring ESG factors in to the investment process tilted towards higher ESG rated companies.

Following the formal presentations a lively and lively question and answer session followed. Some of the key points raised included:

  • It is easier to influence sovereigns through the bond markets than corporates.
  • ESG policies in businesses tend to be top down and not always filtering to the bottom layer of people making decisions.
  • ESG factors influence investment performance but not necessarily on a consistent basis. Some studies show that it can add 0.5% to 0.8% a year in performance. Participants were skeptical because it is hard to disentangle ESG from other factors.
  • Clients have fiduciary duty towards performance so it is a challenge for fund managers to integrate a universally agreed ethical stance into a portfolio (e.g. Calpers divested from tobacco stocks 15 years ago and recently published that that decision cost them USD6bn).
  • Even if findings suggest that ESG is good for performance over the last few years there is a lack of evidence indicating that it will improve performance going forward.
  • The bond industry must evolve to ensure bonds fulfil their green promises. At the moment they just get declassified but there should be penalties. And declassification often takes place long after the bond has de-greened (e.g. Mexico City airport project).

The session concluded with a discussion on the role the debt capital market industry can play in driving standardisation in pricing, measuring and reporting. The key points raised were:

  • At the moment the industry tends to tick boxes and gets PR recognition for this (e.g. the CDP used by the TCFD).
  • There is no perfect measure for transition risk, which will play a key role in consolidating many sectors in the medium term.
  • A nuance that influences the development of the industry positively is that asset managers pay for MSCI scorings while issuers pay for credit ratings.
  • As investors increasing focus on analysing and challenging data a virtuous cycle will be created to drive up the availability and quality of data.
  • A limitation on green bond reporting is the risk of breaching client confidentiality.
  • The proof of concept is just as poor in green project proposals that are submitted for debt funding. This leads to a serious lack of viable sensible pipeline to invest in (especially in the SDG space). Large lenders end up majority invested in their own assets as a result (e.g. HSBC’s SDG Bond

by GEFI

Overview of Ethical Debt Instruments

Introduction 

Debt instruments that provide a coupon as well as a social or environmental return are broadly dubbed as ethical debt instruments. They come in a variety of forms, and innovative new structures are increasingly coming to market.

The major driver of this is investor demand (such as pension funds, insurers and millennials) and issuers keen to tap into this rich pool of investment capital at equal to lower cost than purely financial return focused bonds. Investors increasingly believe that these forms of debt financing better capture long term and existential risks as well as seek to provide non-financial returns.

The most important factors to focus on when evaluating such instruments is whether the issue meets a common set of Social Bond Principles, namely use of proceeds, project or investment selection process, management of funds in accordance with a pre agreed framework that has been evaluated by a third party (e.g. Sustainalytics or CECERO) and aligns with a recognized global or national set of principles (such as the Green Bond Principles, the Social Bond Principles and/or the Sustainability Bond Guidelines) and impact metrics monitoring and reporting.

Green Bonds

By far the largest ethical debt market place at the moment, with USD11.9bn issued to date in 2019 alone. Last year there was USD167.3bn in issuances. This year is forecasted to mobilise USD250bn in issues. The majority of these bond issuances are aligned with the Climate Bonds Initiative to provide environmental integrity. A few are certified by the climate bond standard which is backed by a board of investors that represent USD34tr in AUM.

Essentially the proceeds of the bond must be used in areas that are consistent with the 2-degree Celsius warming limit specified in the Paris Agreement. BNP Paribas is consistently in the top five underwriting league tables for green bonds. Several stock exchanges have a dedicated section allocated to green bonds, such as Oslo, London, Mexico, Luxembourg, Italy, Shanghai, Taipei, Johannesburg and Japan. Interestingly the US, China and France are the largest sources of labelled green bonds.

Issuers range mostly from multi sector to energy or building related. Structures are sophisticated and diverse ranging from covered bonds and asset backed securities to green Schuldschein, green sukuks, mortgage backed securities and medium-term notes. Apart from issuing its first green bond (USD500mn) as early as 2015, HSBC has also issued an equity linked green bond for EUR34mn (2017) that pegs returns to the performance of a basket of ESG compliant listed companies that are measured against 134 KPIs (STOXX Europe ESG Leaders 30 Index). The proceeds are dedicated to projects that improve energy efficiency.

SDG Bonds

SDG bonds are a type of sustainability bond that aligns the projects it finances or refinances with social and / or environmental impact linked to specific SDGs. These may include all the SDGs or only some of them, such as in the case of the ANZ SDG Bond that seeks to contribute to the achievement of nine of the seventeen goals including health, education, sustainable cities and climate action or the HSBC UN SDG Bond that uses proceeds towards projects that achieve one or more of seven specified SDGs including clean water, energy, education and infrastructure.

In both cases the proceeds can also be used on its own operating or capital expenditures as long as it contributes to the achievement of one or more of the nine SDGs identified.

In HSBCs case the bond is majority invested in two of its LEED Gold certified headquarters in the Midlands and in Dubai. The HSBC bond which was launched in 2017 was USD1bn, 3x oversubscribed and matures in 2023. The more recent SDG bond issued by the World Bank links return on investment to the stock performance of thirty listed companies that make up the Solactive Sustainable Development Goals World MV Index. Proceeds will be used to finance their development projects. BNP Paribas arranged the bond while Banque SYZ placed it.

ESG Bonds

ESG is now a mainstream topic steering investment towards it, and this will continue at a steady pace given that Millennials, who put greater emphasis on adopting these values, will become 75% of the work force by 2025. One of the challenges the industry faces however is a lack of standardization making it difficult for investment funds to set a fixed ESG criteria. In addition, the size of ESG bond issues are generally small relative to their conventional peers and are issued by those with no track record thereby making it difficult for large institutional investors to participate. In fact 50% of European investors in a recent report said they did not think there were enough ESG products in the fixed income space. Another influencing factor in the debt capital markets is that whether labelled as a type of sustainability bond or not, 85% of European investors apply ESG criteria to at least investment grade bonds. (RBC Global Asset Management & Cerulli Associates)

Blue Bonds

These are bonds that raise financing for projects that support the sustainable use of ocean resources, inspired by the green bond movement but at a naisant stage. Only one issuer has raised a blue bond so far and that is the Seychelles, an island highly dependent on the ocean for its livelihood. The issue size was a modest USD15m and the coupon is part guaranteed by the World Bank and the Global Environment Facility. Considering the size of the issue only three investors participated: Calvert Impact Capital, Nuveen and Prudential.

Vaccine Bonds

Vaccine bonds were in fact pioneered in 2006 by the International Finance Facility for Immunisation (IFFIm) launched by GAVI (The Vaccine Alliance) and began the movement by the financial sector towards developing a set of principles to hold the socially responsible bonds universe together. Vaccine bonds are directly aligned to SDG 3, which aims to end the preventable death of children under 5 years of age by 2030. GAVI has been able to raise USD5.7bn so far as effective bridge financing until grant providers can step in.

Other Bonds

Other kinds of social & development impact bonds include Tobacco Social Impact Bonds (TSIB), a rhinoceros conservation impact bond, a cocoa and coffee production bond in Peru and a youth unemployment program bond in Serbia. Sometimes referred to as a pay for success model or a social benefit bond, these innovative financial instruments tend to be driven by private investors with an interest to offer upfront capital for a particular and specific social or environmental goal. These investors work with governments, philanthropists and/or aid donors to come up with mutually beneficial structures that reward them if outcomes are met.

Conclusion

Although the green bond marketplace has taken off well over the last few years, it is not enough to fill the USD3 to USD5 trillion annual gap that is required to meet the SDGs. Banks are in a perfect situation to align just part of their broad loan books towards SDGs that are material to them to drive more capital towards the achievement of the SDGs. Certain sectors can be identified as most closely aligned and a framework for tracking and reviewing annually can be put in place based on industry learnings from the green bond issuance space. As a result, banks will not only be able to expand their product offering and client base but also support their clients who wish to similarly begin engaging with and reporting on their contributions to the UN SDGs.

References: ICMA, UN, Dealogic, MSCI, European Commission, Climate Bonds Initiative and HSBC

Ethical Finance Round Table

HSBC is an active lender in the sustainable finance industry globally and a member of The ICMA Green Bond Principles Executive Committee, The Catalytic Finance Initiative, The Equator Principles Association, The WEF Climate Leaders CEO Group, The Climate Bonds Initiative, The Social Bond Guidance Steering Committee, China’s Green Finance Committee, and the Adopted Taskforce on Climate Related Financial Disclosure. It is the founder of the HSBC Centre of Sustainable Finance and the award-winning Climate Change Centre of Excellence and the first sovereign Green Bond arranger (EUR750mn Polish Bond 2016). HSBC will be speaking at the Ethical Finance Roundtable in Edinburgh hosted by GEFI on Feb 27th 2019. To be considered for an invitation, please click here.

by GEFI