Capital Markets Corporate

July 9, 2020

Money talks

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This week, Christine Lagarde, president of the European Central Bank (ECB), committed to stepping up the ECB’s fight against climate change. In an interview with the Financial Times, she said she wanted to “explore every avenue available in order to combat climate change” and would examine making “greener” changes to all of the central bank’s operations, including asset purchases. This could include using its now infamous €2.8tn asset purchase scheme to pursue green objectives for the first time. The move would make the ECB the first main central bank to use a flagship bond-buying programme to pursue green objectives. This is bold, headline-grabbing and necessary institutional leadership because, as Lagarde puts it, “at the end of the day, money talks”.

This is also the view of BlackRock CEO Larry Fink whose firm held its first annual Global Summit at the end of June, convening thousands of clients and thought leaders for a virtual discussion around the question of whether sustainability can accelerate recovery. In his view, climate change presents a true investment risk today and, as such, is likely to drive what he calls a fundamental reshaping of finance as investors rethink their portfolio risk profile.

In addition, he argues that both the pandemic and the rise of the Black Lives Matter movement have dramatically elevated the conversation about social responsibility and highlighted the urgent need to build a more sustainable stakeholder capitalism model for future generations.

There is no doubt that business leaders and companies will be judged heavily on how they perform relative to environmental and social issues in the months and years to come. No more so than by investors, who are becoming increasingly impatient for action as they face real investment risks resulting from record heatwaves and droughts, as well as social unrest driven by systemic racial inequalities. Many believe – like Lagarde and Fink – that the current double crisis provides companies and institutions like the ECB with an opportunity to lead by example and fundamentally rethink their business models.

Money truly does talk and investors with their power to allocate vast amounts of capital can drive positive transformational change and be at the forefront of this transition. This is very much the view of David Blood’s pioneering funds at Generation Investment Management, whose firm’s vision since launch has been to see long-term, sustainable investing become best practice, and for sustainable capitalism to become the enduring economic model. Recent events are now accelerating this trend with demand for sustainable investment products continuing to rise steadily, both in the institutional and private markets. Furthermore, earlier adopters are likely to outperform in the long term as recent performance has demonstrated.

As we consider the critical choices now facing governments, businesses and investors to ensure a healthier, safer and more equitable world, it is reasonable to believe that companies that understand this context and adapt rapidly stand a better chance of survival. Those that turn today’s insight into foresight to create fresh strategies and truly responsible business models, products and services, are the ones that will thrive. As Instinctif strategic advisor Mike Barry wrote recently, it is now urgent to come together in a collective effort to build back better.

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