Anthony Rowley, Tokyo

How much will it cost to save Planet Earth from climate change and other systemic threats? Who will pay and how can the rescue be achieved These are the big, unanswered questions of today and yet a belief seems to have taken hold that “Sustainable Investment” can magically provide solutions. 

The belief is based on a view that if companies behave like good corporate citizens problems with regard to environmental and other issues problems will go away and we can all breathe freely again.

This is over-simplistic and yet investors are pouring trillions of dollars into the gamble.

Sustainable Investment (which goes by many names such as “green” or “responsible” investing but nowadays is associated mainly with ESG or Environment, Social and Governance investing) is not exactly a South Sea Bubble situation but its objectives are distinctly “fuzzy”.

Depending upon definition, the size of the Sustainable Investment “universe” has grown to between 20-40 trillion dollars in terms of assets
under management.Thousands of Sustainable Investment funds have sprung up – and they are generating handsome commissions for financial practitioners.

Those who assume meanwhile that the big environmental and other issues can be taken care of by financial markets and business corporations while governments simply act as facilitators are almost certainly deluding themselves. There is no master plan for financing the rescue of the planet.

Most people do not realise this because if they wish to invest in a “Save the Earth” rescue operation – as indeed many people do now, from small
retail investors and philanthropists to giant institutional investors – they will be guided by advisors into the Sustainable Investment arena.

Not that there’s anything wrong with wishing to improve and monitor corporate behaviour, which is what ESG is all about. But this is at best only a partial solution to the  socio-economic problems confronting the world today.Searching questions need to be asked about what is going on.

A coordinated action plan is lacking even as the threat of irreversible climate change grows ever nearer and the Covid pandemic highlights the
need for huge spending on healthcare and sanitation, and also as transport and other infrastructure crumbles or is not built, owing to lack of  investment.

We know where we need to get to in order to save the planet but mapping the route to there is proving to be more a scrambling retreat from looming disaster than a visionary advance toward a better future. It is more an “every man for himself” situation  than a” follow-my-leader” progression.

The United Nations identified the 17 Sustainable Development Goals we need to aim for back in 2015 but it stopped short of recommending concrete ways and means of achieving these goals. Into this vacuum has stepped a financial industry seemingly intent on profiting from the hazy situation.

Myriad firms are being assured in effect that if they do their bit to help save the planet all will be well when arguably what is  needed is
state-directed action at country and global level.The Titanic captain needs to steer away from the iceberg and not just order rearrangement of
deck chairs.

While schemes like limiting industrial emissions, carbon “capture” and carbon trading markets will make useful contributions to reducing
pollution and global warming, applying these at individual company level instead of as part of a coordinated global strategy will have only limited effect.

Yet this is what the ESG approach is all about and while the concept originated back in 2004 when former UN Secretary General Kofi Annan asked leading CEO’s to sign onto it, ideas do not seem to have progressed to meet the needs of the UN Sustainable Development Goals issued a decade later.

The goals were designed  to cover: Climate Action, Clean Water and Sanitation, Affordable and Clean Energy, Economic Growth, Industry
development, Innovation, Infrastructure development, Sustainable Cities and Communities, Responsible Consumption,Good Health and Wellbeing and many more.

This shopping list of social and economic goals seemed to represent just what was needed in order to provide a lead and to create a vision for a
new era of cooperation among the 157 member governments in the UN family and between public and private sectors of the global economy.

Achieving this, the UN said, was going to be expensive, although not impossibly so given the size of the world’s financial resources. The bill
could amount to $5 trillion dollars  per year over the 15 year life of the SDG implementation period up to 2030 or around $75 trillion in total.

This is a lot of money, equal to roughly one year’s  gross domestic product (GDP) Even then, $75 trillion almost certainly understates the
required spending in areas such as basic infrastructure and on improved medical facilities in the wake of the COVID-19 pandemic.

It is customary for governments to finance public goods but the UN said that governments would almost certainly not be able to foot anything like the entire bill. Thee public sector would be unlikely to  supply more than around one half of the annual spending required.

This meant that another half would need to com from  savers and investors in private capital markets. Again this sounds like a lot of money – some $2.5 trillion a year – but  set against the $270 trillion estimated to exist in private savings in market economies such amounts do not sound formidable.

The trouble is that the SDG’s are not easy to invest in. There are few “SDG funds” as such and so investors have to go in via the back door or
through ESG or similarly indirect routes.That means that fund managers can profit hugely from this fuzziness.

As Jesper Koll, a veteran Tokyo-based financial analyst says “the greatest thing about ESG in the asset management business is that no-one can define it” This means that very large sums of money from well-intentioned investors could be diverted from true priority areas into peripheral
investments.

What is needed is to put concrete structures around individual SDG responsibilities and allow these entities to issue securities whose proceeds are channelled directly to their targets and not to the corporate sector at large. It is a worthwhile challenge for financial engineers to devise such targets.

IMF managing director Kristalina Georgieva and “climate tsar” Mark Carney (former governor of the Bank of England,now UN special advisor on climate finance) have spoken of the need for corporate”transparency” on climate actions but more transparency is needed on what Sustainable Investment is really all about.