Firstly, a rise in awareness; second, a wave of ambitious stakeholder commitments for achieving environmental and societal change; and finally, the accelerated digitisation of the economy. If harnessed, together these trends could act as a powerful tailwind for positive change. Here we highlight three areas that we believe will top the agenda for sustainable finance as the year unfolds:
1. Nature in focus
In 2010, McKinsey named biodiversity as ‘the next environmental issue for business.’ A decade later, and the World Economic Forum’s 2020 Global Risks Report ranked biodiversity loss and ecosystem collapse as one of the top five threats humanity will face in the 10 years ahead. Biodiversity, defined as the variety of plant and animal life in the world, supports activities as wide-ranging as the discovery of new medications to ecotourism, soil formation to crop pollination. One attempt to put a monetary value on the goods and services our ecosystems provide comes to an estimate of $44 trillion a year; almost half global GDP (WEF). Yet the complexity of nature makes its benefits hard to quantify – so we don’t.
But finally, 2021 is showing signs of being the year that nature realises its value. We’ve already seen the launch of the Terra Carta by HRH Prince Charles, a voluntary framework which commits companies and investors to ensuring their businesses are aligned with preserving the world's biodiversity (protecting 50% of the biosphere by mid-century). In February, the publication by the UK Treasury of the Dasgupta Review, an independent review of the economics of biodiversity announced by the Chancellor of the Exchequer in March 2019, which assesses the economic costs and risks of biodiversity loss, may have the same impact for nature as the Stern report did for climate. Add to this the specific disclosure requirements prescribed in the EU Taxonomy framework and the momentum behind the Taskforce for Nature Related Disclosures, and our planet may finally be receiving the attention she needs.
Much of the global economy depends on nature, or ‘natural capital’—the world’s stock of nature’s assets. Yet in parallel with unprecedented changes in climate, nature is declining globally at rates never seen in human history, and the rate of species extinction is accelerating. 2021 may be the year that we begin to reverse this trend.
2. COP, climate and carbon
The forthcoming conference of parties, the long-awaited COP 26 due to take place in Glasgow, is significant. Not only is it the first COP to take place after the landmark Paris Agreement's measures have taken effect and the first opportunity since for nations to collectively review commitments and strengthen ambition, but it follows the COVID 19 pandemic – itself a significant experience. The summit will take place from 9 – 20 November with around 30,000 delegates expected to attend – the biggest the UK has ever hosted. This includes heads of state, climate experts, business leaders, and campaigners. There is no doubt that carbon will be front and centre of the agenda.
With a number of forward-thinking investors and pension funds announcing net-zero commitments, it is likely that further pledges will follow. Alongside this, expect to see entrepreneurial actors employing digital technologies to tackle carbon challenges through technological innovation and by developing business models that infuse these innovations with purpose. Prompting the Economist to imagine a futuristic world where technology could track all carbon emissions via smartphones, consumer-facing apps showing the footprints of our lifestyles have proliferated.
Given that a significant proportion of their footprint for many consumers may be contained in their investment portfolios, could carbon become an expected metric alongside performance criteria?
3. The rise of citizen finance: now, everyone's and investor'
Whilst the outcome of many of today’s events remain unknown, we do know that the necessity of organising our day to day lives – alongside our fundamental need for connection – has driven us more online than perhaps we have ever been. Activity in investment apps, which allow users to trade stocks directly from their phone, is a beneficiary of this trend, with 88% growth in the average number of sessions per day from January to June 2020.
Investing is becoming democratised: it’s easier and more accessible than ever before, with lower fees and the convenience of making trades on demand, wherever customers are in the world. Robinhood is one example – it has more than 13 million customers, 3 million of whom signed up in the first four months of the year (and, millennials’ share of Robinhood’s assets under management in 2019 was a giant 80%).
Combined with this, advances in technology have supported the scalability of sustainability data-gathering, allowing for replicable, quantitative evaluations of companies and governments’ activities based on a breadth of dataset that was previously not possible – all with the ability to deliver this information to investors on demand through their online investment platforms for the first time at scale.
Soon, it will be retail investors – global citizens – to whom this information will be revealed – in response to increasing demand, enabling consumers to understand where their long-term savings are invested, and on the finance industry to meet this demand by using investments to end extreme poverty, tackle inequality and defeat climate change – all at a moment when these issues are brought into stark focus.