There is no denying that mistakes were made during the 5,000-year evolution of the financial markets and will, within certain boundaries, continue to be made. The landmark appearance of the first sustainable finance instrument in 2008 marked a pivotal moment in this evolution. As our understanding of our impacts on the planet and societies deepens, so does the realisation that we cannot afford to delay action or be hindered by the pace of scientific process by not having complete information.
The first financial instrument was a clay table that recorded a credit agreement. Currency started as shells, then precious metals, paper, and digital, and now cryptocurrencies are rising. Stocks were originally devised for joint ventures. Their trading has evolved into sophisticated and organised stock markets, the first of which was in Amsterdam in the 1600s. Instruments like tally sticks, war bonds, bearer bonds, bills of exchange, and scrip were innovated through trial and error. Their popularity rose and then declined and sometimes faded from history.
The urgency of our current environmental and social challenges is undeniable. Since the onset of the Industrial Revolution around 1760, carbon dioxide (CO2) levels in the atmosphere have surged by 150%, reaching concentrations never before experienced by human beings. Biodiversity is declining, our oceans are increasingly polluted with plastics, and natural resources are depleted rapidly. Meanwhile, societal issues like rising inequality and lack of trust also underscore the critical need for greater care for the individuals that make up our societies.
Embracing the unknown: how entrepreneurship shapes sustainable finance
From a simple start with the first green bond in 2008 from the World Bank, sustainable finance has developed rapidly. Designed not only to yield financial returns but also to promote positive environmental and social outcomes, there is now a menu of sustainable finance instruments available, e.g., green, blue, transition, sustainable linked bonds, and loans. More will appear. Intriguingly, much of this growth has been organic, driven by financial actors rather than regulatory mandates. This self-propelled progress highlights the sector's entrepreneurial dynamism, a key driver of its evolution and diversity.
This entrepreneurial vigour is the cornerstone of constructing the sustainable finance market. While emerging legal and regulatory frameworks, such as the EU Taxonomy and the Chinese Green Bond Catalogue, introduce certain limitations, they also guide the sector's responsible growth. It's important to acknowledge, however, that not all innovations in this space achieve their intended objectives. Sustainable finance instruments, while revolutionary, are not immune from misuse or unintended consequences.
A notable challenge in sustainable finance is the potential to inadvertently support unsustainable practices, labelled as ‘brown’ or ‘dirty’. Sometimes this can work to lock in or prolong the life of ‘brown’ or ‘dirty’ activities and industries that we need to get out of, such as electrifying rail transport by coal or shipping oil and gas. Such instances, while not ideal, contribute to the learning curve in this evolving field. Nevertheless, it can be argued that these mistakes are a price well worth paying if they lead to the continued development and innovation of instruments that are welcomed by a market consensus. Of course, we should try to minimise such mistakes.
Evolving with science: adapting financial instruments to emerging sustainability understanding
In sustainable finance, it can be argued that a ‘common sense’ use of science should be pursued, meaning not getting lost in excessive details and nuances but not ignoring evolving scientific understanding. We should also recognise that science itself is a dynamic process in which accepted ideas are changing (if slowly!). Science is dynamic, continually reshaping what we know about environmental issues like biodiversity conservation and the growing responsibilities in economic activities.
The challenge lies in striking a delicate balance. On the one hand, we need thorough scientific scrutiny to understand the multifaceted impacts of financial instruments on critical human-impacted areas like climate change and biodiversity. On the other hand, overly detailed analysis and bureaucracy can make sustainable finance tools impractical, too costly, or both, hindering their adoption and development. Balancing scientific rigour with practicality is crucial in fostering a sustainable finance market that is both effective and accessible.
Recognising that mistakes are an inevitable part of this journey is key. In the evolving landscape of sustainable finance, errors not only inform us but also drive progress. Mistakes should be acknowledged and allowed as a natural component of innovation and adaptation. It's important to understand that while mistakes will be made within legal boundaries, neither legislation nor regulations are static. They can and often should be influenced and adapted in response to new insights and developments. Mistakes will happen, and should be allowed!
Takeaway questions
Can labelled sustainable financial instruments endure trial and error and survive for a long time?
What potential sustainable financial instruments might emerge in the future?
How effectively do sustainable financial instruments assess risk, including interest rates, while accommodating mistakes?
What is the significance of science in this context, and to what extent should we adhere to current scientific findings?
At Accrona, we offer actionable insights from a wealth of experience. We are your trusted partner for all your sustainable finance needs, from strategy to issuances and equity raising to intelligence and capacity building. We've navigated the uncharted territories of sustainable finance, embracing risks and learning from our own mistakes in the process. This hands-on experience has not only shaped our expertise but also deepened our understanding of the challenges you face. We turn insights and challenges into success stories. Contact us today to explore how our tailored services can drive tangible and positive change for your organisation and contribute to building a sustainable future.