• Lenny Kessler

A Bright Future!

When Sustainable Finance Becomes The Norm


The COVID health crisis forces us to reorder our priorities. The 2020 United Nations Climate Change Conference, or COP26, has been postponed to 2021. But climate change is still a priority and I am convinced actions in favour of sustainability will follow quickly and accelerate dramatically.


The problem was always one of “transition cost” versus “adaptation cost”. “Transition cost” is a real cost we need to pay now to transform our social organisations into sustainable organisations, hopefully before the worst happens. This cost is immediate and, I would argue, often overestimated. “Adaptation cost” is the cost we will have to pay to adapt to new realities if and when they materialise. This cost will have to be paid sometime in the future and is usually vastly underestimated.


Why bother with transition if it is cheaper to adapt later on? Transitioning implies change and change is always uncomfortable. So let’s procrastinate and dance while the music goes on…


COVID brought us back to reality. We are now seeing first hand what “adaptation cost” is. And it hurts!

Some might argue that COVID has nothing to do with climate change; that it is a crisis of an entirely different nature. While some researchers would disagree (here, here and here), that is not the point. Climate change may be a less immediately palpable danger, but both are global disruptions of a physical nature that cannot be ignored.


JP Morgan estimates that COVID is having a comparable impact on our lives to a 2° global worming. Two degrees! That is our global Paris Agreement target! We are collectively aiming at a world in which the exceptional hurdles we are going through today would be the new normal… and that is pretty much our best case scenario. Crises of such physical nature are disruptive and nonlinear; that means 4° global warming is not twice as bad than 2°. It is much worse.


“Transition cost” may not be so high after all. And since change is upon us anyway... let’s get moving.

Sustainable finance is maturing from a fast growing niche of finance, comprising ESG, SRI, Impact Investing, etc. to becoming the new norm. All the aspects that were holding it back from becoming mainstream are being addressed and in some countries, like France, institutional investors are already reorienting their portfolios to be fully sustainable. We are clearly past the stage of awareness and strong regulatory frameworks are being put in place.


Europe is arguably at the forefront of this change (at least at a meaningful scale). Last December, the President of the European Commission Ursula von der Leyen announced the European Green Deal, a roadmap to making the EU’s economy sustainable. In march, it brought into law the carbon neutrality by 2050 target and confirmed its intention to set a carbon tax on imports to prevent “carbon leakages”. The Commission also launched an impact study on the opportunity to raise its 2030 target, from reducing greenhouse gas emission by 40% versus 1990, to 50 or 55%.


Last month, the Commission published its 10 points Action Plan for a Greener and Cleaner Economy. With concrete goals ranging from mainstreaming sustainability in risk management to Fostering transparency and long-termism to sustainability benchmarks, this action plan encompasses everything we need for “sustainable finance” to become “finance”. For example, Action 1 of the plan calls for the establishment of an EU classification system for sustainable activities. The EU Taxonomy is now published and will serve to guide further actions.


Sustainability was clearly on the agenda before COVID. The framework is there and the crisis will be the trigger for large scale implementation!

Westerners grew up under the false economic assumption that if everyone acted in his or her best interest, the interest of the society would be fulfilled and the world would find its optimal state. Yes, economists recognise “negative externalities”, but they are not taken care of systematically. Moreover, we often leave that responsibility to “others”. This leads to the famous “tragedy of the commons” where individual actions can run counter to the collective good. Sometimes, we need a higher power to force non optimal individual actions upon us. In our current context, individuals are paying a small price (staying home) to save as many lives as we can. One can read the great article of Nassim Taleb here.


Last week, the European Commission staged a live Q&A event. The speaker was extremely clear: the immediate challenge is to save jobs and they will do “whatever it takes” to do so. Taps are open. But the economy will nonetheless need help in order to restart. And that help will be compatible with the Green Deal and the EU Taxonomy. And it will be proportional with the needs: it will be huge!


I have mainly focused on Europe, but leaders all over the world are coming to similar conclusions and are following similar paths. Yes, some leaders are sceptics and some are short-sighted by the current crisis. Some geographies are sending mixed messages. It is unfortunate. But sustainability is also big business and I hope that once the COVID dust settles, most countries will follow.


When we add the near-zero interest rates, today is the best time to invest in our future!

We are not ready for a 2° global warming. And reaching that “goal” requires historical reductions in CO2 emissions year after year after year, starting now. I am not minimising the challenge. But this challenge is also a historical opportunity to reinvent our world and make it a better place!


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