Welcome to ‘In the Hot Seat’, a fortnightly series where we tackle some of the biggest questions facing sustainability professionals across a range of industries. We’ll also explore what sustainability means and how it is interpreted across different sectors and geographies.
This week, Zara de Belder, Head of Maitland/AMO Sustain catches up with Amundi’s Frédéric Samama, co-author, Green Swan: Central Banking and Financial Stability in the Age of Climate Change, to discuss materiality and the role of central banks in tackling climate change.
1. Questions are being asked about why the investment community didn’t recognise the material risks of a health pandemic. Do you think COVID-19 has placed more emphasis on materiality and due diligence within ESG analysis?
I think we can look at this question in two ways. Firstly, whether companies are ready to face unexpected external shocks. ESG forms part of the assessment as it may determine those companies that are already fragile. We must assess if corporates pay attention to their supply chain, to their employees, if they are in favour of diversity, etc. It delivers some clues on the preparedness and resilience of corporates.
Secondly, we can look at how companies are responding to the issue of biodiversity and their role in mare damaging the planet through the excessive use of natural resources. We should pay close attention to factors such as water management and whether businesses have practices in place to protect and rebuild their local biodiversity.
2. You recently co-authored a book looking at how climate change will impact the entire financial ecosystem, from regulators to central banks. What role can central banks play in helping us to achieve a low-carbon economy?
Central banks have a variety of different roles to play, but a key role is their ability to send signals. If an issue is important to them, it should be for all investors.
In January, I co-authored Green Swan: Central Banking and Financial Stability in the Age of Climate Change with BIS, Banque de France and Columbia University, which was inspired by Nassim Nicholas Taleb’s famous text, The Black Swan.
In the Green Swan, we describe a new “swan” that has three key features:
(i) a likely risk;
(ii) the forces behind the risk are non-linear and interact with each other and;
(iii) the risk is harmful to human lives.
Although we didn’t publish the book with COVID-19 in mind, the pandemic brings to life this framework. It’s clear that central banks have now put climate change on their agenda. More than 60 central banks and supervisors have joined the Network for Greening the Financial System. This surge in interest isn’t because central banks have changed their agenda, it’s because they recognise that climate change is threatening financial stability.The magnitude and complexity of the problem means there won’t be a silver bullet. It will require some cooperation between all the involved players.
3. In terms of thematic strategies, what are your hot topics for the remainder of the year?
We’ll be paying more attention to social issues because of the problem associated with the virus and climate change – heightened inequality.
We know that we have striking inequalities and that they are threatening how our societies function.
And now we have two new forces that are exacerbating this existing trend: COVID-19 and climate change. Look at which demographics have been the worst affected by coronavirus. Climate change will have the same effect. It will have severe consequences in developing countries and for the most vulnerable members of our society. We’re in a fragile environment as inequalities are already stark. The two crises of COVID-19 and climate change are exacerbating a challenging situation.
We’ve also found that the pandemic has helped us understand and assess how corporates are tackling Social factors. For example, there is a better sharing of the knowledge that some US companies don’t offer employees paid sick leave. We need to talk about the Social pillar in terms of protecting peoples’ lives.
4. If you have one piece of advice for someone considering a career in responsible investing, what would it be?
Try to innovate, try to push the boundaries. As Steve Jobs famously said in his Stanford University speech, “Stay foolish, Stay hungry.” We need people to develop innovative financial products.
I look at the sustainability agenda from three phases.
Phase 1. Getting people convinced about the importance of ESG.
This has been achieved.
Phase 2. Clarifying the debate.
This is still an issue and is being addressed.
Phase 3. Developing what financial products/instruments can help shift portfolios.
This phase needs further work. We need to look at how we can invest in the green financial system of tomorrow and this will need to be underpinned by innovative financial products.
5. Finally, what does sustainability mean to you?
For me it means that a corporate must live in harmony with its environment. Corporates can’t be a predator. They must cooperate with their environment. You can have your own focus (mainly to be profitable and grow), but it can’t be your sole focus.
Read the last edition of Maitland/AMO Sustain’s In the Hot Seat, where we caught up with Rebecca Perlman, corporate lawyer at international law firm Herbert Smith Freehills and Co-Chair of the firm’s global impact investment and social finance practice, HSF Impact, here.
About the Author
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