26 May 2020
In the first of this two-part series, Hervé Duteil drew on three sustainability foresights offered by the Covid-19 pandemic crisis: the future we want, the future we fear, and the future we create.1 In this second part, he now explores three enabling mindsets that we must adopt to create the future we want, and where Sustainable Finance has an important role to play
Read the first part of this two-part series of features here.
First enabling mindset: expect the unexpected
To create the future we want, we must break away from business as usual scenarios once and for all. This mindset starts with no longer assuming that fossil fuel demand can, or even will, continue to rise for decades on end. This realisation does not mean an end of oil and gas companies, but an end of oil and gas companies as we know them.
In recent months, some of them have already further committed towards net-zero emissions on a scope 3 basis.2 Let us not pretend any differently: these leaders have embarked on a journey to transform from being fossil fuel-based companies to becoming energy companies. And, for one thing, the Covid-19 pandemic crisis has brought a powerful warning to the fossil fuel industry of what is to come.
Transformation is not limited to the oil and gas sector. Coronavirus has given us a taste of what an end to unfettered growth3 might look like.
It has invited us to stretch the notion of "stranded assets" 4 beyond the oil and gas sector, from grounded airplanes to moored cruise liners, empty airports, hotels, restaurants, malls or music hall theatres.
In all cases, keeping such infrastructure running exercises a strain on planetary limits that must be respected for a healthy life on Earth – be they safe carbon emission limits or intensive care hospital bed maximum usage.
From all standpoints, the Covid-19 crisis reminded us that we are living in a finite world that cannot accommodate unrestrained growth – or we must expect the unexpected.
Second enabling mindset: think the unthinkable
For one thing, the Covid-19 pandemic has also brought us rays of hope. In its response to the crisis, our global village has demonstrated what the human race is capable of when facing an existential emergency, as it almost instantly shut down growth to preserve our most precious assets to those that needed them the most. Beyond generosity and solidarity, these measures illustrate what drastic action can achieve in a short amount of time.
"In its response to the crisis, our global village has demonstrated what the human race is capable of when facing an existential emergency, as it almost instantly shut down growth to preserve our most precious assets to those that needed them the most"
Whilst the developed world thought it could not reduce energy consumption through a decline of its own demand (but only through efficiency improvement), the International Energy Agency (IEA) recently forecast that carbon dioxide emissions could fall by 8% this year on a global basis.5
Large-scale solutions, especially those involving radical changes in mindsets and behavioural shifts in consuming patterns in the developed world, all of a sudden appear possible. While not saying that staying home is the optimal operating model, the impossible is possible – and we must think the unthinkable.
Third enabling mindset: shift from traditional Finance to Sustainable Finance
As we know, there is no "invisible hand"6 to solve the "tragedy of the commons"7 when negative externalities are not priced in. To that end, public policy along with private sector action can step into the void left by our irrational exuberance.
The public sector, in particular through central bank reflationary stimulus packages, has an opportunity to embark on a green new deal, where green infrastructure spending could achieve the dual outcome of economic recovery as well as climate change mitigation and adaptation through orderly planned decarbonisation.
The private sector, for its part, has an opportunity – or rather the need and the responsibility – to transition towards more sustainable operating models; and Sustainable Finance can and will play an important role in accelerating this transformation.
However, let us be clear: Sustainable Finance does not finance anything that traditional finance could not finance.8 Its genius resides elsewhere: in the 'race to the top' which it has created.
As Sustainable Finance labels bonds according to their use of proceeds, or links cost of capital to sustainability performance, it creates a divide among borrowers, as well as capital providers. All of a sudden, a measure has been created to distinguish between 'green', 'transition', and 'brown'; 'dark green' and 'light green'; 'green' and 'greener'; 'greener' and 'greenest'.
Then, it will not take long for human greed to compete for green, ash Sustainable Finance restores an "invisible hand" to channel our irrational exuberance into a virtuous global race that will shape the future we want.
Here is the good news: Tomorrow's finance is already here; it's Sustainable Finance!
Epilogue for financiers and investors: embrace three mindsets to create the future we want
Expect the unexpected,
but anticipate Sustainable Finance to gradually replace traditional Finance.
Think the unthinkable,
and believe that all traditional Finance will become Sustainable Finance.9
Shift from traditional Finance to Sustainable Finance,
and accelerate the advent of the future we want.
Hervé Duteil is Chief Sustainability Officer for BNP Paribas in the Americas. In that role, he leads the bank's regional strategy for sustainable finance, corporate social responsibility, and company engagement. He serves as a member on Commodity Futures Trading Commission's Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee, Canada Standards Association's Technical Committee for the Development of a National Standard for "Transition & Sustainable Finance", and the Yale Initiative on Sustainable Finance Advisory Board.
1 To recall, as our current system has failed to deliver wellbeing and prosperity for all, forcing four billion of us into confinement and lockdown, we have acknowledged through global solidarity that we are one, facing a common long-term goal: the desire to live a happy future.
In doing so, civil society and world leaders have learned to further listen to science, especially as it tells us that our way of life has become increasingly vulnerable to shocks from the natural world. However, we have also faced science's shortcomings that it is rarely perfect truth, but a path to access it. In spite of this, government leaders still need to take responsibility for bold decision making when we cannot wait for a perfectly predictable future.
Lastly, this crisis has shown us that disorderly de-carbonisation pathways are possible. It has also brought to the fore the announced decline of a fossil fuel based economy, while the global shutdown may have very well accelerated the demand trajectory for peak oil. Already under long-term structural pressure, the oil and gas sector may see further permanent demand destruction due to a retreat from globalisation and the persistence of some behavioural responses to the crisis.
While these exceptional times have shown us a path for an economically and orderly transition into a better future they have also exposed a deficit in global cooperation that is essential to collectively chart the course towards taking emissions down to net zero and achieving the Paris goals.
2 A per Greenhouse Gas Protocol, "the GHG Protocol Corporate Standard classifies a company's GHG emissions into three scopes. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions."
3 Economists call "degrowth" the need to reduce global consumption and production for a socially just and ecologically sustainable society, with well-being as indicator of prosperity instead of GDP. It proceeds from the view that climate change and biodiversity erosion cannot be halted through improved efficiency or new technology alone. (Source: Wikipedia)
4 As per Carbon Tracker, "stranded assets are now generally accepted to be those assets that at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company's internal rate of return), as a result of changes associated with the transition to a low-carbon economy (lower than anticipated demand or prices); or, in simple terms, assets that turn out to be worth less than expected as a result of changes associated with the energy transition."
5 For reference, as per the IEA, global emissions would need to need to fall by some 7.6% every year this decade in order to limit warming to less than 1.5°C above pre-industrial temperatures. Of note, China emissions were temporarily down 25% at one point during the crisis.
6 "The invisible hand describes the unintended social benefits of an individual's self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution." (Source: Wikipedia)
7 "The tragedy of the commons is a situation in a shared-resource system where individual users, acting independently according to their own self-interest, behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action. The theory originated in an essay written in 1833 by the British economist William Forster Lloyd, who used a hypothetical example of the effects of unregulated grazing on common land (also known as a "common") in Great Britain and Ireland." (Source: Wikipedia)