In his third insight on sustainable finance, Prof. Hugues Bouthinon-Dumas, ESSEC Business School, explores the reasons why finance has changed towards the sustainable.   

What triggered the change in attitude among those in the financial field?

Without doubt, there are two, combined phenomena:

• A very general tendency in society of awareness of the stakes – and even of the emergency of – the climate issue. Players in the financial field do not live on another planet, even if in the past financial rationality did not generally include concerns of this nature.
• Pressure exerted via various actors leading companies in the financial sector to take into consideration the stakes much more seriously than they did before.

Some of these actors were in advance of the times, such as SRI funds, extra-financial rating agencies or financial institutions working in the development aid sector such as the AFD (French Development Agency) – though these forerunners occupied a relatively small space on the wider stage of things.

However, what has radically changed the standpoint of traditional financial players on social and environmental stakes has without doubt been risk assessment even more than the potential of commercial developments in this new niche.

It takes a disaster to make a change

The consequences of climate change and social troubles associated with it generally have a negative impact on the assets of financial institutions because a large number of their investments will lose value – for example, energy infrastructures which pollute, or ski resorts located in areas where in future years it will no longer snow. In the case of insurance companies, the negative effect is doubled because they may have to dole out compensation for the victims of catastrophes that we can anticipate will occur through climate change. As such, not only their assets but also their liabilities will be affected.

One of the mechanisms which in retrospect seems to have played a major role in this awareness is in France with the “Loi sur le devoir de vigilance” (duty of care) and, more generally, the mechanisms for extending the legal responsibility of companies which now oblige them to take care of negligence and risks regarding their subsidiaries as well as their supply chain. In other words, it is no longer possible today to outsource social and environmental risks and even more so to base one’s business model on forms of unethical exploitation or policy that does major harm to the environment. From this moment on, these risks will have to be taken into account as seriously as possible: identify them, measure them and take action to minimise them.

Hugues Bouthinon-Dumas

Useful links:

• Read Hugues’ insights 1 and 2 on sustainable finance, the law and sustainable development.
• Follow Prof. Hugues Bouthinon-Dumas on Twitter @BouthinonH
• Study at ESSEC Business School, France, Singapore, Morocco
• Download the CoBS Publishing book on the subject.

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