Sustainable finance
Chapter 2 - Society
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Welcome to the Sustainable finance page
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Core ideas
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Current situation
Climate Governance Initiative reported (2024):
We interviewed 17 board directors from across the world to find out their motivations for taking action in their boardrooms on climate.
In the wake of our research that only a third of board directors globally see climate as a high priority in their boardrooms, why should boards care about climate and sustainability?
The board directors we spoke to pointed to a variety of reasons, like:
- lowering a company’s cost of capital
- providing certainty to investors and employees
- extending their competitive advantage over other businesses
- mitigating physical climate risks that impact the business’ supply chain
- leaving a liveable planet for their relatives and the next generation.
What motivates you to take action in your boardroom on the climate crisis?
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Deep dive
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Neo-classical view on money
Fiat money
A government decree or fiat makes fiat money legal tender. The term is usually reserved for legal-tender paper money or coins that have face values far exceeding their commodity values and are not redeemable in gold or silver. Throughout history, paper money and banknotes have traditionally acted as promises to pay the bearer a specified amount of precious metal, typically silver or gold. By the late 20th century, it had become impossible for the United States to maintain gold at a fixed rate, and in August 1971, U.S. Pres. Richard M. Nixon said he would "suspend temporarily the dollar's convertibility into gold or other reserve assets." The move spelt the end of the Bretton Woods system and the last vestiges of the gold standard. Within two years, most major currencies "floated," rising and falling in value against one another based on market demand. According to the quantity theory of inflation, excessive issuance of fiat money can lead to its depreciation.
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Quantity theory
In the 19th century, quantity theory contributed to the ascendancy of free trade over protectionism. In the 19th and 20th centuries, it played a part in the analysis of business cycles and in the theory of foreign exchange rates.
In economic contexts, efficiency means that the monetary evaluation of the inputs used to produce some goal is minimal and that the costs associated with achieving that goal are minimal. If something is called inefficient, the goal could have been reached with less cost or could have been better achieved (in some monetarily measurable fashion) with the same expenses.
One implication of this theory is that the size of the money supply must be considered when shaping governmental policies to control prices and maintain full employment.
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Trust
Since fiat money doesn't have intrinsic value and isn't linked to physical commodities, its value derives from people's confidence and trust in the government that issues it. Financial authorities strictly regulate and oversee it to maintain and encourage a stable, reliable money system that protects consumers and businesses. The lack of tangible backing allows governments more flexibility in managing and regulating currency.
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Belgian situation (2024) by Pierre Wunsch (NBB)
The climate transition will cost us 3.5 per cent of the gross national product. That is the calculation of Pierre Wunsch, governor of the National Bank. ‘That cost is bearable.’
The climate transition is a subject close to the heart of the governor of the National Bank Pierre Wunsch. In recent years, he has studied it intensively in his spare time. In his case, this self-study did not result in an opinion piece but in a thorough calculation of what the greening of our society would cost Belgium. This is the first time that the calculation has been made.
Wunsch arrives at the cost of 3.5 per cent of the gross national product. "That is comparable to the price of an oil shock, spread over 25 years." Converted, this amounts to a reduction in the real growth of our economy of 0.1 percent per year.
The climate transition will therefore "not be a free lunch", Wunsch believes, "but the cost we have to pay for it is bearable. We have experienced that. And if the question is: ‘Do we want to save the Earth for the price of an oil shock?’, then I think the answer is: ‘Yes.’”
However it is important to acknowledge that the climate transition will cost money, says Wunsch. According to him, the message has been heard too often - for example from policymakers - that the climate transition would be an opportunity. “We would invest a lot of money, create jobs and it would not cost us anything. That is fake news. When people notice that, they will feel cheated.”
Energy price
Wunsch builds his argument on a study of the price of energy. Disregarding the fact that it varies greatly depending on the energy source (coal is the cheapest, electricity the most expensive), the expectation is that energy prices in Europe will never again approach those before the energy crisis of 2020. “However, the consensus is that the price of renewable energy will drop to around 50 euros per kilowatt hour by 2050,” says Wunsch. “That is starting to resemble energy prices as we knew them around 2010.”
Does that mean that the road to a climate-neutral society is paved? No. For various renewable energy sources and applications – think of electric driving or heating homes with a heat pump – we are already approaching that tipping point. For other, more complex processes in the chemical industry that require a lot of heat, for example, we are not (yet).
Wunsch also identifies a few stumbling blocks. In Europe, he sees three things in tension with each otherː
- First and foremost, the European Union is a single market.
- But secondly, one that imposes steep climate ambitions on itself, which are often higher than those of other countries.
- Finally, we strive for open trade with everyone.
“You can have two of the three things at a time, but not all three,” Wunsch says. “Take the low gas prices in the United States. Suppose you have production processes in industry that require high temperatures. These are things that often cannot rely on electricity, but fuels that are difficult to decarbonize. But they also cost five to ten times more than gas in the US. That creates the risk that some chemical plants here would close and move to the US.”
| Content source |
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| De Morgen |
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Do you want to know more?
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| IFRS |
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| The IFRS Foundation is a not-for-profit corporation founded on the principle that better information leads to better decisions. Investors need reliable, transparent and globally comparable information about companies to make better investment decisions. IFRS Standards meet this need by enabling companies worldwide to provide such information to their investors. |
| https://www.ifrs.org/ |
| International Accounting Standards Board (IASB). The IASB is an independent group of experts with an appropriate mix of recent practical experience in setting accounting standards, in preparing, auditing, or using financial reports, and in accounting education. |
| https://www.ifrs.org/groups/international-accounting-standards-board/ |
| International Sustainability Standards Board (ISSB). The Trustees of the IFRS Foundation announced the formation of the International Sustainability Standards Board (ISSB) on 3 November 2021 at COP26 in Glasgow, following strong market demand for its establishment. The ISSB is developing—in the public interest—standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. |
| https://www.ifrs.org/groups/international-sustainability-standards-board/ |
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| Finance & Justice |
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| The original 1992 United Nations Framework Convention on Climate Change set the stage for climate justice by embracing a landmark principle: common but differentiated responsibilities. It requires everyone to act on climate change. But justice demands that those who have contributed more to the problem assume a greater responsibility for solving it. |
| https://www.un.org/en/climatechange/raising-ambition/climate-finance |
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| Net-Zero Banking Alliance |
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| Bank-led and UN-convened, the Net Zero Banking Alliance is a group of leading global banks committed to aligning their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050. NZBA’s framework, guidance, and peer learning opportunities support members to design, set, and achieve credible science-based net zero targets for 2030 or sooner that deliver value for their investors, clients, and customers.Reducing greenhouse gas (GHG) emissions is a critical issue, which will require action across public and private sectors. Financial institutions have an important role to play, including in the measurement, disclosure and reduction of their Scope 3 emissions. |
| https://www.unepfi.org/net-zero-banking/ |
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| Platform on Sustainable Finance |
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| The Platform on Sustainable Finance plays a key role in enabling cooperation by bringing together the best expertise on sustainability from the corporate and public sector, from industry as well as academia, civil society and the financial industry. |
| https://finance.ec.europa.eu/sustainable-finance/overview-sustainable-finance/platform-sustainable-finance_en |
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| ESG Disclosure Guidance Database |
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| The SSE initiative is a UN Partnership Programme organised by UNCTAD, the UN Global Compact, UNEP FI and the PRI. The SSE’s mission is to provide a global platform for exploring how exchanges, in collaboration with investors, companies (issuers), regulators, policymakers and relevant international organizations, can enhance performance on ESG (environmental, social and corporate governance) issues and encourage sustainable investment, including the financing of the UN Sustainable Development Goals |
| https://sseinitiative.org/esg-guidance-database |
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| The Green Growth Knowledge Partnership |
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| The Green Growth Knowledge Partnership (GGKP) is a global community of policy, business, and finance professionals and organisations committed to collaboratively generating, managing, and sharing knowledge on the transition to an inclusive green economy. The GGKP's three knowledge platforms - the Green Policy Platform, Green Industry Platform, and Green Finance Platform – offer quick and easy access to the latest research, case studies, guidance, and tools to empower policy makers and advisors, small and medium-sized enterprises (SMEs), and banks, insurance, and investment firms to make evidence-based decisions about how to green their operations. |
| https://www.greenfinanceplatform.org/ |
| https://www.greenindustryplatform.org/ |
| https://www.greenpolicyplatform.org/ |
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