As one of the world’s largest and most influential industries—six of Forbes’ global top 10 companies are financial institutions—it's no surprise that the financial sector is going to great lengths to adopt more sustainable practices.
Green finance and ESG (environmental, social, governance) investment have rapidly risen from the periphery of finance to now shape the future of the entire industry. Here are some of the key ways that sustainability is changing the future of finance.
1. Sustainable investment strategies are attractive
Historically, companies were valued according to their revenue or earnings if they were publicly traded. But increasingly investors are valuing today’s companies by their impact, as well as their profits.
In 2021, the amount of money invested in ESG-focused sustainable funds rose by 53%. The rise of a more ethically conscious investor means that companies must pay close attention to their environmental and social impact.
“Today most asset managers are pressed by their clients to integrate sustainability issues in their investment processes,” says Olivier David Zerbib, associate professor of finance at EDHEC Business School and a specialist in sustainable finance.
“That’s not only to mitigate ESG-related financial risks, but also to contribute to supporting the transition toward a more social and greener economy.”
2. Sustainable finance jobs are growing
As priorities throughout the sector shift to become more ethically-conscious, sustainable finance jobs are becoming increasingly common. Established roles are also changing to incorporate sustainable objectives.
Today, analysts need to be able to assess a company’s ESG performance, alongside its financials. Likewise, risk advisors must be able to assess any sustainability issues a company is at risk of encountering. Even in the cutthroat world of trading, dealmakers have had to adapt to accommodate investors’ new appetite for sustainable investments.
“This change in investing principles has led to an evolution of practices for many investment professions. Today, asset managers must understand and often implement sustainable investment strategies,” David explains.
There’s also a growing number of roles emerging that are entirely dedicated to sustainable finance. The likes of Goldman Sachs and JP Morgan are hiring associates, executives, and directors across sustainable finance and ESG departments.
Today, you could land a role as a sustainability reporting project manager, an ESG quantitative analyst, or vice president of a sustainable finance group.
“Yet, even if we observe a wide diffusion of sustainable finance practices, we are still at the beginning of the road ahead because the real impact of sustainable finance on the environment and society is still extremely marginal,” David points out.
3. Shareholder activism is changing company practices
Investment in sustainable funds and green companies is now an established strategy for investors aiming to help bring about a transition to a more sustainable economy. But it’s not the only way to enact change.
In 2021, impact-focused hedge fund Engine No.1 took on ExxonMobil—one of the world’s largest publicly traded energy companies—installing three directors on the company’s board with the help of institutional investors like Blackrock and Vanguard.
Through shareholder activism, Engine No.1 aims to use its position to pressure Exxon to reduce its climate impact.
"The recent academic literature suggests that investing only in ‘green’ companies is not necessarily the best way to support the ecological transition,” David says.
“A more active approach, such as shareholder engagement by purchasing the shares of ‘brown’ companies and pressuring their management teams, may be more effective.”
4. Business schools are teaching students sustainable finance
Where will the next generation of sustainable finance leaders come from? Top banks and financial institutions including the likes of Morgan Stanley, Blackrock, and HSBC have long hired from business school talent pools.
Today’s finance students are now being prepared to lead the green transition, with the finance curriculum changing to incorporate a greater focus on sustainable topics.
David is the academic director of the MSc in Climate Change and Sustainable Finance at EDHEC. The double degree program sees students receive a dual education in sustainable finance with EDHEC, and in environmental engineering with top engineering school Mines Paris.
The program’s curriculum focuses on areas such as climate change economics, low-carbon transitions, and sustainable investing, along with more traditional areas like corporate finance, asset pricing, and project finance.
“We make sure that we teach from a scientific standpoint, with the latest research available,” David explains.
“I personally believe that understanding the science underpins the practice. It’s very important because it gives you the ability to challenge how sustainable finance is implemented today."
Through programs like the MSc in Climate Change and Sustainable Finance, business school grads can build on the changes already occurring throughout the finance industry, ensuring that climate science remains a key focus for the sector’s future.
“My wish is that these students, the managers of tomorrow, will be proficient on sustainable issues and will be able to structurally change the business models of the companies for which they work,” David says.
“Their role is not only to implement these changes but also spur and accompany them.”
