Plenitude: Sustainability | Responsible Investing | Wealth & Pensions | UK
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Green Finance Interview Series

Our Green Finance Interview Series brings you the leading voices of sustainability and responsible investment

Omar Shaikh - Chief Executive Officer - Ethical Finance Hub

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Tell us about yourself and the Global Ethical Finance Initiative

I have two decades of experience in Financial Services (FS), a Chartered Accountant by profession and, over the years have developed specialisms in assurance, ethical finance, private equity and government policy advisory. The majority of the first decade of my career was with EY in London and Bahrain. After gaining my CA qualification I became a Subject Matter Expert for Islamic finance, heading the service offering in London and assisting Her Majesty’s Government across various working groups. Having recognised the synergies between Islamic finance and ethical finance, I felt faith-based finance was a sub-set of the broader, fast growing, ethical finance universe and thus after leaving EY I got more involved as an advisor to governments and regulatory bodies across the globe, building policy and capacity. This involved considerable amounts of advocacy work to build ecosystems in ethical finance, to which I brought a strong FS practitioner’s perspective. Since 2010, my work has involved initiating and advising on an extensive array of innovative activities in the ethical finance arena. Some of the most enjoyable and fulfilling have included working in Africa in financial inclusion, establishing leading convening platforms for ethical finance in Edinburgh, initiating the world’s first joint venture between Islamic finance and the Church to create a shared values-based ethical finance solution open to all and working with the United Nations Development Programme (UNDP) to develop innovative financial instruments, to channel capital towards the Sustainable Development Goals (SDGs), et al.  

Last year, with the support of the Scottish Government, Baillie Gifford and RBS, we consolidated all of our work in ethical finance under the Global Ethical Finance Initiative (GEFI) brand. GEFI now oversees, organises and coordinates a series of programmes to promote finance for positive change. Along with delivering practical projects at GEFI, we host an annual Ethical Finance summit in Edinburgh which, has become the premier event in the country for ethical finance.

 

Many, at large, are unaware of or underestimate the importance of the susbstantial green finance ecosystem in Edinburgh - much focus is on London.  With the annual Ethical Finance summit also upcoming, what makes Edinburgh the sustainable/ethical/green finance centre that it is?  

From Adam Smith, renowned as the father of modern economics, to the Reverend Henry Duncan, founder of the world’s first commercial savings bank, Scotland has been a pioneer in financial innovation and the development of professional standards. Today we are emerging as a leader of a new financial paradigm that looks beyond profit and shareholder value to deliver social, economic or environmental impact.

With a distinguished history in financial services which dates back over 300 years, today Scotland is one of Europe’s leading financial centres accounting for 161,000 jobs across: banking, insurance / long-term savings, asset management, asset servicing and professional services. The strong purpose-led roots underpinning the sector remain to this day and Scotland now has a growing reputation for research and development, financial technology and ethical finance.

The ethical finance agenda is being driven at the top in Scotland. It is one of only a handful of countries in the world to integrate the SDGs into its National Performance Framework. Hence we were happy to select Scotland as our GEFI European Host Partner during our discussions with the Scottish Government.

The Scottish Government is focused on creating a more successful country, with opportunities for all of Scotland to flourish, through increased well-being and sustainable and inclusive economic growth. Recognising that the environment and economy are intrinsically linked, Scotland is currently transitioning to a low carbon economy and having declared a ‘climate emergency’, the Scottish Government has committed to setting a world leading 2045 target for net zero emissions.

The Scottish Government’s activities in relation to ethical finance include:

•  Launching the £2 billion Scottish National Investment Bank – a public body with an SDG-aligned, mission-based approach to investment

•   Co-funding GEFI and associated projects (as mentioned above)

•   Providing a Regional Selective Assistance grant to support the build-out of the first regulated investment exchange to be focused on businesses that are making measurable positive social and environmental impact

•   Publishing new guidance on Human Rights Due Diligence for investments

•   Creating a new unitary fund to invest in rural, marine and coastal enterprise

•   Commissioning the Ethical Finance Hub and The Good Economy to conduct a study on business-led inclusive growth.

In order to deliver sustainable economic growth at the same time as creating a greener, fairer and healthier Scotland by 2032, the Scottish Government is anticipated to have a substantial requirement for private infrastructure, project and real-estate finance. Scotland is open to do business with partners committed to maximising positive impacts on the environment, community, society and  the economy, in short, meeting the triple bottom line.

The world needs a better system of financial management that delivers more than financial profit exclusively. Given its proud heritage, strong financial services ecosystem, commitment to addressing climate change and desire to be a good global citizen, Scotland is well placed to convene the global narrative and become the ‘Davos’ of ethical finance.  

That is exactly why we are convening the world’s foremost business, political, civic and social leaders of society at Ethical Finance 2019 in Edinburgh (8/9 October 2019) to network, share, co-develop and shape a fairer, more sustainable financial system.

 

How do you see the sustainable finance sector has changed since you started and how do you see it developing?

Ethical finance is certainly not a modern idea. But in the post-recession world, it is an idea that has never been more popular or needed. The failure of trickle-down economics to fairly distribute wealth and encourage inclusive growth, the damaging impact on the planet of the unchecked pursuit of profit, and the banking scandals of mis-selling and rate-fixing of the past decade have provided the context for the emergence of a new narrative. 

I recollect in the late 90’s and early 2000’s raising questions around ethical investing which, was largely understood to be a marginal play and I would hear comments from colleagues in the City such as this is for “tree-huggers”, “haircut” on performance, “hidden marketing plays”, “that’s CSR not business”, “green-washing”.  Indeed as a young auditor, following the Parmalat, Enron, Andersen collapses I was even more intrigued by the systemic nature of our financial systems, but found most of my questions were largely dismissed. Along came the crash! And I changed my questions, from being driven from intellectually curious, to asking “so you said the system was perfect – what went wrong then?”.

When we started our ethical finance journey in 2010 which, on reflection, we found we were ahead of the curve, we had a lot of encouragement and support but struggled to make much traction. Ethical finance was considered niche rather than the norm and businesses were not sure what they had to do to engage in the sector as there was a proliferation of terms. My 6 years of experience in Islamic finance prior to that was a huge bonus as it provided a direct experience of taking a sector from niche to mainstream at a global level. Today, with global sustainable investing assets estimated at around $30.7 trillion (Global Sustainable Investment Alliance), ethical finance is more mainstream and interest in our work and demand on our time has never been greater.

The growth is the result of convergence between grassroots movements and regulatory pressures.

Across the globe, individuals, organisations and Governments are starting to move from talk to collective action as we strive to achieve inclusive economic growth without depleting natural resources or leaving anyone behind.

Society is now increasingly desiring a more conscious form of consumerism and it is now widely recognised that the financial services sector has a fundamental role to play in delivering universally supported targets such as the Paris Agreement and the UN’s Sustainable Development Goals. However, despite its potential, the current financial system can be a cause of, rather than a solution, to some of the pressing challenges our planet and its people currently face. 

We are entering a new world, where innovation and alternative thinking (for e.g. GDP as a measure of capturing well-being?) will have significant relevance in informing a new economic paradigm where finance is used for positive change serving an economy that works for all people and the planet. Whilst the contemporary circumstances are different, this challenge is not new as Smith referred to such facets in his earlier work, The Theory Of Moral Sentiments. The debate between leading Scottish thinkers over two centuries ago is resurfacing – the balance of self interest (profit maximisation!) vs acting for the inherent good (social impact!).

To foster this creativity, there is a critical need to encourage a broader narrative. And therein lies a unique opportunity to make Scotland, with its proud heritage, convene this pressing global narrative as the headquarters of ethical finance.

 

Last month you – the Ethical Finance Hub - launched a report, commissioned by the Scottish Government about the economy of the south of Scotland. Can you tell us more about this, the South of Scotland Enterprise bill passed in October 2018 and how they aim to promote inclusive finance? 

The independent report, commissioned by the Scottish Government and delivered in partnership with The Good Economy, outlines the role the South of Scotland’s new enterprise agency can play in driving business-led ‘inclusive growth’ and good job creation throughout the region. 

With the Scottish Government keen to work closely with businesses to promote inclusive growth and good job creation, a core objective of the project was to ensure that its inclusive growth policies meet the needs and aspirations of businesses. As such, we interviewed a cross-section of approximately 70 businesses from different sectors and of different sizes located in the South of Scotland. We also spoke with local experts and Scottish financial providers. 

There was a feeling that the south of Scotland has entered a ‘watershed’ in its economic development, a crucial turning point and an opportunity for change which it must grasp if the region is to make the transition to sustainable and inclusive growth. 

We made a series of key recommendations including: enhancing transport links such as extending the Borders Railway; developing a strategy to attract young workers and families to the area; improving tourism promotion; and overhauling town centres.  

From a finance perspective we felt that in the south of Scotland there is a need to better link existing demand for finance with supply, as well as develop financing products that better meet the needs of smaller businesses. 

We recommended establishing a Regional Investment Advisory Board bringing together public, private and philanthropic funders with a mandate to drive increased investment into the region in support of business-led inclusive growth and good job creation.

 

How does the BoE’s PRA/FCA/FRC/Pensions Regulator joint statement on climate change and the formation of the Green Finance Institute, change the future for sustainable finance?  

The joint statement by the head of the UK’s regulation authorities makes it abundantly clear that climate change is a pressing risk to business. 

This is particularly important in the world of finance because of ‘fiduciary duty’, the responsibility to manage others’ money properly. Historically, this has simply meant making investments as profitable as possible without excessive risk. For this reason, many investors have been reluctant to take proactive steps on climate change, as their legal duty is to maximise profit. 

By establishing that they view climate change as a serious risk to profit, regulators are able to indicate that financial practitioners who choose to take action on climate change will not be in contravention of their fiduciary duties. 

The issuing of guidelines like this by regulators, is often a very important first step in establishing more concrete policy. Once it is established that financial practitioners have the freedom to act responsibly towards the environment, then it will be easier to regulate to give them a duty to act responsibly, as well as setting standards in the world of green finance which, benefit consumers by reducing the risks of mis-selling.

Initiatives like the Green Finance Institute only add to this, establishing that green finance has the backing of the government, while leading change from within by building coalitions of practitioners. This allows the barriers to change to be more effectively identified. 

This proactive step from the regulators is welcome because we simply do not have time to allow markets to adjust on their own. There is, as Mark Carney put it, a “tragedy of the horizon”: once we realise there’s a serious problem, it’s too late to solve it. By establishing smart regulations that allow finance to contribute as part of the solution, we get ahead of the game.

 

Regulation vs innovation: which is more important right now?   

It goes without saying that both regulation and innovation are important, and vital to addressing problems like climate change. With that being said, I would broadly place the onus on innovation, because it generally plays the ‘creative’ role, unlocking new approaches to problems, while regulation plays the ‘destructive’ role of ensuring that harmful behaviours are not engaged in. 

Innovation can provide us with new financial products, product structures and marketing strategies to allow the financial sector to do better. Of course, both innovation and regulation feed off each other; it is no good devising an innovative financial product if nobody trusts you, and knowing that there is effective regulation gives consumers confidence in financial innovation. 

One important example of financial innovation is auto-enrolment in pensions. When first introduced, this innovation made it far easier to start a pension, but the long-term effect has been to cluster the vast majority of people on a few “default” plans. The question then is how can we ensure that consumers have real choice in the market.

 

What are the aspects of green finance that you’re most passionate about?

Green bonds have been around for some time, and global emissions have been increasing for all of that time. It is only recently that green finance has gone truly mainstream. The SDGs have been a big part of this, broadening the conversation and really emphasising the intimate link between sustainability and the economy. This is exciting as it raises the possibility of finance leading on, and delivering, systemic changes. 

In general we need a more holistic, joined-up approach. Above all else, the transition to a low-carbon economy will involve reducing or re-using waste in all its forms. We need to be asking what’s happening to the heat from the back of the fridge, the off-cuts from a factory, and how can finance support entrepreneurs. 

Another area that I think can be overlooked is agriculture which, contributes far more to climate change than most people realise. Finance and agriculture have such a long history together; many of the world’s oldest financial institutions were originally farmers’ banks which, could help with buying seed, or dealing with a bad harvest. Now though, a lot of the focus of green finance is on green energy. Of course this is important, but we must be alert to opportunities to deliver positive change in other sectors too.

Geilan Malet-Bates