Sandra Villars, partner, financial services at management consultancy firm Oliver Wyman writes that financial services can no longer ignore the importance of sustainability practices.
Sustainability-led thinking in the financial services sector is evolving from a nice-to-have to an imperative during this decade. This is especially true for the African continent, which has immense potential for sustainable growth.
As an example of the intrinsic link between nature and the economy, a 2023 Emergency Event Database (EM-DAT) report revealed that droughts affected 88.9 million people across the continent in 2022, and floods in Nigeria cost $4.2 billion.
Given its emerging economy, development of the right technologies and business practices could springboard the continent to the forefront of a more sustainable future and potential global leadership in such sectors as solar energy, green hydrogen production, and tourism.
Africa has 60% of the world’s best solar energy resources. That’s without mentioning the immense scientific and tourism value found in Africa’s flora and fauna and many other areas of sustainability. If effectively harnessed, these resources could benefit communities and businesses alike and significantly grow the African economy.
To achieve this, sustainable technologies and business practices need to be expanded to commercial scale. Doing so reduces their price points and increases their chances of success, especially against deeply entrenched, unsustainable interests. Achieving this level of commercialisation requires significant involvement and commitment from the finance community.
The financial community should ideally be positioned to drive the commercialisation of sustainability. It can provide not only investment but also the necessary business guidance and mentorship.
However, the African financial services sector needs to evolve significantly to overcome the challenges currently faced in commercialising sustainability.
Many areas of financing and investment in sustainability are relatively new, making it difficult to forecast growth and development within it in the decade ahead. The availability of limited historical data makes it difficult to develop business cases and demonstrate the positive financial impact of sustainability investments.
This relative newness means that individuals within the financial community are still gaining the experience necessary to assess risk and return in the sustainability arena. Additionally, there are also complications on the product side. The products and services needed to commercialise sustainability are still in development. As a result, financial teams are still learning and understanding the business models and stakeholder value propositions behind them.
Reporting practices are also still evolving globally, making it unclear which performance metrics financial professionals should focus on. This uncertainty is evident in debates on how to assign economic value to natural capital assets.
Uncertainty and debate around whether there’s a premium from sustainability or a so-called “greenium” also inhibits the sector’s ability to grant access to capital and price products competitively. When financial risks are fully factored in, the potential benefits to be considered should not just be lowering the cost of capital but the ability to access capital in the first place.
Additionally, financial sector professionals typically find it more challenging to quantify and demonstrate the longer-term risk mitigation and valuation benefits versus direct and immediate revenue and cost impact. Both have a financial impact, but people understand the latter more easily and are more accustomed to well-known financial reporting metrics. Sustainability investments typically require us to understand and articulate both. Aligning the short-term decision-making of the organisation with longer-term outcomes is not a trivial problem, and requires real intention.
Having laid out where the financial community can improve when it comes to commercialising sustainability, there are several steps that can be taken to initiate progress, starting with engagement.
It’s important for the finance community to engage with businesses and other stakeholders at the frontline of sustainability and understand product economics, market potential, and risks. High levels of engagement will make it easier to develop pricing models with rigour. It will also be easier to ensure that the important factors affecting an institution’s financial performance are considered in decisions regarding sustainable financing.
It’s also important that individual companies understand how the wider finance community approaches sustainability. Look at what others are doing and reporting, as this is a fast-moving area. But also engage with associations that are setting or helping to achieve standards. The financial community can leverage its data experience in the sustainability arena.
The community must work intentionally to enrich the data environment for calculating the financial performance and outcomes of sustainability practices. However, it must also recognise that numbers can only take you so far. It’s critical to think creatively about how to tell the story and communicate the outcomes of any initiatives it helps to commercialise. Ultimately, the urgency for sustainable business practices has never been clearer and the finance community has a vital role to play in that.
