The Rocky Mountain Institute (RMI) is banking on banks to get us over the carbon-neutral finish line by 2050. 

The nonprofit announced Wednesday that it’s partnering with four of the world’s largest financial institutions — Wells Fargo, Goldman Sachs, JPMorgan Chase and Bank of America — to launch the Center for Climate-Aligned Finance. The center will serve as a hub for cross-sector collaboration, bringing traditional financial instruments to innovative ideas to decarbonize the planet. 

“It’s not the responsibility of any single country or single sector,” said Paul Bodnar, managing director for climate finance at RMI. “But one sector provides the lifeblood that powers all the others and that’s finance.” 

A new buzzword, climate-aligned finance, is RMI’s answer to the uneven responsibility put on the financial sector. Its goal is to integrate the financial sector’s attempts at going green, including green business investments, exclusionary policies for certain fossil fuels and the industry’s ESG policies, into one complete strategy. 

The Center for Climate-Aligned Finance will focus on four areas using RMI’s knowledge of sustainability in a variety of sectors and its deep understanding of the financial world. First, it will create specific, personalized initiatives for high-emitting sectors such as steel and cement production, utilities and the energy supply. Secondly, it will generate global frameworks on climate-aligned finance to guide other financial institutions around the world. 

It’s important that the tools we develop be as practical and commercial as possible.

“We really need tools now to take us from theory to practice,” said Marisa Buchanan, head of sustainability at JPMorgan Chase. “It’s important that the tools we develop be as practical and commercial as possible.” 

The center also will support individual institutions and shape public discourse in the financial sector as the two other main areas of focus. 

According to Bodnar, while the strategy starts with advocating a vision of carbon neutrality for the highest energy-using corporations, it will need to be stewarded by the loans, grants and investments doled out by these large financial partners.

Wells Fargo has pledged to lend or invest $200 billion to sustainable businesses and projects by 2030. Goldman Sachs plans to help its clients transition into a climate-resilient model with $750 billion by 2030, and Bank of America is directing $300 billion towards these efforts as well. And in February, JPMorgan announced a goal to facilitate $200 billion in financing in 2020 for transactions related to climate action and the United Nations Sustainable Development Goals.

“To serve our clients requires really analytical tools,” said John Goldstein, head of the sustainable Finance Group at Goldman Sachs. “Real technical chops required to do this work thoughtfully for analyzing, advising, financing and navigating.”

While the banking industry has invested a lot into a green future where it sees an opportunity for job creation, profitable returns on innovative new companies and risk mitigation, it hasn’t seemed ready to walk away from the fossil fuels that built the sector’s wealth. 

But pressure is mounting for the banks to overhaul their lending practices holistically. This includes a focus on solutions that will benefit vulnerable communities on the front lines of climate change that often have been overlooked by the environmental movement. 

“The communities that are disproportionately affected by pollution from heavy industry, it is pretty well documented that communities of color and low-income communities tend to suffer the most,” Bodnar said. “That is an urgent call for us to accelerate the transition out of the assets that are generating the most pollution.”  

As a Brit based in Santa Monica, California, Daniel E. Ingram is the chair of investment advisory company Wilshire’s ESG and Diversity Committee. Wilshire, which has more than $8.6 billion in assets under management and $168 billion in assets under advisement, recruited Ingram in 2017 as part of an effort to expand its ESG and socially responsible investing capabilities. Previously, Ingram was head of responsible investing for BT Pension Scheme, the United Kingdom’s largest corporate retirement plan.

Ingram is also a member of the CFA Institute’s ESG working group responsible for defining an industry standard, along with representatives from the International Monetary Fund, BlackRock, the Principles for Responsible Investment and other prominent players in the responsible investment arena. 

Ingram helps advise institutional asset owners on how to protect and grow long-term capital by integrating ESG risks and opportunities into investment decisions. We recently spoke about the expansion of ESG analysis in investment strategies, the end of shareholder primacy and why investors may be better off preparing for the next potential crisis sooner than later.

Shannon Houde: Tell me about your role in ESG and how you ended up in this space.

Daniel E. Ingram: My role mainly involves delivering educational workshops to trustees and investment staff from public and private retirement plans, foundations and endowments on the investment case for ESG. As discussions move from why ESG to how, I help to design ESG policies, source high-performing investment products and conduct impact analysis on investment portfolios. 

I’ve been working in the ESG space since before the term was coined. My interest in issues like climate change stems from my early career in public service on the graduate program at Her Majesty’s Treasury. I worked as chief of staff for — now Lord, then Sir — Nick Stern on his landmark review on the economics of climate change. Even though it was published 14 years ago, much of the findings of that seminal report are relevant today, namely that the benefits of addressing climate change, sooner than later, far outweighs the costs.

Houde: What’s the investor outlook for ESG?

Ingram: Investor interest in ESG issues continues to grow, and it’s becoming increasingly self-evident that the management of ESG risks and opportunities, such as resource efficiency and board skills/independence, can have a material impact on asset values. As a result, there’s been a show of confidence in ESG strategies, with Q1 2020 seeing inflows to some ESG funds. 

In terms of performance, some ESG funds have posted relatively positive returns due to lower exposure to conventional energy and balance sheet leverage, and higher exposure to quality growth factors and technology.

Governance is king. It tends to lead to better environmental and social performance.

Houde: What’s the role of corporate governance and investor stewardship in crisis?

Ingram: Governance is king, and it tends to lead to better environmental and social performance. In times of crisis, like the 2009 financial crisis or COVID-19, investors are compelled to take a closer look at corporate governance practices like disaster contingency plans, cybersecurity risk management and decisions about capital structure — [such as] share buybacks & M&A activity. 

Investors may also be compelled to become better stewards of financial capital by holding companies to account for their leadership actions, incentive structures and strategic decisions.

For example, the San Francisco Employee Retirement System issued a statement calling for corporations to find innovative ways to reorganize their manufacturing, distribution, resources and service capabilities to address COVID-19.

Houde: Is this a moment of reckoning for the S in ESG?

Ingram: Yes, I believe so. The S — for social — relates to issues around human capital management such as labor practices, employee health and safety, and employee engagement, diversity and inclusion. These issues are becoming increasingly financially material, particularly for the extractives and services sectors. 

In recognition of this fundamental shift, the U.S. Business Roundtable issued a new statement in 2019 that redefined the purpose of a corporation away from its previously held position that corporations exist principally to serve shareholders to its new position that corporations should serve for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders. 

The S — for social — relates to issues around human capital management such as labor practices, employee health and safety, and employee engagement, diversity and inclusion.

Houde: What’s next for how investors approach ESG?

Ingram: In the same way epidemiologists have been warning of a deadly coronavirus outbreak for years, climate scientists have been warning us for decades about the social and economic risks from rising sea levels, droughts, wildfires and air pollution. While there’s no way we could have predicted the devastating scale or exact timing from the coronavirus pandemic, many of us would readily admit we could have been much better prepared and responded more rapidly. 

Investors require high-quality advice to help them prepare and position their investment portfolios for climate change and potential future lower-carbon investment opportunities. These preparations may include: measuring portfolio exposure to different transition and physical risks; developing an ESG policy; evaluating how active investment managers take climate risks into account in valuations; or investing in a lower-carbon passive index fund.

Houde: What advice do you have for someone wanting to work in ESG?

Ingram: There are so many great ESG opportunities right now — if you’re not working in the space and want to get in, maybe find yourself a coach to help present yourself in the best possible light. The ESG community tends to be relatively close-knit and highly approachable. 

If you can participate in an ESG conference or reach out to ESG professionals via LinkedIn, most of us will gladly offer our 10 cents of advice and tell you how incredibly rewarding it can be to work in this increasingly important and fast-growing industry.