How smart thinking can make the world a better place
Combining an imaginative approach to finance and technology with a greater understanding of what motivates people will help to achieve sustainability.
When it comes to sustainability, it’s easy to feel overwhelmed. A glance at the news headlines reveals seemingly intractable problems. Global warming appears to be increasing the ferocity of storms and wildfires; sexual and racial prejudice remain rampant despite decades of anti-discrimination legislation; and there are still lessons to be learned by some companies about corporate governance.
Fortunately, despite these real – and in some cases escalating – challenges, there are grounds for optimism. The simple fact that there is so much prominence given to sustainability issues compared to a decade ago is a clear sign of progress. Countries, companies and communities are making significant advances in improving sustainability and thinking about economic, environmental, and social performance in an integrated way.
The world is constructing frameworks to help this process. Chief among these is the United Nation’s Sustainable Development Goals (SDGs), a collection of 17 objectives across a wide variety of areas, including poverty, gender equality, clean energy and climate change, which have a deadline of 2030. By crystallising the challenges facing countries – and putting pressure on governments to explain how they intend to meet their obligations – the SDGs have already proved valuable.
Achieving the SDGs – and sustainability more generally – will be difficult. But human ingenuity, which ironically created many of today’s challenges, is now being trained with laser-like precision on sustainability. Entrepreneurs and scientists are innovating solutions; the finance sector is hard at work honing structures to align the interests of capital and sustainability; and advances in behavioural economics are helping us all to act more sustainably.
Smart ideas and big business
The UN SDGs have prompted a flurry of activities designed to harness smart thinking to improve sustainability. A global innovation lab called Unleash brings together 1,000 talented people every year to collaborate on solutions to meet the SDGs – so far labs have taken place in Denmark and Singapore. “This [is] about seeing how we can mobilize some really smart young people to down the road become a force of nature collectively,” explains Henrik Skovby, executive chairman of the Dalberg Group, who helped develop Unleash.
Other SDG problem-solving initiatives include YouthSpeak's Hackathon in Ukraine, a three-day hackathon in Nigeria, and Connect2Effect, a 48-hour hackathon that took place simultaneously in nine cities around the world (the winning ideas were then financed via a new crowdfunding site). “Initiatives like Connect2Effect ignite the creative spirit and foster collaboration, serving as the spark to convert ideas into actions,” explains Mitchell Toomey, director of the UN SDG Action campaign.
Many challenges facing the world are so weighty that people instinctively feel motivated to act – there’s a strong current of idealism at the hackathons described above. But altruism does not generally drive progress. Although people don’t care to admit it, our better natures are sometimes less important than a profit motive. Most of the advances in living standards over the past century have come about not through charity but commerce – sustainability is no different. A flurry of recent announcements by major companies indicates that sustainability is now big business.
In October, BMW formed a technology consortium with Northvolt and Umicore to develop a sustainable value chain for electric vehicle batteries in Europe. The objective is to make battery cells sustainable by establishing a closed life cycle loop, with a long period of primary use as a drive battery, possibly followed by another phase of secondary use as a stationary energy storage device. At the end of its life cycle, the cell is recycled and the raw materials reused, completing the loop. Although the companies don’t describe it as such, this is the circular economy in action.
Meanwhile, Lego is making the switch from oil-based to plant-based plastic sourced from sugarcane. Since March, Lego pieces such as leaves, bushes and trees have been made from bio-plastic – the goal is to use sustainable materials in core products and packaging by 2030. “We want to make a positive impact on the world around us,” says Tim Brooks, vice president environmental responsibility at Lego Group. “This is a great first step.”
While there’s plenty of attention focused on ‘big bang’ ideas to improve sustainability – such as technology that can extract CO2 from the atmosphere to produce biofuels– it may well be incremental improvements to existing technologies such as batteries or plastics that do much to transform the world’s sustainability prospects. Equally, small innovations that make us aware of sustainable opportunities, like Madaster’s digital inventory of built environment materials, could – in aggregate – have a major impact.
Fortunately, continually refining and improving existing technologies and processes is something that humanity is extremely good at, according to Paul Romer, who won this year’s Nobel prize for economics. His endogenous growth theory states that human ingenuity will allow us to extract ever greater value from resources over time. “We make progress because of things that people do,” he writes. “We should encourage people to do a lot more of whatever it is that they are doing to generate progress.”
How finance can make a difference
Also finance is becoming greener. The International Capital Market Association established the Green Bond Principles in 2013: 39 countries had issued bonds by 2017 while green bond issuance hit a record high of €149 billion for the year.
Recently, issuance focused on other SDGs, such as improving gender equality or reducing poverty, has flourished. “Bond issuers, whether they are governments or companies, have an essential part to play by aligning debt issuance to specifically support the SDGs,” explains Mike Amey, head of ESG Strategies at Pimco, which runs the world’s largest bond fund, Amey says that investors and issuers must work together to integrate sustainability analysis and improve assessment of risk and return.
There’s also plenty of innovation outside the strictures of the UN. ING has been at the forefront of efforts to encourage sustainability among its clients. The bank issued its first €1 billion sustainability improvement loan, with an interest rate coupled to the company’s sustainability performance and rating, to health tech company Philips in 2017 and has continued to develop the concept. A fresh tranche of deals this summer included the first with an interest rate linked directly to recycling company Renewi’s sustainability targets rather than an external sustainability rating. And a €1 billion revolving credit facility for nutrition company Royal DSM linked the interest rate to reductions in its greenhouse gas emissions.
“Banks have a responsibility to finance positive change and we are stepping up to that.”
In September, ING took another step forward for the finance sector when it became the first sizeable bank to announce that it will steer its loan portfolio of over €500 million towards meeting the Paris Agreement’s two-degree Celsius goal. ING is using an approach dubbed Terrato measure its portfolio, identify the technology needed by clients to achieve a sustainable future, and align lending with those requirements. “Banks have a responsibility to finance positive change and we are stepping up to that,” says Isabel Fernandez, head of ING Wholesale Banking.
Thinking outside the box
It’s all very well finding clever ways to finance sustainability and mobilising new technology to help overcome the world’s challenges. But a large part of any shift to a more sustainable future must come from changes in our behaviour.
Recognition of the importance of human psychology – understanding what motivates people – has grown in recent years. Work by Richard Thaler, author of the book Nudge: Improving Decisions About Health, Wealth, and Happiness and Nobel laureate, has been extremely influential and directly inspired government policy in several countries. One of the best known ’nudges’ is pension auto-enrolling, which can quadruple savings rates compared to systems where people have to opt-in. As people save more for their future, economic sustainability, which is threatened by an aging population, is improved.
Nudge theory and behavioural economics more generally can also inform how we address environmental challenges. Most people are reluctant to change their behaviour when the benefits take time to appear or require cooperation – both of which are the case with sustainability. New research by ING shows reluctance among home owners to invest in energy efficient appliances because of a long payback time, for example. But by taking advantage of what Thaler calls the ‘endowment effect’ – where people feel they have ownership – impressive results are possible.
In the Philippines, illegal fishing and overfishing has threatened fish stocks and the livelihoods of rural communities. “Rather than telling a fishing village how to manage its waters, we work with them to design their own solutions,” explains Brett Jenks, CEO of international conservation organisation Rare. “This sense of ownership inspires [fishermen] to not only abide by the management rules they set for themselves, but also become long-term stewards of the ocean ecosystem.”
Businesses also need to think afresh about how they can change ingrained behaviours. In recent decades, many companies have put pressure on their suppliers to lower costs. Sustainability requires corporates to work with their supply chain so that cost cutting doesn’t result in unsafe working conditions in suppliers’ factories or increased environmental pollution.
Creativity is not enough – coordination is decisive
Creativity – in finance, technology and behavioural economics – is essential if the world is to become more sustainable. The gap between current investment and what is required to achieve the SDGs in developing countries alone is estimated by the UN at around €2.2 trillion a year. It can only be bridged with financial ingenuity that leverages “the billions of dollars in official development assistance to trillions in investment of all kinds, whether public or private, national or global”, as World Bank group president Jim Yong Kim pointed out in 2015.
It is also clear that a technological transformation is necessary to advance sustainability. Indeed, the Paris Agreement explicitly makes assumptions about as-yet-unproven negative emissions technologies: we should not be complacent in thinking that such solutions will come easily. Similarly, the spotlight thrown on gender issues worldwide by movements such as #MeToo – while welcome – is a stark reminder of the mountain that needs to be climbed in terms of many people’s attitudes and behaviour.
To be effective, society will have to deploy all the tools at its disposal in a coherent and coordinated way.
Put simply, clever financing tools, new technology, or insights into human behaviour are unlikely to do enough to address sustainability on their own. To be effective, society will have to deploy all the tools at its disposal in a coherent and coordinated way.
If we accept that changing human behaviour is critical to the success of new financial or technological endeavours, then we must uncover catalysts to accelerate behavioural change. One might be the increasing use of artificial intelligence which – via our smartphones – could constantly analyse our actions and provide guidance on the most sustainable choices: a smart nudge, if you like (although such technology would raise concerns about personal choice and privacy).
A more profound change, however, may come about by applying one of the most basic ideas in economics – that, all other things being equal, a price rise leads us to buy less of something or search for an alternative. So far, the world has only half-heartedly applied this logic to sustainability. Nobel Prize-winning economist William Nordhaus is most famous for his advocacy of a global carbon price, either through taxes or cap-and-trade mechanisms because it would “provide appropriate incentives for businesses and households to move to low-carbon activities”. It may be an idea whose time has come.
The View is the online magazine of ING Wholesale Banking