Trillions. Who cares?
The next decade of sustainable finance must be defined by a focus on financial materiality and accelerated capital allocation.
About this post
This is Tenfold's EDITORIAL#1. It's roughly 2,000 words and should take you 10 minutes to read. It's worth it!
AI disclosure
Minimal AI use. All content was written by the author. AI was used to review the narrative and for minor editorial corrections.It’s an interesting time for progress. A time of great success and a time of great difficulty: the successes of Moore’s law in compute and Swanson's law in renewable energy; the challenges of climate action. A time of immense possibility and crippling uncertainty: when accelerating technology opens unimaginable possibilities; when cynical geopolitics pins us to the past.
Here's my take on the next decade of sustainable finance.
First, a little housekeeping. What do we mean by sustainable finance? It's generally defined as ‘the process of integrating Environmental, Social and Governance (ESG) considerations into financial decision-making.’ While I don’t entirely disagree, this needs a rethink. Do read on.
Trillions. But who cares? This, to me, is the heart of the problem - and the solution.
1. People first
Do say: People are at the heart of sustainable development outcomes.
Don't say: Machines are coming.
A good place to start to understand sustainable finance is sustainable development: ‘progress that does not compromise the opportunities of future generations’ (if you have not yet, you should read Our Common Future).
Sustainable development is about all of us and all those who will come after us. It is also about environmental, social and economic systems in which people operate. Over time this has been captured in frameworks such as: People-Planet-Profit; Environmental, Social & Governance; and the Sustainable Development Goals.
People are not just at the heart of sustainable development outcomes, they are very much at the centre of the process.
Starting with people is wise at this time of accelerated technological transformation. Yes, Artificial Intelligence (AI) is progressing fast. Yes, it stands to profoundly disrupt how we live and work. Yet, as most frontier labs hope, this technology’s purpose is to serve us, the people. Additionally, there is still some way to go for AI to overtake human creativity and ingenuity.
2. Awe-inspiring scale
Do say: This is a multi-trillion-dollar opportunity.
Don’t say: This is small fry on the margins.
Let's talk about trillions.
First, it’s worth taking a step back to consider the scale of planetary systems. As an example, a large hurricane will dissipate more energy in a day than is contained in the world’s nuclear arsenal or that we could generate by running all installed electric capacity at 100% for a day. We’ve managed to alter global geochemistry with greenhouse gas emissions. Turning things around requires big thinking.
In financial terms, that means trillions, no matter whether we look at risk or opportunity. Climate-related losses are staggering. Trillions. Energy transition investment numbers are equally mind-boggling and growing at a pace few had anticipated. Trillions.
The exact numbers are uncertain and vary depending on scope and methodology. What they generally agree on is that, within a few decades, we could face many trillion dollars of annual economic losses from climate impacts, and that we need well over ten trillion dollars annually to meet even less ambitious sustainability objectives.
The exact numbers don't really matter. What matters for sustainable finance is that there are vast risks to manage and even greater needs for investment. A tremendous opportunity in financial terms.
3. Time
Do say: Now is a great time to act.
Don’t say: Why do today what you can do tomorrow.
Trillions indeed. But who cares? The first answer to that question is simply that we all should.
In our daily lives, we depend on functional energy systems and our health is impacted by the combustion of fossil fuels. The United Nations adopted the 2030 Agenda and the Sustainable Development Goals by consensus. In climate action, we often look out to 2050, a manageable horizon that is now less distant than many of our mortgages. In broader climate science, we forecast to 2100, well within our (grand-)kids’ expected lifespans.
These horizons matter to all of us. They must matter to policy makers. The decisions we make or don't make have meaningful impacts on our lives.
Yet, it has proven difficult to make the economics work, to speak to financial decision makers, and to achieve anywhere near the scale and speed of transformation that we need. It's in part due to the infamous ‘tragedy of the horizons’: the mismatch between the timescales of desired outcomes and financial decision-making. Part of it is also a ‘lost in translation’ problem: the mismatch of sustainable finance practices and financial decision-making.
4. Financial materiality
Do say: It needs to make financial sense.
Don’t say: Good intentions are good enough.
Trillions indeed. But who really cares? The more important answer to that question is that we have to understand who cares in financial terms.
For sustainable finance to succeed, meaning to meet the speed and scale of investment we need, a large number of (good) decisions must be made. And the fact of the matter is that an overwhelming majority of these decisions can only be made if they are financially sound.
But to be truly visible, meaningful and impactful, sustainable finance principles and objectives have to be financial material. They have to contribute to financially viable outcomes. They have to make financial sense.
It’s an ongoing failure (or perhaps just work in progress) of sustainable finance. There are great people, good intentions, sound science, and plenty of data. Yet there remains a chasm with financial decision-making.
There are comprehensive ESG disclosure frameworks, yet there is limited evidence to show the value in corporate performance or investment strategies. There are remarkable climate models that produce insight into multi-decadal risks, but to quarterly performance and annual budgets these models have limited value. There are measures of climate-related losses, labelled 'Climate Value at Risk’ (C-VaR), yet they are often deterministic when ‘Value at Risk’ (VaR) is a probabilistic measure in finance.
Thankfully, there are reasons to be hopeful. First, climate risk is increasingly proving material on financial timescales. Second, renewables and storage are often cost-competitive, meaning they can make financial sense. Third, market participants have invested significantly to integrate sustainable finance in their businesses.
5. Boots on the ground
Do say: Impact happens in the real world.
Don’t say: Let's play a hot potato game.
A lot of decisions need to be made at many levels: jurisdictions, portfolios, companies, projects. Crucially, these decisions must relate to measurable impact in the physical economy.
Emissions are generated at the asset level. Physical risk is material at the asset level. The energy transition requires physical infrastructure to be built. Global supply chains depend on physical mines and fields, factories and transport infrastructure. AI is hyper-scaling with data centers. Etc.
There are of course non-physical aspects to sustainable development. The G of ESG, or SDG16 on Peace, Justice & Institutions. Yet, if we're talking about sustainable finance, we need to focus on physical assets. We need to build a lot of stuff. And we need that stuff to make financial sense.
In focusing on physical infrastructure, it's also important to acknowledge regulatory and permitting hurdles to overcome. Projects that make financial sense are a good starting point, yet other stars must align for these projects to get off the ground.
6. Energy
Do say: The energy transition is unstoppable.
Don’t say: Burning things is nice.
Energy is an obvious place to focus. The energy transition is no easy feat, yet there is a promising alignment of circumstances.
First, resources are plentiful. The scale of the natural system we operate in is awe-inspiring and provides vast opportunity.
Second, energy is the bedrock of global economies, directly correlated to growth, prosperity and progress. Energy also accounts for around three quarters of global emissions. Simply put, energy matters.
Third, Swanson's law has delivered. The cost of solar power (and more broadly of clean energy technologies), has fallen so sharply that it is now cost-competitive in many circumstances. It makes financial sense.
Fourth, clean energy technologies also makes practical sense. Hyper-scalers need vast amounts of power and they need it fast. Renewables plus storage are generally faster to deploy.
Fifth, we have come a long way in resolving grid integration and management issues inherent to intermittent energy sources, and the pace of innovation is accelerating.
As a result, the energy transition is a powerful platform for the next decade of sustainable finance. It is core to desired outcomes and makes financial sense. It is no longer driven by risk, it is driven by opportunity.
7. Innovation
Do say: Human ingenuity knows no boundary.
Don’t say: It wont't work and it's time to give up.
Solutions are needed far beyond energy. Some are already financially viable, for example in transport. Others may require continued innovation across policy, technology, business and consumer realms.
Crucially, a focus on financial materiality does not undermine these other forces of transformation. Financial materiality works in tandem with innovation.
We still need innovative policies designed for the long-term and able to meaningfully shift economic conditions. We still need technologists to think outside the box and innovate toward futures that may seem inconceivable today. We still need business innovation to take new technologies to niche markets and scale them as they mature. We still need consumers to express their preferences through democratic or economic decisions.
A focus on financial materiality helps better define where, when and why non-financial mechanisms are needed. And no matter the ebbs and flows of these other forces, an obsession with financial materiality will ensure that sustainable finance is optimizing for outcomes.
8. AI forward
Do say: AI will accelerate progress.
Don’t say: This is all very dystopian.
Frontier technologies are marching forward and bring both great promise and extraordinary challenges. AI's energy-technology paradox, labour implications, copyright concerns and safe deployment issues are critical matters we must consider. The energy paradox is particularly interesting for sustainable finance and we must ensure AI helps catalyze the energy transition rather than cannibalize available clean power. I will explore these questions in future posts.
Looking at upsides, the deployment of traditional AI, machine learning, deep learning, generative AI and physical AI is compounding and offers tantalizing opportunity for sustainable finance.
Traditional AI allows us to analyze structured datasets and produce sophisticated models. Weather simulations can for example predict global weather based on observed starting conditions and physics-informed models.
Machine learning uncovers meaningful patterns in vast datasets. We’ve seen extraordinary advances in learning from historical weather to model out to seasonal horizons, all while dramatically reducing compute requirements.
Deep learning has taken us even further in our understanding of structured and unstructured information. We can find meaning in complex, multi-faceted economic, social and environmental information, exactly as sustainable development outcomes require.
Generative AI opens the doors of content production. It can power agentic workflows to transform multi-dimensional data, produce financially material insight and accelerate decision-making.
Physical AI, finally, promises to close the loop back to the physical world. Next-gen Earth systems modeling, advanced manufacturing, robotics and other emerging disciplines will effect the transformative power of frontier technologies in the real world.
9. Mainstreaming
Do say: Sustainable finance is finance that understands progress.
Don’t say: Sustainable finance is a fringe discipline.
Sustainable finance is not a specialist discipline from obscure corners of middle- and back-office functions.
It must be embedded in every aspect of front-office functions too: in research, advisory, lending, investing, valuations, trading, and the myriad other ways that financial institutions do business; in energy, industry, technology, healthcare, consumer products, real estate, transport and all other industry segments.
Sustainable finance must become a part of the information puzzle required to make sound financial decisions in a complex world. It must contribute an understanding of desired outcomes, a view into extra-financial considerations and relentlessly demonstrate the financial materiality of this information.
Sustainable finance practitioners must find any and every instance in which they can contribute information that can bend the arc of progress toward sustainable development outcomes. They must understand who cares in financial terms, wherever these decision-makers might sit.
That is not to say that it can be effective all the time. As one among many pieces of the information puzzle, sustainable finance cannot always cast the winning vote. When it cannot, it must help identify alternative policy, market, business or consumer mechanisms to overcome barriers.
10. Paradigm shift
Do say: Sustainable finance is about outcomes.
Don’t say: Sustainable finance is just a fun process.
Disclosure frameworks have been helpful. Yes, we need standardized disclosures and better data, but that is not enough.
Double materiality frameworks are insightful. Risks on the environment and risks on market participants matter. Yes, we need to understand risks, but that is not enough.
Success in the next decade of sustainable finance requires a paradigm shift. We need to focus on desired outcomes and, to achieve such outcomes, we need to focus on opportunity and capital allocation.
Sustainable finance must be about deploying financial systems with speed and scale to empower progress that does not compromise the opportunities of future generations.
A better definition for sustainable finance is perhaps to think of it as ‘the deployment of financial systems to realize sustainable development outcomes, including the energy transition and climate action.’
We must focus on desired outcomes. We must downscale from big-picture objectives to specific, asset-level opportunities. We must understand who cares in financial terms. And we must relentlessly demonstrate financial materiality.
Let's get to work.