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‘We’re on the cusp of a very positive transformation’

‘We’re on the cusp of a very positive transformation’

18-12-2018 | Interview

How fast will sustainability investing become mainstream? Bertrand Badré is a former managing director of the World Bank and the founder of Blue like an Orange Sustainable Capital, a company that invests in sustainable projects in emerging countries. We talked with him about the challenges of sustainable development, the role the private sector can play and the main ideas developed in the book he recently authored on this topic.

  • Yann Morell Y Alcover
    Yann
    Morell Y Alcover
    Investment Writer

Speed read:

  • Public and private sectors must tackle sustainability hand in hand 
  • Trillions of US dollars are needed to fund sustainable development
  • Investor’s money needs to be allocated differently at a global level

The main thesis of your book is that finance can serve the ‘common good’. Could you explain what you mean by ‘common good’ and how it relates to concepts such as sustainability investing and ESG?

“The question of the common good is a difficult one. It is a fairly Western concept. I have talked with Chinese people and there is nothing equivalent in their culture. They have things such as harmony or peace. I think we can describe it as a harmonious development of our societies or what in new international jargon is known as sustainable development. In other words, a development model that respects the remuneration of not only financial capital but also human capital, social and societal capital and natural capital.”

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In your book, you explain that the private sector has an important role to play in this context. Nonetheless, a large part of the book is devoted to the public sector, particularly multilateral development banks (MDBs). So, what exactly can the private sector do?

“You are right. That’s probably because until recently I spent several years working for these multilateral institutions. My take is that MDBs are valuable, but that we could do much more with them. We have to, in fact; and that’s where the private sector should come in. A few years ago, I coordinated the publication of a World Bank report1 on the resources needed to meet the United Nations’ Sustainable Development Goals (SDGs). I wanted the report to be no more than 20 pages long, to be written in accessible English and to have a catchy title.”

“More importantly, the report had to provide concrete orders of magnitude. Oftentimes, people struggle with orders of magnitude when it comes to money. As soon as an amount exceeds a few hundreds of millions, or even a billion, we tend to simply say it's a lot. So, what the title we chose ‘From Billions to Trillions’ attempts to communicate is disparity: we can see that although we have a USD 100 trillion economy, only around USD 250 or 350 billion is available to fund sustainable development. There are many estimates of what is really needed, but basically it’s several trillion dollars. So there’s a clear gap, hence the title. How are we bridging this gap? The answer is quite simple: basic math.”

“Part of the difference will be filled by local resources, namely savings and taxes. But that probably won’t be enough. Some of the money may also have to come from foreign private savings. Unfortunately, this type of financial resource often does not make its way into sustainable projects in developing and emerging countries. And so my deep conviction – which I stress in my book – is that public development institutions have a role in helping private investors, to take them by the hand, as it were. MDBs need to understand that while it’s important for them to fund development operations, it’s probably even more important that they mobilize resources.”

It’s obvious that money is being poorly allocated

With this in mind, what role can asset managers play?

“To me, this question concerns one of the most important challenges we face today: how we allocate resources at a global level. We've never had so much money in savings and under third-party management. We’ve never had so many asset managers and so many large asset owners, including large pension funds and sovereign wealth funds. And yet, a significant part of this money is invested in debt that offers low or even negative rates of interest. It’s obvious that money is being poorly allocated.”

“Money needs to be allocated differently, through regulation and incentives, using market economy mechanisms. End-customer demand is clearly pushing in this direction. Obviously, the amount of money flowing into these kinds of projects will be small at the beginning. But we need to make sure that in time the trillions I spoke about in my previous answer become just that. Otherwise, the current refugee crisis may well be a mere taste of things to come.”

Does this mean that all asset managers will have no other choice than to embrace sustainability investing?

“On a 20 to 30-year horizon, I think it’s a given. But let’s not be naïve, it won’t happen overnight. People have to get used to it – they will have to test it and realize that it actually works. We’ll need to develop new products and new ecosystems on a more industrial scale. We’ll also need new breeds of rating agencies that specialize in assessing sustainability risks. I think this is a task for the next market cycle.”

Although we’re still at a very early stage, we’re already seeing major disparities in the quality of what is proposed by asset managers in terms of sustainability. There seems to be a lot of enthusiasm but few rigorous approaches. What’s your take on this?

“I’m not really surprised. We are on the cusp of a very positive transformation, so it is quite natural that things are a bit all over the place. We are seeing a flurry of new concepts that people don't always understand, from ESG to PRI and impact investing. At the same time, we must make sure that we don’t wake up with a hangover in five years, thinking we’ve been brainwashed. The current commotion will have to stop at some point, regulators will need to set the tone.”

So regulators will have to step in?

“Yes, of course. That’s normally how things go. I am not against creativity, but this creativity should not be dishonest.”

This article is an excerpt of a longer text published in our Robeco Quarterly magazine. Read the full ‘We’re on the cusp of a very positive transformation’ article.

1See: ‘From Billions to Trillions: Transforming Development Finance’, report prepared jointly by the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank, the International Monetary Fund, and the World Bank Group for the 18 April 2015 Development Committee meeting.

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