EXCLUSIVE: “Net Zero Gains” – Craig Wellman, Microsoft UK in ‘The Fintech Magazine’
Craig Wellman, Director of Financial Services for Microsoft UK, explains why he thinks the industry is key to changing individual and corporate behaviour – and buying time for the planet
The world has accepted that climate change is happening and most of us acknowledge that tackling it will be the biggest technological and societal upheaval we have had since the Industrial Revolution. But while businesses almost universally agree that urgent action is needed, only 41 per cent are currently on target to meet the UK Government’s aim to be net zero by 2050.
That’s according to a Microsoft UK/Goldsmiths, University of London study published ahead of the United Nations’ 26th Conference of the Parties (COP26) climate change summit, held last November. And if you think that’s an alarming figure, the same stat for companies surveyed in the financial services sector is a woeful 16 per cent.
“We’re going to have to reverse a lot of the bad that we’ve done, a lot of the working practices that have grown up, and fundamentally change the way we do business, the way commerce happens,” believes Craig Wellman, director of financial services for Microsoft UK.
Wellman’s role at Microsoft sees him look after relationships and co-author strategies with some of the biggest names in financial services, including banks, payment providers, asset managers, fund managers and insurers. The tech giant has itself set ambitious targets around getting to net zero, aiming to be carbon negative by 2030 and, by 2050, to remove from the environment all the CO2 it has emitted – directly or by electrical consumption – since its founding in 1975. So, Wellman knows first-hand the challenges large companies face in becoming more sustainable.
But, while financial services may have been slower than others to act, he’s convinced the industry is in a strong, and possibly unique, position to effect change – because it’s made up of large, data-driven organisations that have influence and control over the way other businesses and entire economies run.
Mark Carney, former governor of the Bank of England, now UN special envoy on climate action and finance, would agree with him. Carney has long warned that large money institutions have been too focussed on short-term investments, instead of using their leverage to mitigate the long-term impacts of climate change. Wellman puts it succinctly: “What gets financed, gets done,” he says. “Whether they’re lending, helping companies invest or insuring their assets, there are instruments available to financial institutions – there are ways that can be managed – to encourage sustainability. And that’s going to drive behaviour.”
Referencing Carney’s work on sustainable finance, he says there needs to be a multitude of different incentives, applications and strategies to encourage organisations to pull those levers.
For example, according to an International Energy Agency report last year, to achieve global net zero emissions by 2050 and keep warming to 1.5°C compared to pre-industrial levels, at least $5trillion needs to be invested in climate solutions every year until the turn of the next decade: the investment community has a role to play in that by constructing innovative vehicles, particularly long-term green investment bonds; insurers can also design products to reduce some of the risks inherent in the necessary infrastructure projects. The problem is, while we’re still in the foothills of this new investment landscape, the incentives for investors aren’t exactly compelling. Green bond holders, for instance, currently see only 50 per cent of the yield they could be getting elsewhere.
Wellman cites the example of an insurer that Microsoft has been working with to create more sustainable products that appeal to people in the market who care about such issues. Like any insurer, what’s not paid out in claims is hedged, reinsured or invested.
“The challenge for them, as they start to switch away from investing in the best returns to investing in greener and more sustainable outcomes, is that, at the moment, the returns are not as good,” he says. “I think what we’ve got to do is stimulate the returns that can be expected – through governmental and regulatory intervention, and by riding this wave of [green] sentiment that we can see in society now – so that it’s a no-brainer for organisations like this to invest in more sustainable outcomes.”
The Climate Policy Initiative (CPI) is an analysis and advisory group that came up with a ‘commitment taxonomy’ that captures details of actions, real and promised, to slow climate change, taken by 301 financial institutions worldwide (tracking their mitigation targets, investment goals, exclusions and divestment, and new business practices). Using that index, it says Western Europe is well ahead of the rest of the world in the amount of assets committed to net zero, at $44.267billion. But – and it’s a big ‘but’ – the CPI’s 2021 report showed there were some significant shortcomings when you scratch beneath the surface of those companies’ public commitments.
Notably, while CPI tracked almost $6trillion in investments pledged to climate solutions by 2030 (in effect doubling 2021 levels), it said ‘these commitments lack detail on target sectors and regions’. It added: “Tracked climate finance commitments, historically, have not gone to developing economies and hard-to-abate sectors, and these are both areas in which financial institutions can have an outsized impact if they commit to invest.”
And, in the contentious area of fossil fuels, where several banks have been publicly denounced for continuing to support big polluters, the CPI found ‘a real shift away from fossil fuel investments is missing’. It said: “Overall, we found that the divestment thresholds of most entities contained broad ranges. As a result, continued financing of new and existing coal projects is effectively allowed, for example for companies with up to 40 per cent of revenue coming from coal or through financing parent companies with many subsidiaries. Moreover, few entities are taking steps to phase out oil and gas financing. Those that do are focussed on specific locations such as Arctic drilling and tar sands.”
In other words, they are perhaps sensitive to the media shaming that comes from being associated with extraction in highly vulnerable and high-profile environments, rather than making a fundamental moral choice.
A reliable index?
Banks that have direct relationships with investee companies, might not have many excuses for continuing to invest in high-carbon activities. But there is a genuine issue of transparency for other investors due to the absence of any green business barometer or index against which to measure companies reliably; it’s hard to be certain investments are ‘clean’.
“Think about investment managers and fund managers. Are the funds they call green truly green funds? Do they have the data underneath to support the claim that those funds are sustainable?” asks Wellman.
The Green Cloud
If there’s one thing the second-biggest company in the world knows a lot about, it’s collecting and interpreting data and, in the middle of 2020, Microsoft in the US took a step towards helping the sustainable investment community understand it better. It drew up an agreement with MSCI, which provides critical decision support tools and services for the global investment community, initially to move MSCI’s products, data and services onto Microsoft’s Azure Cloud platform.
But the longer-term aim was to collaborate on leveraging MSCI’s deep knowledge of climate risk and environmental, social and governance (ESG) issues, and combine it with Microsoft’s Azure and Power Platform to provide new, data-driven capabilities to help investors ‘better understand and interpret the business risks and opportunities that climate change brings’, the companies said.
The initiative builds on MSCI’s ESG Ratings and Climate Search tool, which currently allows investors to search more than 2,900 companies by name or ticker, to view their implied temperature rise, decarbonisation target, ESG rating and ESG rating history, and compare them to the ESG rating distribution by industry, as well as industry-specific ESG issues. The MSCI tie-up is part of what Wellman describes as Microsoft’s ‘sustainability Cloud’ – a number of initiatives that leverage the Cloud to give companies greater insight into the green credentials of an industry and the individual businesses within it. That not only helps them pull those levers that Carney was talking about, it also avoids exposing the institution to financial and reputational risk.
US bank BNY Mellon is already using Microsoft Azure to deliver ESG data analytics for investment managers so that they can customise investment portfolios to individual ESG preferences with support from crowdsourced ESG data and demonstrability screens. In the UK, Microsoft has been working with retail bank NatWest.
“Our sustainability Cloud effectively looks at data and transactions – in individuals, in businesses and in market sectors – and starts to inform the bank on their sustainability and carbon footprints,” explains Wellman. “So, in theory, in an area like SME lending, where NatWest is particularly focussed, it could start to look at market sectors, or even businesses, and say ‘how much of an effort are they really making to be sustainable, to be green, to reduce their carbon footprint?’. It will enable the bank to be more deliberate in how it lends and who to, which, again, starts to create a new wave of financing for more sustainable businesses.”
Wellman believes that those financial service providers who stay at the forefront of innovations like this are more likely to capture the market as sentiment shifts. Skewing investment decision-making towards more sustainable target companies might be desirable, but it isn’t without jeopardy for the institutions involved. The authors of a recent post hosted on the Financial Conduct Authority’s Insight blog considered if such a move towards greener investments posed a threat to healthy market competition. It pointed out that imposing common standards when it comes to classifying ‘green’ activities, such as those now being developed by many regulators – including in the EU and UK – ‘may increase compliance costs for firms, and enhanced rigour could lead to products formerly marketed as ‘ESG’ exiting the market if they fail to meet classification requirements’.
Likewise, climate-related financial disclosures, which will become mandatory for all companies by 2025 in the UK, could also distort competition, they said, if not carefully balanced. Whatever the framework, Wellman believes: “The way the industry encourages organisations to be more responsible is going to be critical.”
It’s not just about products and investment services, of course. Sustainability requires action by financial services providers at all levels, stresses Wellman, including reimagining working practices. “And organisations are starting to do that,” he says. “Their carbon footprint, in terms of property, travel, how they work and run legacy operations, are way out of date [but] I think people have realised, during the pandemic, that there
is a rebalancing opportunity, away from constantly being on a train, in a car or on a plane, to travelling less and being more effective [at work].
“I think there are green shoots of positivity everywhere you look, because the societal change, which I would call the pull element of all of this, [is] creating demand and awareness,” he says. “There’s an opportunity for institutions to ride that wave, and also start to think about how they create products for people at home, and for businesses, that reflect it.”
At the end of the day, reversing or halting climate change requires all of us –corporates and individuals – to make a leap of faith; to be prepared to challenge long-held norms, from working arrangements to investment strategy, in the interests of protecting the ultimate asset: our planet.
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