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Men in Suits

Why ESG and Blended Finance Aren't Enough to Address Climate Change

In the fight against climate change, governments throughout the globe face a massive challenge: reconciling the urgent need for sustainable development with the financial resources necessary to implement revolutionary solutions. This is where blended finance emerges as a tool in the battle against climate change, using development finance and charitable money to mobilise private capital flows to emerging nations. Its importance is especially felt in countries like India, where the combination of fast economic expansion, environmental sensitivity, and ambitious climate targets presents both problems and opportunities for sustainable development. However, much like the two sides of a coin, blended finance has its own set of limits. Some significant disadvantages and concerns require a comprehensive examination and thoughtful consideration.


Harnessing Blended Finance for Climate Resilience and Sustainable Development


Developing countries are disproportionately affected negatively by climate change. Twenty per cent of the GDP of the 55 economies most susceptible to climate change has already been lost.  There is currently a lack of finance since just 1.6% of total adaptation funding originates from private investment. Furthermore, it is projected that until 2050, a worldwide shift to a low-carbon economy will require between 4 and 6 trillion USD yearly. Even if private investment flows for climate-resilient and low-carbon projects are growing, they are still dreadfully insufficient. Blended finance provides a ray of hope in situations like these when traditional financing channels fall short of meeting the enormous financial demands necessary to meet climate commitments. 


The strategic use of development funding from charitable and governmental sources to raise more money from the private sector for sustainable development is known as blended finance. It says it can de-risk initiatives that the private sector deems too dangerous by utilising catalytic capital, creating potential for climate solutions such as the clean energy transition. By addressing issues like infrastructural deficiencies and large upfront expenditures, our partnership makes these projects both financially feasible and appealing to private investors. To reduce risk and encourage investor engagement in sectors like green infrastructure, industrial decarbonisation, and the switch to renewable energy sources, blended financing makes use of cutting-edge financial tools like guarantees and concessional loans. With this strategy, communities affected by the switch from fossil fuels are supported and energy security and affordability are guaranteed.

Explore the limitations of ESG and blended finance in combating climate change and discover the innovative potential of steward leadership.

The Indian financial landscape: blended finance.


The revised Nationally Determined Contribution (NDC) for India lays out aggressive goals, including a 50% increase in non-fossil fuel-based electricity capacity and a 45% decrease in the GDP's carbon intensity by 2030. However, with India's twin focus on environmental preservation and economic growth, accomplishing these goals is a daunting undertaking. India has to dramatically raise climate investments from 18 billion $ to 170 billion USD per year till 2030 in order to decarbonise its energy industry. An estimated 10.1 trillion USD would be needed to achieve net-zero emissions by 2070. Relying exclusively on public and charitable funding will not be sufficient to support the significant investment needed for renewable energy, energy efficiency, and sustainable infrastructure projects. Although blended finance plans are recommended as a way to close this financial gap, there are obstacles in the way of their implementation in India. Significant hurdles include capacity limitations, regulatory impediments, and low stakeholder awareness. There are still questions about how well they will work to mobilise private sector investment, notwithstanding their promise. For example, the India Green Growth Equity Fund is said to be the nation's first fund with a climate focus. Although it focuses on low-carbon solutions and climate resilience, concerns are raised over its scalability and potential influence on India's numerous climate-related issues.


Blended finance plays an increasingly important role as the world moves closer to a sustainable future. Blended financing presents itself as a solution to speed up climate action by combining the advantages of both public and private money. Still, it needs to be handled carefully. When businesses use integrated finance efforts to their benefit while engaging in unsustainable activities, serious concerns are raised. Strict selection criteria and thorough due diligence are needed to solve this when choosing participating firms. To keep them responsible, transparency and continual observation are essential. A reassessment of blended finance's efficacy and significance in accomplishing development and climate goals is needed due to its inherent problems and limits. Stakeholders, investors, and governments must take a well-rounded and knowledgeable approach as they negotiate the complexity of climate financing. India has the potential to become a worldwide leader in climate action with the correct partnerships and policies in place, opening the door to a more resilient and environmentally friendly future for both people and the planet.


A New Approach: Steward Leadership


Steward leadership offers a compelling alternative to traditional models of corporate governance. At its core, steward leadership prioritizes long-term value creation for all stakeholders, including shareholders, employees, communities, and the environment. Unlike traditional profit-driven models, steward leaders embrace a broader purpose that extends beyond financial gains. One notable example is Faber-Castell, a company renowned for its sustainable forestry practices. By prioritizing environmental stewardship and social responsibility, Faber-Castell demonstrates how steward leadership can drive both profitability and sustainability. In contrast to approaches that focus solely on meeting ESG metrics and reporting requirements, steward leadership emphasizes genuine, impactful action.


Steward leadership represents a paradigm shift in corporate governance, emphasizing a holistic approach to value creation that extends far beyond the bottom line. Unlike traditional profit-driven models, which often prioritize short-term financial gains at the expense of long-term sustainability, steward leadership places equal importance on the well-being of all stakeholders, including shareholders, employees, communities, and the environment.


At the heart of steward leadership is a commitment to serving a higher purpose—one that transcends mere profit maximization. Companies guided by stewardship principles recognize their role as custodians of resources and stewards of the planet, and they actively seek to balance economic prosperity with social and environmental responsibility.


A compelling example of steward leadership in action can be found in Faber-Castell, a renowned manufacturer of writing instruments and art supplies. Faber-Castell has long been celebrated for its sustainable forestry practices, which prioritize the conservation of natural resources and the protection of biodiversity. By sourcing wood from responsibly managed forests and investing in reforestation efforts, Faber-Castell demonstrates how businesses can thrive while also safeguarding the environment for future generations.


Unlike approaches that rely solely on meeting ESG (Environmental, Social, and Governance) metrics and reporting requirements, steward leadership is characterized by genuine, impactful action. Steward leaders understand that true sustainability requires more than just ticking boxes or paying lip service to environmental and social issues—it demands a fundamental shift in mindset and behaviour.


By embracing steward leadership, companies can cultivate a culture of responsibility, innovation, and long-term thinking. They can foster stronger relationships with stakeholders, build resilience in the face of uncertainty, and create value that extends beyond financial returns. Ultimately, steward leadership represents a powerful force for positive change—a force that has the potential to reshape the future of business and society for the better.


The Importance of Innovation


Central to the concept of steward leadership is a culture of innovation. In tackling complex challenges like climate change, incremental changes and adherence to rigid frameworks may not suffice. Instead, steward leaders advocate for experimentation, creativity, and bold solutions. By pushing the boundaries of what is possible, businesses can develop groundbreaking technologies and sustainable business models that address climate change while driving economic growth. Collaboration, investment in research and development, and a willingness to embrace risk are key tenets of this innovative approach.


The urgency of Climate Action and Investment for Net Zero


The need for urgent climate action has never been more pressing. With each passing day, the impacts of climate change—rising temperatures, extreme weather events, loss of biodiversity—grow more severe. To mitigate these effects and limit global warming to 1.5 degrees Celsius above pre-industrial levels, rapid and decisive action is required.


Reaching net zero emissions by 2050, as outlined in the Paris Agreement, is essential to avoid the most catastrophic consequences of climate change. However, achieving this goal will require a monumental effort and significant investment. Estimates suggest that transitioning to a low-carbon economy could require between 4 and 6 trillion USD annually until 2050.


Limitations of Current Approaches: ESG and Blended Finance


While initiatives like Environmental, Social and Governance (ESG) criteria and blended finance have gained traction in recent years, they alone are insufficient to address the magnitude of the climate crisis.


ESG frameworks, which assess companies based on their environmental, social, and governance practices, provide valuable insights into corporate sustainability efforts. However, they often focus on risk management and compliance rather than driving transformative change. Similarly, blended finance, which combines public and private funding for sustainable development projects, faces challenges in attracting sufficient investment to meet climate financing needs.


The Problem with Traditional Solutions


The main drawback of traditional solutions lies in their reliance on incentives, regulations, and measurements to drive change. While these mechanisms play a role in shaping behavior and encouraging accountability, they are not always effective in driving the systemic transformation required to achieve net zero emissions.


Moreover, the Enron scandal serves as a stark reminder of the limitations of relying solely on incentives and regulations to ensure corporate accountability. Despite adhering to regulatory requirements and receiving favourable ESG ratings, Enron's fraudulent activities went undetected until it was too late, resulting in one of the largest corporate bankruptcies in history.


In essence, traditional solutions like ESG and blended finance represent variations on the same theme—a piecemeal approach to addressing climate change that fails to tackle root causes or drive meaningful change. To truly address the climate crisis, we need innovative approaches that go beyond incremental improvements and embrace bold, transformative action.


Flaws in Relying on Incentives, Regulations, and Measurements


Relying solely on incentives, regulations, and measurements to drive change in corporate behaviour is inherently flawed for several reasons. Firstly, incentives and regulations often focus on short-term outcomes or compliance rather than addressing systemic issues. This approach may encourage companies to prioritize meeting regulatory requirements or maximizing short-term profits, rather than adopting sustainable practices for the long term.


Secondly, regulations can be subject to loopholes or manipulation, allowing companies to circumvent compliance measures without facing meaningful consequences. In the case of Enron, the company exploited regulatory gaps and engaged in fraudulent accounting practices to inflate its financial statements, deceiving investors and regulators alike.


Thirdly, measurements such as ESG ratings may provide valuable insights into a company's sustainability efforts, but they do not always capture the full extent of its environmental or social impact. Companies may engage in "greenwashing," where they exaggerate their environmental credentials to improve their ESG scores without implementing substantive changes to their operations.


The Enron Scandal as a Case Study


The Enron scandal serves as a poignant example of how reliance on incentives, regulations, and measurements can fail to prevent corporate misconduct. Despite receiving favourable ratings from credit agencies and boasting high ESG scores, Enron's fraudulent activities went undetected for years.


Enron manipulated financial regulations, exploited accounting loopholes, and misled investors to artificially inflate its stock price. The company's executives used complex financial instruments and off-balance-sheet entities to conceal massive debts and losses, leading to the eventual collapse of the company and significant financial losses for investors.


Enron's downfall can be attributed to several factors. Firstly, despite publishing a manual of ethics, the company engaged in complex financial practices that were difficult for shareholders and analysts to understand. These practices involved manipulating financial statements and misrepresenting earnings to create the illusion of favourable performance. Additionally, Enron's speculative business ventures proved to be disastrous.


Key executives like Lay, Skilling, Fastow, and others perpetuated many of these problems, which ultimately led to Enron's bankruptcy. Lay, as the chairman, approved of the actions of Skilling and Fastow, even though he did not always delve into the details. Skilling prioritized meeting Wall Street expectations and advocated for the use of mark-to-market accounting, which inflated the company's value. Fastow and his colleagues created off-balance-sheet entities and complex financing structures, making it challenging for outsiders to understand Enron's true financial health.


The Enron scandal underscores the limitations of relying solely on regulatory oversight and measurements to ensure corporate accountability. It highlights the need for a more holistic approach to governance—one that prioritizes ethical leadership, transparency, and accountability.


ESG and Blended Finance: Variations on the Same Theme


While ESG frameworks and blended finance initiatives aim to promote sustainable practices and mobilize investment for environmental and social projects, they are not without their shortcomings. ESG metrics often focus on compliance and risk management rather than driving meaningful change in corporate behaviour.


Similarly, blended finance seeks to leverage public and private funds to finance sustainable development projects, but it may struggle to attract sufficient investment to meet the scale of climate financing needs. Both approaches may fall short of addressing the root causes of environmental degradation and climate change.




Fostering Innovation and Adaptability: The Essence of Steward Leadership


Steward leadership fosters a culture of innovation by encouraging individuals and organizations to embrace a mindset of continuous improvement and adaptability in addressing complex challenges. Unlike traditional leadership approaches that may prioritize short-term gains or adherence to rigid structures, steward leaders focus on long-term value creation and sustainability for all stakeholders.


One way steward leadership promotes innovation is by creating an environment where experimentation is encouraged and even celebrated. Instead of adhering strictly to predefined frameworks or processes, steward leaders recognize the importance of flexibility and agility in responding to evolving circumstances. They understand that complex challenges often require creative solutions that may not fit neatly into existing paradigms.


By embracing experimentation, organizations under steward leadership can explore new ideas, technologies, and approaches to problem-solving. This willingness to take calculated risks and learn from both successes and failures fosters a culture of innovation where individuals feel empowered to challenge the status quo and contribute their unique perspectives.


Moreover, steward leadership emphasizes the importance of collaboration and diversity of thought in driving innovation. Leaders actively seek input from diverse stakeholders, including employees, customers, partners, and communities, recognizing that innovation thrives in environments where different viewpoints are valued and respected.


In essence, steward leadership advocates for a shift away from rigid, top-down approaches towards more adaptive and inclusive models of leadership. By empowering individuals to experiment, collaborate, and think creatively, steward leaders inspire organizations to tackle complex challenges with resilience, agility, and innovation.


Conclusion


In conclusion, as we confront the urgent challenges of climate change, it is clear that traditional models of corporate governance fall short of fostering the innovation and change needed to address this global crisis. Steward leadership emerges as a powerful alternative, prioritizing long-term value creation for all stakeholders and embracing a purpose-driven approach to sustainability.


Steward leaders put lasting positive effects on society and the environment before the constraints of short-term profit maximization. By fostering a culture of innovation, steward leadership enables businesses to tackle complex challenges such as climate change with creativity and determination.


Therefore, businesses must embrace steward leadership and adopt a more sustainable and purpose-driven approach. This requires a fundamental shift in mindset and organizational culture, placing value on environmental stewardship, social responsibility, and long-term sustainability over short-term gains.


Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.


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