Sustainable finance has emerged as a powerful force for driving positive social and environmental impact alongside financial returns. As major global crises like climate change, biodiversity loss, and inequality continue to pose existential threats, there is a growing recognition within the financial sector that business as usual is no longer tenable. Sustainable finance represents a fundamental shift towards aligning the financial system with broader societal goals like sustainability, inclusion, and resilience.
The Growth of Sustainable Finance
Over the last decade, sustainable finance has moved from a niche concern into the mainstream of the financial system. The global sustainable debt market has grown from just $36 billion in 2012 to over $1.6 trillion in 2021. Major institutional investors are increasingly factoring environmental, social and governance (ESG) criteria into their investment processes. And leading banks have made high-profile commitments to align their lending and underwriting activities with the objectives of the Paris Agreement on climate change.
This growth has been driven by both push and pull factors. Pull factors include growing investor demand – particularly amongst millennials – for responsible investment products that make a positive impact. Push factors include increased policy and regulatory action to encourage sustainable finance, such as transparency requirements regarding climate and ESG risk exposures. And the heightened physical and transition risks posed by climate change are forcing the financial sector to grapple with what a ‘net zero’ economy looks like.
Breaking Down Barriers
However, significant barriers continue to impede the growth and impact of sustainable finance. Here are three key barriers that the industry is actively working to break down:
- Inadequate tools and standards for measuring sustainability impacts. Investors lament the lack of trusted, consistent standards for evaluating the environmental and societal footprints of portfolios, companies, and projects. Intensive efforts are underway to tackle this barrier, including initiatives like the Taskforce for Climate-related Financial Disclosures (TCFD).
- Mispricing of social and environmental costs and risks. Our existing financial system does not properly price in sustainability factors, skewing capital allocation decisions towards polluting and extractive activities. Carbon pricing schemes, appropriate capital charges, and firms incorporating ‘shadow carbon prices’ into decision-making can help overcome this sizable barrier.
- Insufficient financing directed towards sustainable solutions and business models. While scrutiny of so-called ‘brown financing’ is increasing, we need to rapidly scale up ‘green financing’ to fund innovation and growth across renewables, electrification, ecosystem restoration, circular economy business models, and green infrastructure. Bridging this financing gap, particularly across developing countries, is arguably the defining challenge for sustainable finance.
Unlocking Progress Across the Sustainable Development Goals
Creating systems, structures, and incentives to overcome these barriers represents the primary focus of those leading the sustainable finance charge. Because access to financing can act as a ‘chokepoint’ limiting progression across each and every one of the UN Sustainable Development Goals (SDGs), getting this right matters immensely.
Here are three examples of how the growth of sustainable finance can catalyze breakthroughs across crucial SDGs:
SDG 7 – Affordable and Clean Energy: Through relevant risk measurement methodologies, structured financial products and direct investments into renewables firms, sustainable finance can spur the estimated $4 trillion annually required to achieve universal access and the transition to clean energy globally.
SDG 13 – Climate Action: Aligning business models, lending activities and insurance offerings with net zero trajectories through sustainable finance levers can accelerate the decarbonization of sectors accounting for up to 85% of global emissions.
SDG 5 – Gender Equality: By integrating gender equity criteria into financing decisions and engaging with firms to close gender data gaps in their operations and supply chains, sustainable finance can advance diversity while enlarging opportunities for female entrepreneurs in developing countries starved of capital.
In essence, sustainable finance breaks down barriers to financing that propagate inequality, climate crisis and environmental degradation. And redirects financial flows to innovations, technologies, products, and services that serve society responsibly and regenerate our planet’s life support systems.
Collaborative Action is Critical
Ultimately, actor groups across the entire financial system – including investors, banks, regulators, stock exchanges, insurers, credit rating agencies and more – need to play their part to nurture the ascendance of sustainable finance. Constructive, collaborative action involving all actor groups is required to put in place and scale the tools, transparency frameworks, reporting protocols, policies, regulations, and partnerships to rewire the ‘plumbing’ of global finance.
Encouragingly, the establishment of wide-ranging alliances like the Net Zero Asset Owner Alliance demonstrates a willingness for competitive commercial players to cooperate deeply towards positive change. Equally reassuring is the extensive involvement of financial sector leaders in multi-stakeholder platforms like the World Economic Forum’s Alliance of CEO Climate Leaders that are pioneering sustainability solutions.
To accelerate and smooth the effective ‘re-engineering’ of global finance, we need intensified focus from these collaborative entities on tackling knowledge gaps, scaling innovations, dismantling perverse incentives, establishing standardization, and driving concrete policy change.
The Tide is Turning
Sustainable finance has already achieved unstoppable momentum in driving value shifts within financial institutions, redirecting vast capital flows, and financing new decarbonization pathways that once seemed unattainable. But there is no room for complacency and the sheer scale of the social and environmental transformations required means intensified leadership is vital to consolidate early gains.
Nonetheless, the growth of sustainable finance provides reasons for optimism with regards to society’s ability to overcome looming and complex sustainability threats previously considered immovable barriers. Bluntly summarized by the CEO of the world’s largest asset manager BlackRock, Larry Fink: “the tectonic shift towards sustainable investing is still accelerating”. And bringing epochal changes to our economies and societies with it.
