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Green Economy

Published on August 1st, 2018 | by The Beam

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Sustainable Investment: The Future Of Financial Markets In The Light Of Sustainability

August 1st, 2018 by  



While the European market is leading the global climate finance market, most European investors still haven’t aligned their investments with the 2C target. Much more needs to happen in the near future to scale up low-carbon investment and fulfill EU’s determination to scale up its international climate finance contribution towards the $100 billion per year goal set for industrialized countries by 2020 and through until 2025.

To discuss concrete solutions to the current challenges of the European and global climate finance market, Climate Action and UNEP FI (UNEP Finance Initiative) hosted the Sustainable Investment Forum in Paris on March 13, 2018. Decision-makers, European policymakers, NGOs and think tanks were invited to discuss concrete solutions to the current challenges of the European and global climate finance market.

Eric Usher, Head of UNEP Finance Initiative, answered to Climate Action questions on the future of financial markets in the light of sustainability.

UNEP FI celebrated its 25 year anniversary recently. How do you see its role developing over the next five years as sustainable finance accelerates?

Progress going forward within UNEP FI will be about helping its members achieve a fuller scale institutional re-alignment with sustainable development, and aligning with the 2-degree economy. Scaling up the green, but also turning down the brown and realizing the leadership, the management, the products and the full value chain needed to turn the ship.

The climate debate has awakened the broader financial and investor community to the wider and yet still intensifying risks of unsustainability, and forced them to confront how exposure to these risks could affect the bottom line.

This means understanding and embedding climate and natural capital-related risks and opportunities into day-to-day operations. This work is increasingly pointing to the interconnectedness of sustainability risks across not only economies but also financial portfolios, and the need for new second generation, more forward-looking approaches to climate and environmental risk management.

Are financial markets and investors doing enough to tackle climate change? If not, what should they do?

If financial markets and investors were doing ‘enough’ to tackle climate change, then they would already be fully aligned with the ‘climate economy’. Meaning: they would today be effecting capital allocation in ways that would supply the financing required for economic decarbonization and resilience within the shrinking timeframe.

That clearly is not the case at the moment: global flows of climate finance have stagnated at levels much lower than the levels at which they need to be. Flows are roughly USD 700 billion per annum, according to a recent biennial assessment of the UNFCCC, but substantially north of USD 1.5 trillion per annum are needed.

The gap in financing that we see is not just the result of inaction on the ‘supply side of finance’ (meaning the financial intermediaries such as banks, pension funds, and insurance companies that facilitate financing). It is the result of much more systemic issues  — issues that largely depress demand for, rather than the supply of climate finance  —  and that the finance sector alone does not have the power or influence to address. What I mean with the demand side of finance is all the emerging climate-compatible technologies, business models, and infrastructures that we need for the transition to the climate-compatible economy and that require financing to grow, progress, be disseminated, etc. These technologies, business models, and infrastructures, still do not have a level playing field with conventional options because the global carbon externality works against them. And public policy, when looked at worldwide, is still failing to change that.

However, the finance sector has the power and influence to work with other stakeholders  —  especially governments and other public policy makers  —  to help solve the systemic, regulatory issues. By clearly signalling the availability of climate finance even in the absence of demand, they will create momentum and can kick start innovation.

We see promising signs here with the finance sector becoming more politically and technically engaged on climate matters. Be it through global statements on climate policy, global engagement campaigns by shareholders aimed at large emitters of Green House Gases, the development of standardized taxonomies and standards to better categorize, measure and channel climate finance, as well as to assess and disclose climate-related risks.

While promising, certainly more can be done, including in the mainstream of the finance sector.

What outcomes do you expect from the Pilot Project on Implementing the TCFD (Task Force on Climate-related Financial Disclosures) Recommendations?

One of the key outcomes is political: this ongoing pilot for banks, as well as the upcoming pilots for insurers and investors, will signal to stakeholders that the finance sector welcomes, endorses, and is behind the TCFD agenda and the TCFD recommendations. To the extent that they are preparing to significantly increase their levels of climate disclosure, via the TCFD framework. This will further the agenda and motivate other industries to follow suite.

The other outcomes are more technical: the pilot will deliver, and make publicly available, the set of tools required by banking organizations in the wider UNEP FI membership and beyond to fairly easily start assessing and disclosing climate-related risks, as foreseen by the TCFD  —  in a forward-looking way using a range of transition and physical risk scenarios. It will also deliver more qualitative case studies, one per bank in the pilot, on how the bank staff went about working with colleagues from other parts of the organization, to ensure a smooth implementation of the recommendations. This will guide other banks on how the tools mentioned above can actually be applied in the internal processes of the banks.

What do you think are the biggest barriers to ESG integration in Europe?

We believe the next step in ESG integration is for financiers to take a more holistic approach to extra-financial analysis, appraising both positive and negative impacts and doing so across the three pillars of sustainable development.

In an increasingly service-based and technologically enhanced economy, tomorrow’s business models and companies will in fact be impact-based: they will specialize in mobility, in water efficiency, in education and health.

Believing that with the SDGs, Impact is becoming a new sort of currency, a group of UNEP FI members prepared and released last year Principles for Positive Impact Finance. This framework defines what essentially is SDG compliant finance.

By doing this, we’re preparing for an economy where impacts will become much more central, and offer a common language for all actors needing to identify truly positive impact, SDG-serving, business and finance.

Over time the emergence of an SDG ‘market’ is essential if we are to address the so-called funding gap and fulfill the SDGs.

You spoke at the Sustainable Investment Forum Europe, what do you think can be achieved in terms of outcomes of the Forum?

While the industry has made great strides in sustainable finance over the past 25 years, there is still a long road ahead to a sustainable and resilient global economy supported by a sustainable finance system.

It’s no longer enough to just buy a few green bonds or make a few renewables investments and say that you are green and ready for the changes ahead.

Sustainable Investment Forum Europe, building on earlier events in New York and at the Climate COPS, is an opportunity to learn from and meet with leaders from across the industry who are already turning their ships and generating value from investing in our low carbon future.

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About the Author

The Beam Magazine is a quarterly print publication that takes a modern perspective on the energy transition. From Berlin we report about the people, companies and organizations that shape our sustainable energy future around the world. The team is headed by journalist Anne-Sophie Garrigou and designer Dimitris Gkikas. The Beam works with a network of experts and contributors to cover topics from technology to art, from policy to sustainability, from VCs to cleantech start ups. Our language is energy transition and that's spoken everywhere. The Beam is already being distributed in most countries in Europe, but also in Niger, Kenya, Rwanda, Tanzania, Japan, Chile and the United States. And this is just the beginning. So stay tuned for future development and follow us on Facebook, Twitter, Instagram and Medium.



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