Unit 12: The Future of Green and Sustainable Finance PDF

484 |Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance INTRODUCTION LEARNING OBJECTIVES This chapter revises some of the key themes covered On completion of this final chapter, yo...

484 |Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance INTRODUCTION LEARNING OBJECTIVES This chapter revises some of the key themes covered On completion of this final chapter, you will be able to: in this study guide, considers the extent to which the finance sector has aligned its strategies, activities and explain why it is vital to the finance sector and society operations with the objectives of the Paris Agreement as a whole for green and sustainable finance to and the UN Sustainable Development Goals, and become part of mainstream finance; explores what more needs to be done to make finance consider progress to date in aligning finance with truly ‘sustainable’. We examine some of the barriers and the objectives of the Paris Agreement and the UN challenges to embedding green and sustainable finance Sustainable Development Goals; principles and practice across banking and finance, and describe key challenges to the further growth of green how these may be overcome. and sustainable finance; In addition, we introduce two emerging areas of interest describe key emerging areas of interest in green and that Green and Sustainable Finance Professionals sustainable finance - including nature-based and should be aware of – nature-based finance and ocean ocean finance; finance. Finally, we consider the role(s) individuals can explain the role of Green and Sustainable Finance play as Green and Sustainable Finance Professionals Professionals, and what individuals can do to promote in embedding green and sustainable finance principles and embed green and sustainable finance principles and practices within their professional activities, teams and practice; and and organisations, and across finance as a whole, with the objective of ensuring that every professional financial develop a personal action plan for embedding the decision takes climate change – and other environmental and principles and practice of green and sustainable social sustainability factors - into account. finance in your professional activities. 485 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.1 PROGRESS IN ALIGNING FINANCE WITH but growing niches within the finance sector, and in only 12.1.1 Policy and Regulatory Developments to Align SUSTAINABILITY some parts of the world. The threshold for success in Finance with Sustainability terms of alignment is permanent adoption across the Throughout this study guide, we have introduced and As we have seen throughout this study guide, finance whole global financial system so that, as set out in the explored many policy and regulatory initiatives and plays a key role in addressing climate change and other COP 26 Private Finance Strategy - which we explore in responses to climate change and broader environmental environmental and social challenges. We have examined more detail in 12.1.4 “… every professional financial decision and social sustainability challenges. These have included how aligning finance with the objectives of the Paris takes climate change into account…” (and a wider range policy and regulation at the global level (for example, Agreement and the UN Sustainable Development Goals of environmental and social sustainability factors, too). the Paris Agreement), at the regional level (for example, benefits the natural world and society. We have also seen Despite the significant progress that has already been the EU Green Deal and Sustainable Finance Action how this can benefit financial institutions, too. When made and the rapid growth of green and sustainable Plan) and at the national level. Also, as we explored financial institutions develop and embed the expertise finance, this remains a distant but not unachievable in earlier chapters, policy makers, central banks and and cultures that enable them to identify, disclose objective at the current time. financial regulators have identified climate change and and manage climate, environmental and sustainability wider environmental and social sustainability factors risks, this enhances their organisational resilience - and As we have also seen throughout this study guide, finance as potential threats to institutional and overall financial that of the financial system overall. It also helps them has often harmed the environment and society through stability, and so efforts to identify, disclose and manage identify and take advantage of opportunities to invest its lending, investment and underwriting activities, these risks have become priorities in many jurisdictions, in the transition, and support customers’ and clients’ and still does in many areas. There is still much to do, with global responses co-ordinated by bodies including transitions, as well. Supporting sustainable growth, therefore, to align finance and sustainability, and to the FSB and NGFS. resilience and prosperity – globally, nationally and locally mainstream green and sustainable finance principles – is good for finance, good for society and good for our and practice across our financial system. This requires From a policy and regulatory perspective, there has been planet. international and national initiatives (many of which we very significant progress in many areas since the signing introduced and examined earlier in this study guide), of the Paris Agreement in 2015. It is impossible to note or In addition, playing a proactive role in supporting (and, at financial institutions and individual finance professionals summarise all those covered in earlier chapters, but key times, leading) the transition to a sustainable, low-carbon to work together to embed green and sustainable finance developments include those set out next. world helps demonstrate a positive social purpose for the principles and practice throughout finance, as we will see finance sector and profession. This can help reconnect in this final chapter. At the global level: finance and society, contributing to the process of The publication in 2021 and 2022 of the IPCC’s rebuilding trust and confidence in financial services First, we will look at progress in aligning finance with the most recent, comprehensive assessment of climate severely impaired during the Global Financial Crisis in objectives of the Paris Agreement, the UN Sustainable science (AR6, summarized and discussed in Chapter 2008 and by other events. Development Goals and broader sustainability objectives. 2), which found that human activities were having Then, in the next section, we will examine some of the Aligning finance with sustainability, and mainstreaming unprecedented and irreversible effects on the global barriers and challenges that prevent the continued green and sustainable finance must, ultimately, require climate. Global warming is now assessed as being likely growth of green and sustainable finance, and how these green and sustainable finance principles and practices to rise under all scenarios by more than 1.5o above may be overcome. to be irreversibly adopted, implemented and embedded. pre-industrial levels by 2040 and by more than 2oC It will not be sufficient for these to be adopted in small later in the century without dramatic and sustained reductions in greenhouse gas emissions. 486 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance The evolution of global and national climate action number of major jurisdictions, led by the UK, EU and India (the third largest emitter of greenhouse gases) via the UNFCCC COP 26, held in Glasgow, Scotland in other G7 nations are introducing mandatory TCFD- committing to achieving net zero emissions by 2070, November 2021, which saw the first global stocktake aligned disclosures, with other countries likely to follow. including a more ambitious interim 2030 target of of progress towards the objectives of the Paris reducing emissions by 45% from 2005 levels. New Agreement since it was signed in 2015. Countries At the regional level, in Chapter 3 and elsewhere we sustainability disclosure regulations are being presented updated, more ambitious climate action introduced the EU European Green Deal, Sustainable introduced for listed companies, and the Reserve plans for restricting global warming, and also agreed Finance Action Plan and related policy and regulatory Bank of India (the central bank) has joined the Network plans to address biodiversity loss, deforestation activities. The European Green Deal, estimated to for Greening the Financial System and is integrating and other environmental harms. Updated Nationally require investment of some €1 trillion over a 10-year climate-related risks into its supervisory activities. Determined Contributions (NDCs) and other pledges period, aims to support a sustainable recovery from made would not by themselves, however, lead to the the COVID-19 pandemic via accelerating the EU’s green In terms of financial policy and regulation, which we dramatic and sustained reductions in greenhouse gas transition. The European Green Deal will be supported by covered extensively in earlier chapters: emissions required to meet the objectives of the Paris the EU Taxonomy for Sustainable Activities and a range The Network for Greening the Financial System (NGFS) Agreement. of further policy actions including the development of is playing a leading role in coordinating central banks’ a Social Taxonomy, an EU Green Bond standard, new and financial regulators’ approaches to identifying, The establishment in 2021 of the Glasgow Financial transparency and disclosure requirements, and retail Alliance for Net Zero (GFANZ), which brings together disclosing and managing the climate risks faced by investment labels. financial institutions. Having now grown to more than over 450 financial firms responsible for assets of more than $130 trillion from the UN-convened Net- 100 members, the NGFS encompasses the majority of At the national level, three major developments are: Zero Banking, Asset Owners and Insurance Alliances, global emissions via the jurisdictions represented by China (the largest emitter of greenhouse gases) its members, and works with many other international plus the Net Zero Asset Managers Initiative, Net publishing its 14th Five-Year Plan, covering the period regulatory bodies to further harmonise global Zero Financial Services Providers Alliance, Net Zero 2021-2025. The plan sets legally binding targets to approaches. Investment Consultants Initiative and Paris Aligned reduce emissions by 18% in that period, and sets a Investment Initiative. By bringing together this wide target for China to become carbon neutral by 2060. As Central banks and financial regulators are beginning grouping of net zero finance initiatives in one sector- to have mandates revised and updated to include we saw in Chapter 4, China has also recently launched wide strategic forum, GFANZ will catalyse the strategic tackling climate change and ensuring environmental the world’s largest emissions trading scheme. and technical coordination of the financial services sustainability as well as financial stability. Examples sector globally to align lending, investment and other The US (the second largest emitter of greenhouse include the Bank of England, PRA and FCA in the UK; financing activities with the objectives of the Paris gases) re-joining the Paris Agreement. As a and the European Central Bank, European Banking Agreement. consequence, key regulatory bodies including the Authority, European Securities and Markets Authority US Federal Reserve (‘The Fed’) and Securities and and European Insurance and Occupational Pensions The increasing impact of the Taskforce for Climate- Exchange Commission (SEC) are beginning to take Authority, which are aligning their mandates and work related Financial Disclosures (TCFD). Some 3,400 rapid action to ensure financial institutions identify, programmes to support the European Green Deal, and organisations (as of January 2022) now align their disclose and manage climate risks, as we outlined in sustainability more broadly. disclosures with the TCFD’s recommendations, Chapter 5. including more than 60 of the world’s 100 largest A wide variety of national taxonomies, green and public companies. As we saw in Chapter 5, a growing sustainable bond frameworks and other policy tools 487 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance (many examples of which we have seen during this study guide) have been developed and implemented to ensure market integrity and support the continued QUICK QUESTION: WHAT RECENT (OR FORTHCOMING) growth of green and sustainable finance. POLICY AND REGULATORY DEVELOPMENTS ARE YOU In addition to regulatory and supervisory activity AWARE OF IN THE COUNTRY/MARKET(S) WHERE YOU LIVE focused on climate risks, national regulators such as BaFin in Germany and the UK’s FCA are developing AND WORK? regulatory tools and guidance to identify and prevent Write your answer here before reading on. greenwashing and mis-selling, particularly in the retail investment market. The European Commission’s Sustainable Finance Disclosures Regulation (SFDR), which aims to prevent greenwashing by introducing new transparency and disclosure requirements for financial firms providing or advising on investment and mutual funds, UCITS and pensions, is perhaps the best known example of such regulation to date. With policy and regulation key drivers of financial services firms’ strategies, capital allocation decisions, activities and operations, the increasing alignment and clear direction of these - globally, regionally, nationally and in terms of the financial sector - provides a firm foundation for the continued growth of green and sustainable finance. As will be clear from this study guide, the pace of policy and regulatory development is extremely rapid, and is likely to continue to accelerate. Green and Sustainable Finance Professionals should, therefore, do all they can to keep up-to-date with general policy and regulatory developments, and in particular with those developments that impact their professional practice. 488 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.1.2 Market Developments Evidencing the Growth of FinTech and digital finance tools and techniques are hold portfolios aligned with well above 3oC of global Green and Sustainable Finance being used in retail and corporate banking markets, warming. There remains a great deal of inertia and Aligning finance with sustainability implies the growth of in investment and in insurance to align finance with embedded practice to overcome. green and sustainable finance markets, and we have seen sustainability, and to incentivise and support more sustainable consumption and behaviours, as we Whilst policy and regulation can and do unlock evidence of this throughout this study guide and course. discussed in Chapter 11. sustainable finance, ultimately it will be the growing For example: understanding and appreciation of the commercial The green and sustainable bond market continues to As we explored in earlier chapters, there are many drivers opportunities from financing and supporting the grow and develop. As we saw in Chapter 7, total green of the growth of green and sustainable finance markets, transition to a more sustainable, low-carbon world bond issuance now exceeds $1.5 trillion, with record including: that brings green and sustainable finance into the annual issuance of green bonds in 2021 of some $523 mainstream of finance overall. We saw in Chapter 1 that, the development of policy and regulation to address while estimates vary, approximately $6 trillion per year is billion. climate change, other environmental and sustainability required to support the transition to net zero over the Total global sustainable investment now exceeds $35 challenges, and to align finance with the objectives of next 20-30 years. The global economic transition will trillion of assets under management, as we noted in the Paris Agreement and other sustainability goals; be the most capital-intensive in human history and – if Chapter 9, and accounts for more than 1/3 of total we are to keep global warming below 2oC and as close an increasing understanding of climate, environmental global assets under management. to 1.5oC above pre-industrial levels as possible – it and broader sustainability risks – and of opportunities Multilateral development banks (and national that stem from supporting the transition to a more will require a rapid deployment of capital to support development and green development banks) are sustainable, low-carbon world; the development of a sustainable, low-carbon global increasingly aligning their strategies and financing economy within three decades. We have seen that public increasing evidence of at least average and possibly activities to support environmentally and socially funds are insufficient, by a considerable margin, to above-market returns from sustainable investments sustainable sectors, projects and activities, as we saw finance the transition, and it estimated that up to 80% of and sustainable investment strategies, as we in Chapter 8. Development banks play key roles in new the capital required will need to come from private sector discussed in Chapter 9; and market and product development, and in unlocking finance. private finance through ‘blended finance’ approaches. changing demographics and evolving consumer, investor (and investment manager) values, preferences The transition to net zero also involves a fundamental Market standards, frameworks and guidance to economic change: a shift away from generally opex- and behaviours. strengthen market integrity and support the growth of based systems (characterised by relatively low, upfront green and sustainable finance market segments and We must continue to bear in mind, however, and have capital costs followed by high, variable resource input products are becoming more widespread, and more emphasised throughout this study guide, that despite costs) to capex-based ones (with relatively high, upfront firmly embedded. We introduced a wide range of these very substantial growth in green and sustainable finance capital costs followed by low marginal costs). Examples in earlier chapters, including, but not limited to, the since the signing of the Paris Agreement in 2015, there include investments in offshore wind farms (expensive to Green Bond, Social Bond and Sustainability-Linked is still a long way to go before it can be considered construct, but then the wind – at least in theory – blows Bond Principles, and the Green Loan and Sustainability mainstream, that is, a core part of all financial services for free) and retrofit mortgages (the costs of installing Linked Loan Principles. everywhere. Fossil fuel financing outweighs the financing heat pumps and insulation are offset by lower ongoing of alternatives, for example, and global markets overall heating bills). For the transition to succeed, the availability 489 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance of substantial amounts of low-cost capital, particularly for low-carbon infrastructure and technology, and to support sectors’ and firms’ transitions to low-carbon business QUICK QUESTION: WHAT RECENT GREEN AND models, is essential. This can generate substantial commercial opportunities for lenders, investors and SUSTAINABLE MARKET DEVELOPMENTS ARE YOU AWARE underwriters able to assess the risks and opportunities OF IN THE COUNTRY/MARKET(S) WHERE YOU LIVE AND involved and make capital available. WORK? IS THERE A NATIONAL ORGANISATION THAT Mobilising capital to support the transition is the role TRACKS THESE of the finance sector, as set out in Article 2.1 (c) of the Write your answer here before reading on. Paris Agreement – connecting lenders and investors with projects and other investment opportunities that deliver both financial returns and positive environmental or other sustainable impacts. As green and sustainable finance markets grow and develop, capital will become increasingly aligned with sustainable objectives, and the finance sector increasingly aligned with sustainability. 490 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.1.3 Finance Sector Developments to Align Finance the International Network of Financial Centres with Sustainability and Support the Growth of Green for Sustainability (FC4S), introduced in Chapter and Sustainable Finance 3, a collective of some 40 major financial centres In addition to the policy, regulatory and market representing more than 80% of global equity markets developments highlighted in the previous sections, working to achieve the objectives of the Paris further evidence of the alignment of finance with Agreement and the UN Sustainable Development sustainability comes from the growth in the size and Goals5; and impact of key finance sector alliances and initiatives, Climate Action 100+, an alliance of more than 615 many of which we introduced and examined in earlier institutional investors who, as we examined in Chapter chapters. Major alliances and initiatives that Green and 3, engage systemically important greenhouse gas Sustainable Finance Professionals should be aware of, emitters to seek to improve governance on climate and follow, include: change, curb emissions, and strengthen climate- related financial disclosures6. the Principles for Responsible Investment, which, as we saw in Chapter 9, now comprises more than The growth of and coordination within and often between 4,600 signatories from the investment community these and other alliances and initiatives is certainly a representing more than $100 trillion in assets under sign of progress in aligning finance with sustainability, management1; and the growth of green and sustainable finance. The the Principles for Responsible Banking, which, as noted fact that such alliances and initiatives exist, though, is in Chapter 6, have now been adopted by more than also evidence that much more needs to be done to align 270 banks representing approximately 45% of global finance with the objectives of the Paris Agreement and banking assets under management 2; broader sustainability goals. A sense of proportion is also required. Whilst the growth and membership of the the Principles for Sustainable Insurance, which, as we groups and initiatives outlined previously and elsewhere saw in Chapter 10, have been adopted by more than in this study guide and course are impressive, we should 140 organisations representing approximately 25% of remember that many financial institutions – and in some world premium volume3; sectors, countries and regions the majority of them - are the Glasgow Financial Alliance for Net Zero (GFANZ), not members of these. This does not necessarily mean which, as we described in Chapter 3, brings together that such institutions are not aligning their strategies, over 450 financial institutions with more than $130 operations and activities with sustainability, but it trillion of assets under management, coordinating does indicate that there is still considerable progress sectoral net zero initiatives including the Net Zero needed until green and sustainable finance principles Banking Alliance, Net Zero Asset Owner Alliance, Net and practices are irreversibly adopted, and consistently Zero Insurance Alliance and Net Zero Asset Manager implemented and embedded. Initiative4; 491 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.1.4 Fully Aligning Finance with the Objectives of the Paris Agreement – the COP 26 Private Finance Strategy QUICK QUESTION: WHICH OF THESE (OR OTHER) The objective of the COP 26 Private Finance Strategy, FINANCE SECTOR ALLIANCES AND INITIATIVES IS YOUR developed by Mark Carney in his role as UN Special Envoy for Climate Action and Finance, is to “… ensure every ORGANISATION, OR AN ORGANISATION YOU ARE FAMILIAR professional financial decision takes climate change into WITH, A MEMBER OF? account…” – a goal and theme we have returned to on many occasions throughout this study guide. Only when Write your answer here before reading on. this is the case – and when every professional financial decision takes not just climate change, but also the wider aspects of environmental and social sustainability into account - will we be able to say that green and sustainable finance has been genuinely mainstreamed, and finance aligned with sustainability. (These broader aspects of sustainability are beyond the scope of the COP 26 Private Finance Strategy, as it is focused on achieving the objectives of the Paris Agreement.) COP 26 – the global climate summit held in Glasgow, Scotland in November 2021 – provided the first opportunity for a global stocktake of progress towards the objectives of the Paris Agreement since it was signed in 2015, with countries presenting updated, more ambitious climate action plans in the form of their nationally determined contributions (NDCs), including pledges from China and India to achieve net zero by 2060 and 2070, respectively. The main outcomes of COP 26 were published in the Glasgow Climate Pact, which called on governments to enact stricter emissions reductions policies and to close gaps in the implementation of the Paris Agreement, including the “phasing down” of coal- fired power generation7. From a finance perspective, the Glasgow Climate Pact emphasised the need to accelerate the alignment of the finance sector (both public and private) and to mobilise climate finance from all sources to reach the levels needed to achieve the goals of the Paris Agreement. 492 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance This requires the adoption and implementation of a OVERVIEW OF THE COP 26 PRIVATE FINANCE STRATEGY global framework through which private finance can align its activities with the objectives of the Paris Agreement. The COP 26 Private Finance Strategy, published in advance of the climate summit, aims to provide this. Risk It focuses on four areas: reporting, risk management, Management Returns returns, and mobilisation (which we have explored realised from the throughout this study guide), as set out in the diagram of physical and enormous commercial opposite and explored in the reading that follows: transitional risks from opportunities in the climate change. transition to net zero. Reporting Mobilisation of private finance for of climate-related financial investment in developing risks and opportunities and emerging economies by companies in line through new market with the TCFD. Financial institutions must structures and public- be embedded through a private partnerships. framework to ensure every financial decision takes climate change into account Source: Carney (2020) Building a Private Finance System for Net Zero – Priorities for Private Finance for COP 26 493 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance READING: COP 26 PRIVATE FINANCE STRATEGY – Scope and Objectives The COP26 Private Finance Hub, led by Mark Carney BUILDING A PRIVATE FINANCE SYSTEM FOR NET Achieving the objective agreed in the Paris in his capacity as UN Special Envoy and Adviser to ZERO Agreement to limit global temperature increases the Prime Minister, will focus on building a system to below 2°C from pre-industrial levels requires that mobilises private finance to support the re- Introduction engineering of our economies for net zero. a whole economy transition — every company, COP 26, to be held in Glasgow in November 2021 bank, insurer and investor will have to adjust their (delayed by 12 months because of the COVID-19 The objective for the private finance work for COP business models, develop credible plans for the pandemic) is considered to be the most important 26 is simple: ensure that every professional financial transition, and implement them. In recognition of global climate summit since COP 21 in Paris in 2015. decision takes climate change into account. the scale of the task, 125 countries, including half This is because countries are expected to assess the G20, have now committed to net zero by 2050 This requires the right framework so that the progress on implementation of the Paris Agreement at the latest. There is a clear opportunity to invest financial sector can allocate capital to manage risks and announce updated Nationally Determined in a green, resilient recovery as countries seek to and seize opportunities in the transition to net zero. Contributions (NDCs) – their climate action plans, recover from the pandemic. To this end, the COP26 Private Finance Hub will work in effect – aligned with limiting global warming to with the private sector and other stakeholders to below 2oC above pre-industrial levels, and as close Achieving climate goals will require all forms of develop: to 1.5o above pre-industrial levels as possible. finance. Public and blended finance, including the important commitment made by developed Reporting: improving the quantity, quality and This requires a whole economy transition, enabled countries to mobilise $100bn annually by 2020 for comparability of climate-related disclosures by the private finance sector. Finance is critical to climate finance, have a vital part to play in the shift by implementing a common framework built accelerating and smoothing the transition both to a greener, more resilient economy and a fair on the Taskforce for Climate-related Financial by (a) funding new business models, technologies transition for society. They will contribute to critical Disclosures (TCFD) recommendations. Specific and firms and sectors moving from high- to low- infrastructure development, support adaptation deliverables include: carbon models and activities, and (b) amplifying the and resilience, and help develop new markets effectiveness of government climate policies. To for private finance by de-risking investment. And – improving the quality and quantity of climate- support the alignment of private finance with the mainstream private finance will help all companies related financial disclosures objectives of the Paris Agreement, the UN Special realign their business models for net zero. It will Envoy for Climate Action and Finance developed – promoting alignment of disclosure globally fund the initiatives and innovations of the private the COP 26 Private Finance Strategy. This not just around the TCFD framework sector and turn billions committed to climate a strategy for COP 26, but rather a strategy and investment through public channels into trillions of – establishing pathways to mandatory roadmap for the finance sector beyond COP 26 total climate investment. disclosure. to support a successful economic transition to net zero. Risk Management: ensuring that the financial sector can measure and manage climate-related financial risks. Specific deliverables include: 494 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance – assessing the resilience of companies and financial sector to climate risks QUICK QUESTION: WHAT IS YOUR ORGANISATION DOING – ensuring the financial sector develops tools and TO ENSURE THAT ‘EVERY PROFESSIONAL FINANCIAL products to manage climate-related financial risks. DECISION TAKES CLIMATE CHANGE INTO ACCOUNT’? WHAT MORE DO YOU THINK IT COULD DO, AND WHERE SHOULD Returns: helping investors identify the IT PRIORITISE? opportunities in the transition to net zero and report how their own portfolios are aligned for the Write your answer here before reading on. transition. Specific deliverables include ensuring that financial institutions have the frameworks to: – assess the credibility of net zero transition plans – measure alignment of their portfolios with the transition to net zero – make their own commitments to net zero. Mobilisation: increasing private financial flows to emerging and developing economies by connecting available capital with investable projects and encouraging new market structures. Specific deliverables include increasing private flows of finance to emerging and developing economies to finance the transition to net zero by: – developing the pipeline of investable projects – aligning development bank funding with climate goals – encouraging new market structures and products. Source: Carney (2020) Building a Private Finance System for Net Zero – Priorities for Private Finance for COP 26 (online). Available at: https:// ukcop26.org/wp-content/uploads/2020/11/COP26-Private- Finance-Hub-Strategy_Nov-2020v4.1.pdf [Accessed: 23 January 2023] 495 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.2 CHALLENGES TO THE GROWTH AND a lack of co-ordination and consistency the lack of uniform or harmonised taxonomies to MAINSTREAMING OF GREEN AND SUSTAINABLE data challenges support a common definition of, and approaches FINANCE to, green and sustainable finance (and the inclusion capacity, capability and cultural challenges preventing for political reasons of some activities in taxonomies, Despite undoubted progress in recent years, as outlined and avoiding greenwashing such as gas-fired power generation, that many would in the introduction to this chapter and throughout this consider to be unsustainable); and study guide, finance overall is not at present aligned We examine each in turn next. with the objectives of the Paris Agreement and the UN the lack of clear and consistent guidance for 12.2.1 Policy and regulatory challenges boards and investment managers on incorporating Sustainable Development Goals. As we saw in earlier chapters, bank financing for fossil fuels increased each As we have explored in this study guide, there are sustainability within fiduciary duty (as we discussed in year following the signing of the Paris Agreement in many international and national policy and regulatory Chapter 9). 2015, only falling back slightly in 2020 and 2021. Whilst initiatives designed to improve the identification of Policy and regulatory challenges go beyond those in the the green and sustainable bond market has grown climate and other sustainability risks, support the growth financial arena, however, and many of the challenges to rapidly, total issuance only comprises a small proportion, and integrity of green and sustainable finance markets, the growth of green and sustainable finance come from perhaps 3% - 5% (depending on the definitions used) of and encourage and incentivise financial institutions other areas of policy and regulation that impact on the total bond issuance. Investors and investment managers to align their strategies, activities and operations with willingness or ability of financial institutions to invest in are adopting sustainable investment strategies and sustainability. Despite this, and the efforts of bodies projects and activities with sustainable outcomes and aligning portfolios and funds with ESG and other criteria, such as the NGFS in particular, the broader architecture objectives. but there is growing doubt about the sustainable of policy and regulation often does not support the credentials of some funds, leading regulators to take alignment of finance (and economic activity in general) In general, financial markets and financial institutions action to prevent greenwashing and mis-selling, as we with the objectives of the Paris Agreement and other require policy and regulatory stability, and when this is examined in Chapter 9. Overall, as we set out in Chapter sustainable goals. absent it becomes more difficult and expensive to lend 1, it is estimated that financial institutions’ portfolios are and invest, particularly in the longer term. Changes in For example, in terms of financial policy and regulation, aligned with significantly more than 3o of global warming building codes, carbon taxes, emissions criteria, feed-in current challenges include: above pre-industrial levels, rather than the below 2o and tariffs and subsidies for electric vehicles and renewable ideally 1.5o as required by the Paris Agreement. There is existing bank and insurance capital requirements energy, to give just some examples, can affect the still a long way to go, therefore, until “… every professional (Basel III and Solvency 2), which, as currently drafted, risk/return profile of a lending or investment decision. financial decision takes climate change into account”. can restrict the flow of capital to green and sustainable Uncertainty over the frequency and extent of changes projects due to relative capital weightings; to these and other policy and regulatory areas tends to There are a number of significant challenges to be increase risk and reduce the ability and willingness of overcome to mainstream green and sustainable finance, the absence of a ‘green supporting factor’ for bank institutions to deploy capital. many of which we have explored throughout this study capital, or similar incentives for investors (including guide. These include: insurers) to hold sustainable assets – or the introduction of higher risk weightings for high carbon policy and regulatory challenges assets; economic challenges 496 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance Unfortunately, the reality in many countries is that, despite high-level political commitments to tackling climate change and other sustainable goals, a wide QUICK QUESTION: WHAT POLICY AND REGULATORY variety of economic, political and social factors lead to policy and regulatory changes on a frequent basis. CHALLENGES (IN TERMS OF FINANCIAL REGULATION, OR An obvious example is the US withdrawing from the MORE BROADLY) ARE YOU AWARE OF IN THE COUNTRY/ Paris Agreement under President Trump and re-joining MARKETS WHERE YOU LIVE AND WORK? under President Biden. At a more prosaic level, many countries have seen subsidies for solar panels introduced, Write your answer here before reading on. increased, decreased, and removed. Given that many of the financing decisions required to support climate change mitigation and adaptation activities, and other sustainable objectives, require a longer-term time horizon, policy and regulatory uncertainty reduces the attractiveness of such investments relative to well- known, stable (but high-carbon) alternatives. Financial institutions do factor this uncertainty into lending and investment decisions, but long-term policy and regulatory certainty would improve the viability of many projects and investments. 497 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.2.2 Economic challenges and costs of doing business more generally. For the Progress has undoubtedly been made, but can be over- The greatest economic challenge to mainstreaming green green and sustainable finance sector to grow in many stated. For example: and sustainable finance is the lack of a realistic, global developing countries, the finance sector itself must develop and grow, too. The UN Sustainable Development As we saw in Chapter 5, some 3,400 organisations carbon price, although – as we saw in Chapter 5 - some Goals provide a helpful framework for addressing the (as of January 2022) have aligned their reporting with countries and regions are now making progress in this wider sustainability issues faced by the developing the TCFD’s recommendations, including more than area. As we saw in earlier chapters, the IMF estimates that world in particular, but further substantial capital will be 60 of the world’s 100 largest public companies. Some a global carbon tax of $75 per ton would be required by required to achieve these. jurisdictions, including G7 members, are introducing 2030 to reduce emissions to a level consistent with 2oC of mandatory TCFD disclosures for large companies, global warming - but the current average emissions price 12.2.3 Lack of coordination and consistency including financial institutions. This still means, though, ( June 2021) is only $3 per ton, and some 80% of global In earlier chapters, we saw that governments, central that the very great majority of organisations do not emissions are not currently priced at all8. Carbon pricing banks and financial regulators are increasingly seeking report in line with the TCFD’s recommendations, or via carbon taxes, cap-and-trade schemes and credible to coordinate and harmonise approaches to addressing indeed report their exposure to climate risks at all carbon offsetting programmes, as explored in Chapter the identification and disclosure of climate and other (although these may be captured in disclosures to the 5, creates incentives for organisations to invest in low- sustainability risks, and to encourage the growth and extent that they form part of reporting organisations’ carbon technologies and transition to reduce carbon integrity of green and sustainable finance through bodies supply chains). Furthermore, many of the organisations use and emissions. It also helps organisations price - and such as the FSB and NGFS in areas that include: that do currently report do not necessarily fully hence quantify - climate-related risks and opportunities meet the TCFD’s requirements, particularly in terms and make capital allocation and other strategic decisions requiring financial institutions and other large of forward-looking scenario analysis; this makes that take the true costs of emissions (externalities) into organisations to identify and disclose their exposure comparisons between organisations and over time account. The current price of carbon, however, means to climate and other sustainability risks (often aligned difficult. that capital is misallocated, high-carbon investments are with the recommendations of the TCFD); In Chapter 4, we saw how the reporting of greenhouse favoured over low-carbon alternatives, externalities are under-priced, and the growth of green and sustainable conducting stress tests based on climate scenarios gas emissions (particularly Scope 3, financed finance is slowed. such as those developed by the NGFS; emissions) and broader sustainability impacts is fragmented, with a wide range of different bodies enhancing financial institutions’ governance and The need to grow green and sustainable finance in the and methodologies involved. There are no standard management of climate and environmental risks; developing world, where many of the required climate regulatory requirements as there are (to a large change mitigation and adaptation activities need to take supporting the development and adoption of market extent) for financial reporting. As we discussed, place, is a further economic challenge. Aligning finance standards, guidelines and frameworks such as the the newly-established International Sustainability with the objectives of the Paris Agreement in developed Green Bond and Green Loan Principles; and Standards Board (ISSB) aims to standardise non- and mature financial markets alone will not be sufficient avoiding and preventing the mis-selling of investments financial reporting, but it will take time to develop and to support the transition to a sustainable, low-carbon (greenwashing) by developing criteria for describing apply standards globally, and some major jurisdictions world. Investment in the developing world is hampered and labelling funds and investments as ‘sustainable’ – such as the US – may choose to remain outside by a number of factors, including a lack of developed and/or ‘ESG’. the remit of any new body, as is the case for with financial markets and regulatory infrastructure, political International Financial Reporting Standards. instability (in some cases), and higher costs of capital 498 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance Despite the development of the EU Sustainable sustainable objectives can be difficult because there decisions, capital can be misallocated, climate and other Finance Taxonomy and the importance of the is often multiple and overlapping membership and sustainability risks mispriced (or not identified), and European financial markets for green and sustainable reporting. the risks of deliberate or inadvertent greenwashing finance, the Taxonomy does not seem likely to become heightened. a global standard. Other major financial markets, The situation should be improved to some extent including China, the UK and the US, have developed or with the establishment of the UN-convened Net Zero It is not always a lack of data that is the greatest are in the process of developing their own taxonomies, Banking Alliance, Net Zero Asset Owner Alliance and challenge, however. In earlier chapters we noted that which may be broadly similar in many respects but Net Zero Asset Manager Initiative, now encompassed environmental performance data, in particular, are also contain important differences reflecting differing within the Glasgow Financial Alliance for Net Zero becoming increasingly available due to developments political, economic and societal choices. (GFANZ), introduced in Chapter 3. The UN Principles in data collection from satellites and other climate/ for Responsible Banking, Principles for Responsible weather monitoring platforms, as well as from drones, The lack of coordination and consistency is a challenge Investment and Principles for Sustainable Insurance also remote sensors and smartphones. Both structured and to the global growth of green and sustainable finance as bring a greater degree of consistency to their relevant unstructured data are increasingly available and utilised, it increases the cost and complexity faced by financial sectors. and we looked at several examples of this in this study institutions seeking to work globally. This is not just an guide (such as Sustainalytics and Arabesque S-Ray). Thus, issue for large global institutions, which may be used 12.2.4 Data challenges there are other data challenges: to dealing across multiple jurisdictions with different We have explored issues of data availability, quality, regulatory and legal requirements. It is also an issue consistency and comparability throughout this study The ability to analyse and synthesise very large for smaller, more specialist institutions, as many of the guide. In the context of addressing climate and datasets, particularly unstructured data, so that investments needed to support climate change mitigation environmental risks and taking advantage of the environmental and other sustainability impacts and and adaptation, and the UN Sustainable Development opportunities from the transition to net zero, data outcomes can be assessed, and meaningful insights Goals more broadly, are required in parts of the world challenges are often raised as one of the key barriers to to support capital allocation and decision-making where regulation and standards differ considerably from the continued growth of green and sustainable finance. generated (that is, being able to ‘cut through the those in domestic markets, creating a barrier to doing As we saw in Chapter 4, the UNFCCC Standing Committee noise’). business. on Finance and other bodies note that issues of data The costs of obtaining and analysing data – whilst availability, comparability and quality create challenges for institutions such as the World Bank, and many national The lack of coordination and consistency goes beyond investors, regulators, policy makers and others seeking governments, central banks and others make some regulation and standards, however. Throughout this to monitor and report on both environmental impacts - useful data freely available, many data providers are study guide we have introduced a wide range of banking, and flows of climate finance, in particular. As we explored commercial institutions that charge for access to and insurance and investor alliances, coalitions, initiatives in that chapter, the wide range of different reporting analysis of proprietary datasets. This limits access and groupings aiming to align finance with the objectives standards, metrics and organisations for measuring for smaller financial institutions, researchers and of the Paris Agreement and the UN Sustainable and disclosing greenhouse gas emissions and other key organisations, especially in the developing world. Development Goals, and to encourage and support the sustainability data makes consistent and comparable growth of green and sustainable finance. The landscape The multiplicity of proprietary data providers, making reporting difficult. Without accurate, relevant, consistent can be confusing for individuals and institutions to comparisons of environmental and sustainability and comparable data on the environmental and other navigate, and assessing progress in aligning finance with performance over time and between institutions, sustainability impacts of lending and investment projects and activities difficult or even impossible. The 499 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance establishment of the new International Sustainability climate change into decision-making in the finance sector, on their transitions to more sustainable, low-carbon Standards Board (ISSB) and greater agreement on this requires every finance professional to develop at models of production and consumption – are in many metrics and standardisation of sustainability data least a basic knowledge of the principles and practice cases only just beginning to receive the education should help to address this issue over time. of green and sustainable finance relevant to their role, and training they need. Furthermore, similar issues Despite increasing harmonisation around TCFD- function and organisation. of capacity, capability and culture apply to the wider aligned disclosures, many jurisdictions may have professional community of accountants, actuaries, The objective is not to create a finance sector and lawyers and others who support the activities of financial different rules and standards for data and disclosure profession comprised of sustainability specialists, in other areas that impact environmental and institutions and financial services professionals. although greater numbers of environmental and other sustainability reporting (for example, relating to social sustainability specialists are undoubtedly required Capacity and capability issues are particularly marked factors). throughout finance. Rather, it is to build the capacity and in the developing world and emerging markets. As we There is a relative lack of data from developing capabilities of the finance sector and profession so that noted in 12.2.2 and elsewhere in this study guide, capital countries and emerging markets, where many environmental and other sustainability factors are taken and financial markets overall are often less developed of the climate mitigation, adaptation and other into account when formulating strategies, developing in such places, as are the regulatory infrastructure and environmental and social projects and activities need products and services, managing risk, and advising supporting professions. Finance sector capacity and to occur. and supporting customers and clients. Aligning finance capability overall need to be strengthened, therefore, and sustainability requires developing and sustaining alongside specific capacity building to develop and Overall, however, relevant climate and environmental strong, purposeful cultures within institutions, and within embed green and sustainable finance principles and datasets are more accessible than was previously finance overall, aligned with the objectives of the Paris practices. the case. There has been significant growth in the Agreement, the UN Sustainable Development Goals and number of data providers offering open source and/ sustainability overall. Building capacity, capability and culture is not only or proprietary structured and unstructured datasets, important in terms of ensuring that financial institutions analysis and modelling. The falling cost of computing At present, however, even – perhaps especially – the and the finance sector overall can meet their net zero power and the development of advanced data analytics largest financial institutions lack the capacity and and other targets and commitments. As we have also has also made data, and data analysis, more widely capabilities required to achieve mid-century net zero seen throughout this study guide, professional expertise, available. Environmental and sustainability performance commitments or the interim targets for 2030 or 2035, judgment and scepticism are some of the best defences data are increasingly embedded within financial such as those made by members of the Glasgow Financial against greenwashing, which (as we summarize in institutions’ decision-making, helping to align finance and Alliance for Net Zero (GFANZ). Whilst the recruitment of the next section) is a further major challenge to the sustainability. staff with relevant sustainability expertise has increased continued growth of green and sustainable finance. As considerably in recent years, they are still often grouped the sector grows, and the risks of greenwashing are 12.2.5 Capacity, capability and culture challenges in central sustainability and/or ESG teams and the like heightened, greater numbers of Green and Sustainable We have restated the objective of the COP 26 Private rather than involved in day-to-day commercial, lending, Finance Professionals, and finance professionals overall Finance Strategy on many occasions throughout investment and underwriting decisions, product and with a knowledge of green and sustainable finance this study guide and course – to “… ensure that every service design, or supporting and advising clients and principles and practice, are needed to help ensure the professional financial decision takes climate change into customers. Front line staff in financial institutions – those continued integrity of green and sustainable finance account”. As we have discussed, to make this a reality – with key roles to play in customer and client engagement, markets and the mainstreaming of green and sustainable and to incorporate broader sustainability factors beyond working with households, companies and communities finance across financial services globally. 500 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.2.6 Preventing and avoiding greenwashing Another key theme throughout this study guide has been QUICK QUESTION: HOW WOULD YOU ASSESS THE the importance of preventing and avoiding greenwashing, CURRENT CAPACITY, CAPABILITIES AND CULTURE OF YOUR both deliberate and inadvertent. This is a major challenge for green and sustainable finance, and for the transition ORGANISATION IN RELATION TO SUSTAINABILITY? WHAT to a sustainable, low-carbon world overall. If consumers, INITIATIVES ARE UNDER WAY TO BUILD THESE? investors and others lack confidence and trust in the claims organisations make regarding their environmental Write your answer here before reading on. and social sustainability credentials and in the integrity of firms, sectors and markets overall, consumption and investment decisions and behaviours are unlikely to align with the objectives of the Paris Agreement and broader sustainability goals. In Chapter 1, we saw that a majority of institutional investors identified greenwashing as the greatest deterrent to the growth of sustainable investment. As we have explored elsewhere in this study guide, there can be many different types of greenwashing, including: financial institutions making public commitments to climate change and sustainability that are not backed by consistent action and/or are contradicted by an organisation’s activities (for example, launching new ‘ESG’ labelled investment funds whilst still continuing to manage much larger funds containing significant proportions of high-carbon assets); overstating the environmental or social benefits of a product, service or activity (for example, issuing a ‘green bond’ where the proceeds are used to finance gas-fired power generation); highlighting the positive environmental or broader sustainability benefits and impacts of a product or service, whilst failing to mention related harms (such 501 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance as investments in hydro power that have significant To support the integrity of green and sustainable impacts on biodiversity and local communities); finance markets, and to encourage the alignment of describing a loan, investment or investment fund finance with the objectives of the Paris Agreement and as “green” or “sustainable” when in fact only a small broader sustainability goals, regulators are increasingly part of the financing is used to support sustainable developing tools and guidance to detect and prevent activities; greenwashing in the financial services sector, as we discussed in earlier chapters. Many regulators are describing an activity, product or service as “green” focused on the retail investment sector, in particular, at or “sustainable” without monitoring and verifying present, because of the rapid growth of funds labelled outcomes, so the environmental and sustainability ‘ESG’ and/or ‘sustainable’, and because of the risks of mis- benefits are not truly understood (this can often selling. In Chapter 9, we introduced the European Union’s be a problem when relying on ESG ratings, rather Sustainable Finance Disclosures Regulation (SFDR), for than more thoroughly investigating the impacts and example. There is also strong regulatory encouragement outcomes of lending and investment decisions); and for voluntary market standards, guidelines and emphasising the environmental benefits and impacts frameworks, such as the Green Bond and Green Loan of a product, service or activity without disclosing Principles, and other similar sets of principles and that these would have been achieved in any case (for guidance as introduced in this study guide. example, promoting the issue of an SDG bond when the same projects would have been financed by a Greenwashing is not only an issue for the finance sector, regular bond issuance). however. As we briefly described in Chapter 1, there have been many high-profile cases of greenwashing As the green and sustainable finance sector and markets and broader ‘purpose-washing’, including Volkswagen in grow and develop, and as demographic changes and Germany in 2015, H&M in Norway in 2019, and Boohoo in changing consumer and investor preferences increasingly the UK in 2020. Such incidents directly impact the finance align with environmental and social sustainability, sector, as well, by reducing the value of lending and the incentives for individuals and firms to engage in investment to firms (and, potentially, to whole sectors) greenwashing also increase. This is strongly linked with accused of greenwashing, and reducing confidence issues of capacity, capability and culture, too; where and trust in business overall. As we have reiterated these are deficient, the risks of inadvertent greenwashing throughout this study guide, the professional expertise due to a lack of expertise are heightened. The lack of and scepticism of Green and Sustainable Finance common definitions making it hard to classify economic Professionals – and finance professionals overall – are activities accurately and consistently, and products and among the best defences against greenwashing, and services as “green” and/or “sustainable” is also a factor, complement the efforts of regulators and other bodies to although the development of taxonomies (if not always identify and prevent it. completely aligned) helps address this. 502 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance 12.3 EMERGING AREAS OF INTEREST IN GREEN AND SUSTAINABLE FINANCE QUICK QUESTION: HAVE YOU COME ACROSS ANY In addition to the progress made to date (and still to be EXAMPLES OF GREENWASHING IN YOUR PERSONAL AND/ made) in aligning finance with the objectives of the Paris OR PROFESSIONAL LIFE? WHAT, IF ANYTHING, DID YOU DO Agreement, wider environmental and other aspects of ABOUT THEM? sustainability are emerging as areas of concern, interest and opportunity for policy makers, regulators and the Write your answer here before reading on. finance sector. Two areas in particular that Green and Sustainable Finance Professionals should be aware of, and follow developments in, are: a. nature-based finance (finance that recognises our dependency on nature, and seeks to conserve and benefit the environment and nature); and b. ocean (“blue”) finance (although this may be considered as a subset of the former, it is of sufficient importance to be treated separately). 12.3.1 Nature-based finance In Chapter 2, we saw that, according to the UN’s Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, biodiversity (the full range of ecosystems, species and gene pools – all plant and animal life found on Earth and the habitats in which they live) is declining at a rate unprecedented in human history. Wildlife populations have fallen by 60% since 1970, and some 1 million animal and plant species are threatened with extinction, including more than 40% of amphibians, more than 33% of marine mammals, and almost 33% of reef-forming corals9. We also saw that, according to the WWF, species loss is estimated to be between 1,000 and 10,000 times higher than the natural extinction rate10. The UNEP’s “State of Finance for Nature” (2021) report finds that three-quarters of the land and two-thirds of the marine environment have 503 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance been significantly altered by human actions. Since the from losses in biodiversity and other nature-related to meet the objectives of the Paris Agreement. They beginning of civilisation, according to the UNEP and factors13. What the WEF terms a ‘new nature economy’ can also help countries and communities enhance their others, 50% of the world’s forests and 70% of the world’s could, they estimate, generate up to $10.1 trillion in climate resilience by, for example, reducing the risks wetlands have been lost11. annual business value and create 395 million jobs by of coastal or inland flooding. Beyond climate change 2030, however14. mitigation and adaptation, nature-based solutions are The Dasgupta Review (2021) finds that human demands also seen as being able to address many other societal on nature significantly exceed nature’s capacity to supply The Banque de France (2021) estimates that 42% of investments held by French financial institutions come challenges, such as improving human health and us with the goods and services we rely on to maintain enhancing access to clean and healthy water and food. our current standard of living. Global food production from issuers that are highly or very highly dependent causes the greatest damage to biodiversity. The Review on one or more ‘ecosystem services’ (that is, nature)15. From both risk and opportunity perspectives, therefore, estimates we would require the equivalent of 1.6 Planet As we saw in Chapter 5, according to De policy makers, regulators, NGOs and the finance sector Earths to maintain standards of living at present levels; Nederlandsche Bank (2020), Dutch banks, insurance are taking an increasing interest in how finance can be and, as nature is harmed, or destroyed, our planet’s companies and pension funds have around €510 aligned with and support nature rather than contributing capacity to support a growing human population at billion (some 36% of total assets) invested in to environmental harm and destruction through the current levels continues to decline12. companies reliant on biodiversity around the world16. finance sector’s lending and investment activities. This is, The UK’s Dasgupta Review (2021) estimates that however, a highly complex area; the interdependencies While clearly concerning from broad environmental and between the many elements of natural systems are not societal perspectives, such findings are also concerning the stock of natural capital per person declined by approximately 40% between 1992 and 201417. always fully understood from a scientific perspective. The from a narrower economic perspective, as households, relationship between natural systems and the financial companies and communities are highly dependent on The UNEP’s “State of Finance for Nature” (2021) report system is also complex and interdependent; finance nature and on ‘natural capital’ (the stock of natural assets estimates that nature-based finance investments both impacts nature and is impacted by nature-related including air, water, land and all living things). Agriculture, would need to at least triple in real terms by 2030, and physical and transition risks. The economic and financial food and beverages and construction are the sectors increase four-fold by 2050 to a total of more than $8 consequences of this relationship are difficult to measure, most dependent on nature, but many more sectors trillion (some $536 billion of annual investment), to monitor and report, however. Despite these challenges, depend on nature directly or indirectly; for example, meet current global climate change, biodiversity and though, financial institutions and all organisations can try clothing manufacturers and retailers, and travel and land degradation targets18. to: tourism. Just as climate risks are understood as cross- cutting risks with the potential to impact institutional and In addition, nature-based solutions (defined by the a. identify and manage their key dependencies on, financial system stability, nature-related risks are also International Union for the Conservation of Nature as “ … and risks arising from nature (for example, are their beginning to be understood in similar ways. Yet there actions to protect, sustainably manage, and restore natural activities/financing heavily dependent on the availability/ are also opportunities for companies, communities and or modified ecosystems that address societal challenges quality of water, or rising agricultural yields?); and financial institutions that support and finance nature: effectively and adaptively, simultaneously providing human well- being and biodiversity benefits”19) such as restoring b. identify and seek to reduce their impacts on the natural The World Economic Forum’s (WEF) “New Nature forests and wetlands can play key roles in capturing environment, especially biodiversity (such as by avoiding Economy” Reports (2020) found that some $44 trillion carbon emissions and supporting the global transition investments that may lead to deforestation, and linking – more than half of the world’s GDP – was moderately to net zero. According to the UNEP, these could provide future lending and investment criteria to reforestation or highly dependent on nature, and therefore at risk nearly 40% of the ‘global cost-effective solutions’ required and other nature-positive outcomes). 504 | Principles and Practice of Green and Sustainable Finance Unit 12: The Future of Green and Sustainable Finance To try to align finance with nature, several initiatives have line with the Task Force on Nature-related Financial Disclosures’ (TNFD) recommendations when these are available (the been launched that Green and Sustainable Finance TNFD was introduced in Chapter 5 and is also covered on the next page). Professionals should be aware of and follow. These include: READING: ALIGNING FINANCIAL INSTITUTIONS WITH BIODIVERSITY The UN Convention on Biological Diversity (CBD) According to the CBD’s “Financial Sector Guide for the Convention on Biological Diversity”, financial institutions The United Nations Convention on Biological Diversity can align their investment strategies, engage with companies and undertake a range of actions to support the (CBD) was launched at the UN Conference on conservation and restoration of biodiversity. These include: Environment and De