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SUSTAINABLE FINANCE AN OVERVIEW
Sustainable Finance: An Overview
June 2020
Published by Written by
Deutsche Gesellschaft für Internationale Sebastian Sommer, Project Director - FiBraS (GIZ)
Zusammenarbeit (GIZ) GmbH
Headquarters: Bonn and Eschborn Technical review
GIZ Agência Brasília We are grateful to the colleagues and partners who
SCN Quadra 01 Bloco C Sala 1501 have provided feedback and comments to this
Ed. Brasília Trade Center document, including Daniela Baccas (CVM),
70.711-902 Brasília/DF Matthias Knoch and Colin Van der Plasken (GFA),
T + 55-61-2101-2170 Daniel Ricas, Christine Majowski, Makaio Witte and
giz-brasilien@giz.de Felicitas Koch (GIZ)
www.giz.de/brasil
Graphics design
Paulo Barroso (namBBU)
Disclaimer
This publication was developed by the “Green and Sustainable Finance Project” in Brazil (FiBraS), launched
in cooperation with the Financial Innovation Laboratory (LAB).
The FiBraS project is a bilateral technical cooperation project between Germany and Brazil. The project
seeks to improve the framework conditions in Brazil for the development of a green and sustainable
financial market. The German contribution is funded by the German Federal Ministry for Economic
Cooperation and Development (BMZ) and implemented by the Deutsche Gesellschaft für Internationale
Zusammenarbeit (GIZ) GmbH.
All opinions expressed in the document are the sole responsibility of the authors, and do not necessarily
reflect the position of GIZ, BMZ or the local partners of the German technical cooperation.
Contact fibras@giz.de for any comments, doubts or questions or in case you would like to receive the
Portuguese translation of this document.
© GIZ 2020
Sustainable Finance: An Overview
Index
Sustainable Finance: An Overview
1. Introduction 04
2. Background, definition and categories 06
3. Rationale and importance 09
From a sustainability perspective 09
From a risk perspective 10
From an efficiency perspective 12
4. Effects on different financial sector stakeholders 13
5. Further development and outlook 16
Annex 1: International and Brazilian initiatives,
networks, standards and goals
17
References 26
FiBras - Finanças Brasileiras Sustentáveis01 Introduction
It requires a deep transformation of our socio- The financial sector plays an essential role in
economic behaviour, structures and norms mobilizing and allocating the required capital
in order to ensure the stability and resilience for the transition. An efficient and stable
of our livelihood. The acute consequences of financial sector (i) requires the right framework
inconsiderate consumption and production led of policies and regulation and (ii) needs to
to emerging sustainability risks for the global integrate sustainability risks in its financing and
community.1 investment decisions.
On the other hand, the inevitable transformation This document assesses these and other
of the “way of doing business” as we aspects of Sustainable Finance (SF).
know it provides opportunities for future It suggests a definition to develop a common
competitiveness, innovation, growth, prosperity, understanding on SF. It further shows the
security as well as employment and safeguards relevance of SF for the financial sector from (i)
social stability and an intact environment. a sustainability, (ii) a risk and (iii) an efficiency
perspective. The document also shows
In order to avoid disruption, it requires timely, the roles and responsibilities of different
collaborative, systemic and forward-looking stakeholders of the financial sector and their
(inter)action. International agreements like the relation towards SF. Finally, it examines current
United Nations Sustainable Development Goals developments and provides an outlook for
(SDGs)2 and the Paris Agreement on Climate the further progress of the matter, stressing
Change3 provide clear guidance. the importance of national and international
cooperation to develop successful SF
It requires unprecedent financial resources to solutions. The annex presents a list of the most
reach national and international sustainable important networks and initiatives in this area.
development targets. It entails the involvement
of both public and private sector to close this
financing gap.
1
According to the 2020 WEF Global
Risk Report, seven of the ten major
economic risks which will affect the
coming decade are sustainability
risks: climate action failure,
biodiversity loss, extreme weather,
water supply crises, natural disasters,
human-made environmental
disasters, infectious diseases.
2
https://www.un.org/
sustainabledevelopment/sustainable-
development-goals/
3
https://unfccc.int/process-and-
meetings/the-paris-agreement/the-
paris-agreement
4 Sustainable Finance: An OverviewSustainable Finance enables the financial sector to mobilize and allocate the unprecedent amount of capital required for the transition towards a more sustainable economy The skyline of Frankfurt (Envato Elements) FiBras - Finanças Brasileiras Sustentáveis 5
02 Background, definition
and categories
For the purpose of this document, Sustainable The current international debate on
Finance (SF) refers to the integration of sustainability focuses on environmental,
sustainability aspects in the decision-making particularly climate change related aspects.
processes of financial market actors, financial However, the term of Sustainable Finance is
market policy and related institutional and conceptually broader, including the narrower
market arrangements that contribute to the term of green finance, but also social and
achievement of strong, sustainable, balanced governance-related aspects.
and inclusive growth.4
Sustainable Development
Economic Environmental Social Governance
ESG
Climate Change Climate Change Other
Mitigation Adaptation Environmental
Traditional
Financing Models
Low-Carbon Finance
Climate Finance
Green Finance
Socio-Environmental Finance
Sustainable Finance
4
Several definitions include the following
aspects in SF (1) fiscal policy, including
Co2 pricing, taxation and subsidies; (2)
carbon emissions trading; and/or (3)
financial compensation schemes for
loss and damage due to results from
climate change. In this document, the
focus is on the perspective of (public
and private) financial sector actors
regarding their decision-making towards
financing (e.g. credit), investment and
insurance practices and the requirement
to disclose such practices. Source: own graphic, based on European Commission (2017)
6 Sustainable Finance: An OverviewAs with the term SF, there is also no universal definition of the composition of Environmental-
Social- and Governance-related (ESG) aspects. The following graphic suggests some of the areas
within each dimension that are included in the concept:
»» Climate mitigation
»» Adjustment to climate change
»» Protection of biodiversity
»» The sustainable use and protection of water
and maritime resources
Environmental E »»
»»
The transition to a circular economy,
the avoidance of waste, and recycling
The avoidance and reduction of
environmental pollution
»» The protection of healthy ecosystems
»» Sustainable land use
»» Access to appropriate health care and prevention
of diseases and epidemics
»» Compliance with recognised labour standards
(no child labour, forced labour or discrimination)
»» Compliance with employment safety and health protection
»» Appropriate remuneration, fair working conditions,
»»
diversity, and training and development opportunities
Trade union rights and freedom of assembly
Social S
»» Guarantee of adequate product safety
»» Application of the same requirements to entities
in the supply chain
»» Inclusive projects and consideration of the
interests of communities and social minorities
»» Tax honesty
»» Anti-corruption measures
»» Sustainability management by the board
Governance G »»
»»
Board remuneration based on sustainability criteria
The facilitation of whistle blowing
»» Employee rights guarantees
»» Data protection guarantees
»» Information disclosure
Source: own graphic, based on BaFin (2020)
FiBras - Finanças Brasileiras Sustentáveis 7The following non-exhaustive list
The financial sector offers a great variety of appetite and the fact that there is generally
5
provides methods of ESG integration
in the order of increased rigorousness
and resource-intensity in application
investment products. The degree to which no trade-off with financial performance
(can be applied in combination):
(1) “Exclusion criteria/limits or
ESG-aspects are integrated differs widely. (see further discussion below), the - usually
negative screening”: exclusion or
limitation on certain companies,
The SDGs can provide a useful orientation for voluntary - further integration of ESG criteria5
sectors, regions, countries due to
ESG-considerations, (2) “Positive
a methodological approach. The application is still in an early stage. Impact-only driven
list”: identification of companies, of certain minimum (sustainability) standards investments with no or limited capacity and
sectors, regions, countries, etc.
that are preferred for investment, can be legally obliged and apply to most expectations to provide financial returns will
as a general result of compliance
with certain (presumed or proven) financial sector processes. This includes laws remain an instrument for selected impact
sustainability criteria, (3) “Best-in-
class-approach”: identification of to combat money laundering and the financing investors, receiving limited asset allocation.
investees that outperform their peer
group for the sustainability criteria of terrorism as well as social minimum Depending on the intent, ESG processes can
chosen, e.g. based on ESG-ratings,
(4) “Standards based screening standards such as the protection against be undertaken as a risk mitigation or value
/ ESG integration”: sustainability
performance corresponds with child and forced labour. Despite great investor creation tool. (OECD, 2020)
international standards; investor
takes a holistic approach to ESG
integration, (5) “Performance-
based ESG integration”: linkage of
investment or financing product to
an incentive (e.g. lower interest rate)
caused by positive ESG performance,
(6) Engagement: Exercising voting
rights, engaging in dialogue with
companies or exerting influence
on sector organisations to actively Investment types by impact and capital allocation
encourage counterparties to adopt a
more sustainable approach. (based
on BAFIN, 2019)
Amount of capital available
Investment type
Traditional Socially Sustainable Thematic Philanthropy
Commercial Responsible Investing Investing
Investing Investing (SRI) (ESG)
No consideration of Negative screening Positive screening / Selection of impact
- Fully oriented to
impact / exclusion list best in class related sectors positive impact
Impact Investing
Source: own graphic
8 Sustainable Finance: An OverviewRationale and importance 03
Three interdependent perspectives drive the Emerging solutions: The private financial
rationale behind the importance of Sustainable sector, including banks and asset managers,
Finance:6 as well as asset owners, increasingly integrate
ESG-considerations in their financing
From a sustainability perspective, SF decisions.11 Financial instruments such
deals with the requirement to finance the as thematic bonds12 (including transition,
transition towards a sustainable socio- green13, social, blue, CAT and SDG bonds)
economic pathway. To close the financing gap, and sustainable lending products14 (e.g.
unprecedented investments are required.7 ESG-based or green/sustainability loans)
The financial sector plays an important role can channel private and public capital to
in mobilising and channelling these financial investments and activities with positive
resources, thereby “shifting the trillions” of environmental impacts, such as renewable
existing financial assets towards low-carbon, energy generation, energy efficiency in
sustainable and resilient investments.8 production and buildings, sanitation, as well as
Increasingly, asset owners, investment sustainable forestry and agriculture.15 Public
managers and banks consider this transition interventions can help to provide a conducive
as a business opportunity and align their environment by creating rules and regulation as
investment and financing strategy accordingly.9 well as (financial and non-financial) incentives
that affect risk/return considerations, thereby
By redirecting capital flows, SF is a precondition fostering ESG-based financing and investment
to achieve the Sustainable Development Goals decisions. This includes a rethinking of public
(SDGs) and the Paris Agreement.10 Public financing and investments. For instance,
resources alone will not be sufficient to close blended finance instruments receive growing
this financing gap. recognition, as a mean to utilise scarce public
resources, following a subsidiarity principle to
crowd-in private investments.
6
For studies that include survey 9
Recent examples include (i) the 2020, the PRI had roughly 2.800 estimated that green bond issuance
results on the reasons why financial Climate Finance Report: “Annual
world’s largest asset manager signatories including asset owners, needs to reach USD 1tn per annum
institutions engage in SF, refer to EBA tracked climate finance in 2017 and
BlackRock, announcing early 2020 to investment firms and advisers with by the early 2020s. (CBI, 2019)
(2020), PRA (2018) or ACPR (2019). 2018 crossed the USD half-trillion
put climate change in the centre of its about USD 90 trillion of assets under
mark for the first time. Annual
investment strategy (New York Times, management. (source: https://www. 14
The International Finance
7
OECD estimates that around flows rose to USD 579 billion, on
2020), (ii) Goldman Sachs, reducing unpri.org/) Corporation (IFC) estimated the total
USD 6,3 trillion of infrastructure average, over the two-year period
its investments in fossil fuel while green loans and credits of banks in
investment is needed each year until of 2017/2018, representing a USD
at the same time identifying climate 12
The total issuance of labelled bonds developing countries to the private
2030 to meet the SDGs, increasing 116 billion (25%) increase from
friendly activities as “a powerful since the issuance of the first green sector in 2016 to be approximately
to USD 6,9 trillion a year to make 2015/2016.” (CPI, 2019)
business and investing case”, bond in 2007 reached USD 915 USD 1.5 trillion, or about 7% of
this investment compatible with targeting investments worth USD billion by January 2020. Issuance of total claims on the private sector in
the goals of the Paris Agreement. 750 billion over the next ten years. green, social and sustainability bonds emerging markets. (IFC, 2018a; IFC,
(OECD, 2018) Brazil alone requires (Reuters, 2019) grew ~40% in 2019. (Environmental 2018b)
an estimated USD 1,3 trillion of Finance, 2020)
investments in green infrastructure. 10
The Paris Climate Change 15
The total size of Sustainable
(CBI, 2019) Convention requires that financial 13
The growth of the green bond Finance investments and financing
flows are consistent with a path market has caught international is unclear. Depending on definition
8
The IPCC refers to a global stock towards a more climate-friendly attention as a tool to finance, and source, assumptions vary
of USD 386 trillion of financial capital economy (Art. 2.1 c). among others, large sustainable between 1% and 10% of global
(USD 100 trillion in bonds, USD infrastructure projects. It has grown financial assets. However, there is
60 trillion in equity and USD 226 11
The Principles for Responsible rapidly, with annual issuance of a strong growth rate and emerging
trillion of loans managed by the Investment (PRI) initiated by the labelled bonds reaching USD 165 pressure from various types of
banking system) that need to be United Nations in 2005 are a billion, on average, during 2017 and market participant to increase ESG
aligned with climate targets. (Climate voluntary self-commitment to 2018, compared to USD 62 billion in considerations. A useful source
Transparency, 2019) integrate ESG-criteria in investment 2015/2016. To combat the adverse for climate finance indication is the
decision-making. As of January effects of climate change, it is annual CPI Global Landscape of
FiBras - Finanças Brasileiras Sustentáveis 9This may also be a result of the so
From a risk perspective, sustainability-related economy. These risks can be related to
16
called “tragedy of horizons”, a term
coined by Mark Carney, Governor of the
Bank of England in 2015. It describes
risks (ESG risks) are increasingly considered climate mitigation efforts, whereby abrupt
the challenge that risks that are (in the
medium to long term) material for a
as material financial risks. Such risks are policy changes to reduce carbon emissions,
physical asset (e.g. power plant) or a
company (e.g. electric utility) are not
thereby affecting the economic performance and therewith limit global warming, could
necessarily material for their investors of any entity in the value chain, including have significant impact on the economy.
(in particular in short-term investment
horizons) and not necessarily priced in investees, as well as the repayment capacity Disruptive technological change can
by financial analysts. (Carney, 2015)
of borrowers. The financial industry is being be another source of transition risk, for
17
Connected to these direct effects
related to climate change is the example required to adequately identify, assess and example developments in alternative and
of limited insurability. Housing markets in
areas specifically vulnerable to increasing manage risks in connection with sustainability cleaner sources of energy, as well as
severe weather events suffer from
devaluation. In certain coastal areas real aspects, particularly environmental and climate changing consumer and market behaviors
estate has already become uninsurable.
change related sources of financial risks. Risks towards ‘greener’ products and services,
18
Physical risks and transition risks are
interdependent as the window for an from pandemics, such as the 2020 COVID-19 that can result in structural economic shifts.
orderly transition to a carbon-neutral
economy is finite and closing. A sharp outbreak, are equally included in this concept. A third, and closely interlinked source is
increase in physical risks increases
incentives for the economy to transition Current asset valuation and risk management changing market sentiment, that can, for
more rapidly, leading in turn to higher
transition risks. If the required reduction models do not adequately take ESG risks into instance, result from an anticipation of policy
in greenhouse gas emissions is not
carried out in time, physical risks and consideration.16 This may lead to significant changes and changing consumer behavior.
the pressure for action will increase. In
the least favourable scenario, extreme financial losses and even sector-wide instability. In these processes towards a greener and
climate-induced damages as a result
of long delays in energy transition will
In its 2020 Global Risk Report (WEF, 2020), the carbon neutral economy, particularly when
eventually force a sudden and radical
change in the economy.
World Economic Forum lists the biggest threats happening abruptly19, re-valuations of
19
It is unlikely that policy responses
to global economies. For the first time, the top underlying financial assets are likely.
will be introduced steadily and in a
uniform manner. In that context, PRI
seven risks in terms of likelihood are linked to A prominent example of risks related to
has coined the term “Inevitable Policy
Response”. PRI predicts that it is
the environment and health, led by “extreme re-valuation resulting from such a transition
inevitable that governments will be weather events” and “failure of climate-change are so-called stranded assets.20
forced to act more decisively than they
have so far. The longer the delay, the mitigation and adaptation”. From these
more disorderly, disruptive and abrupt
the policy adjustments will inevitably be. and other ESG-related sources, risks can Although the impacts of climate change are
Yet, a forceful policy response to climate
change within the near term is not priced materialize in different ways: highly uncertain, there is a high degree of
into today’s markets, leaving investor
portfolios exposed to significant risk. certainty that some combination of physical
(PRI, 2019)
»» Physical Risks result from damage to and transition risks will materialize in the future.
20
The concept of “stranded assets” is
based in particular on the assumption property, land, and infrastructure, e.g. from (NGFS, 2019)
of a “carbon bubble”. Achieving the
goals of the Paris Agreement only extreme weather-related events and broader
allows for burning a small fraction of
the world’s known fossil fuel reserves climate trends and more broadly can lead A large range of assets will have to be
to keep within the world’s remaining
carbon budget: Globally, a third of oil to loss of life and migration. This reduces reassessed and revalued as changes in policy,
reserves, half of gas reserves and over
80% of current coal reserves would asset values, results in lower profitability for technology and physical risks create new costs
have to remain unused. This implies a
current overvaluation of “brown” assets companies, damages public finances, and and opportunities. (Carney, 2019) However, the
and potential massive undervaluation
of future losses in assets connected to increases the cost of settling underwriting time horizon of materialisation remains unclear.
fossil-fuel-based energy production.
Citigroup (2015) estimates the value of
losses for insurers. Indirect effects on the (EBA, 2020) Increasingly, experts warn that
unburnable reserves to exceed USD 100
trillion. Limiting global warming to reach
macroeconomic environment, such as lower such a re-valuation of assets may not happen
international agreements will require
shifting energy production to alternative
output and productivity, exacerbate these with a constant rate over the next decades.
sources, thereby negatively influencing
the economic viability of traditional
direct impacts.17 Dislocations may happen abruptly21 leading to
extraction and energy-related industries. severe risks of financial sector stability.
Such an abrupt re-valuation was
21
»» Transition Risks18 refer to risks resulting
referred to by Mark Carney as the
“climate Minsky Moment”. from economic costs and regulatory »» Reputational risks become more
(Carney, 2019)
adjustments during the transition towards relevant with the increasing awareness and
a more sustainable and carbon-neutral sensitivity related to climate change and
10 Sustainable Finance: An Overviewwider sustainability considerations (such as face of their potential magnitude, which have E.g. the recommendations
22
developed by the “Task Force on
human or labour rights violation), amplified reached new levels of scale, likelihood and Climate-related Financial Disclosures”
(TCFD), an initiative by the Financial
by the increasing importance of social interconnectedness. Stability Board (FSB). (https://www.
fsb-tcfd.org/)
media and other communication technology. 23
For further examples refer to BIS
It becomes socially unacceptable for At the same time, a mismatch of demand (2020).
financial institutions and asset owners to and supply of green/sustainable investments
disregard ESG considerations. coupled with limited transparency and
information asymmetries may even lead to a
»» Liability risks may hit the perpetrators potential (future) overvaluation of certain green/
of environmental damage, entities (both sustainable assets, creating a “green bubble”.
public or private) that have fuelled climate
change or have violated other ESG- Emerging solutions: Widely acknowledged
criteria. They are being held responsible by recommendations have emerged22 which
governments, international organizations may lead to industry standards. Banks have
and courts, potentially irrespective of direct increasingly integrated ESG risks in their
negligence or fault. It may also include the financing principles and risk management,
compensation paid by insurers of certain e.g. by adhering to voluntary frameworks such
ESG-risks. as the Equator Principles. New kinds of risk
management instruments are being developed
The potential impact of climate and other such as stress testing considering scenario
ESG risks is large, nonlinear, and hard to analysis, assessing climate-related financial
predict. ESG risks are interconnected, can risks based on different future scenarios
materialize parallelly and can be mutually (e.g. 1.5°, 3°, 6°C of global warming). This is
reinforcing. Taking the most prominent supported by the building of new databases
example: Measuring the financial risks which enable companies and investors to
from climate change is complex. It involves better assess potential financial impacts of
assessing the effect of multiple climate climate change and subsequently increase
pathways, with different physical and resilience to climate risks.
transition effects, over several decades.
Traditional environmental risk analysis Central banks and financial regulators develop
methods typically rely on large historical macroprudential policies that aim to manage
datasets, which may no longer reflect the the systemic risks of the financial system
environmental and economic reality. Due directed at financial institutions such as
to the changing average likelihood and banks, insurance and investment companies,
magnitude of low probability, high-impact investment banks, etc. They set market rules
extremes, financial firms need to adopt a that can shift investments, often driven by
forward-looking and long-term approach short-term yields, to long-term sustainable
to risk management. (CISL, 2018 and BoE, solutions. These include: 1) requirements to
2019) Similar dynamics with shorter time integrate climate-related risks into financial
cycles apply in cases of pandemic health- risk management practices, e.g. through
related disruptions. There is a growing stress tests using scenario analysis, as well
recognition that traditional approaches as 2) liquidity instruments, lending limits, and
to incorporating ESG factors into risk differentiated reserve requirements factoring in
management systems are insufficient in the climate related financial risks.23
FiBras - Finanças Brasileiras Sustentáveis 11From an efficiency perspective, transparency Emerging solutions: Central banks and
of material information is essential to enable financial supervisory authorities have developed
market participants to make well-informed rules on disclosure and transparency
decisions, to support long-termism in financial requirements. Financial institutions have
and economic activity and ensure a proper engaged in voluntary commitments to increase
and efficient functioning of the financial sector. transparency. Alongside the established
Increasingly, the requirement to account for rating agencies that invested heavily in either
and disclose material ESG information is building-up internal ESG competencies or
interpreted as part of the “fiduciary duty” of acquiring external expertise, new specialised
financial advisors and investment managers. service providers emerge to offer tailor-made
Most empirical studies find that there is ESG data and tools for their inclusion. Various
either a positive correlation between ESG public and private stakeholders have developed
considerations in investment decisions and definitions (“taxonomy”) to determine if
credit and financial performance or that economic activities qualify as green/sustainable
investment decisions with ESG considerations for their individual institution, members or
do at least not underperform those without. jurisdiction.24 Digitalisation and technology-
This seems to be particularly true in times based financial sector intermediaries (Fintechs)
of crises and uncertainty, such as the 2020 provide opportunities to increase efficiency,
COVID-pandemic, further strengthened transparency (e.g. via blockchain-technology)
by increased “stickiness” of ESG-based and accountability in the financial sector.
investments. Studies moreover indicate that To unlock the full potential, regulators have
this relationship additionally depends on factors developed innovative approaches to shape the
such as regional differences or the sector of future regulatory environment in a participatory
activity (refer to Verheyden et al. (2016), Khan way (e.g. “regulatory sandboxes”) to provide
et al. (2015) and Busch et al. (2015)). As certain a temporary testing ground for new business
ESG risks, like climate risks, may materialize models. (FCA, 2015) Some proponents of
over a longer period of time, such positive the integration of sustainability factors in
effects of ESG-integration may increase over the financial sector argue for an equitable
time. (NGFS, 2019). However, challenges incorporation of ESG aspects alongside
include 1) a lack of ESG data and databases, economic analysis. The development of the
2) instruments to determine their materiality, term EESG (economic, environmental, social
and 3) the lack of a common international and governance) avoids that ESG is seen as a
understanding of a definition of what qualifies compromising appendix. (Favoretto, 2020)
as green and/or sustainable investments.
Client protection, including responsible data
24
Stakeholders which developed, or management, is an integral part of SF and
are in the process of developing, such
definitions, catalogues and taxonomies
receives increasing attention in times of
include financial institutions (e.g.
European Investment Bank,
digitalization and technological change.
International Finance Corporation),
governments or financial regulators
(e.g. China, France, European
Union, Malaysia) as well as individual
networks or standard-setters such
as the Climate Bonds Initiative (CBI)
and International Organization for
Standardization (ISO).
12 Sustainable Finance: An OverviewEffects on different financial 04
sector stakeholders
SF affects all stakeholders in the financing and investment chain. It requires, in particular:
1) the public sector to set a coherent framework25, that enables and incentivizes
2) companies to develop / transition to sustainable business models and26
3) banks, asset managers and asset owners to demand a sustainable utilisation of their financial resources.27
Social
Inv
es
tm
e
nt
Foundations
Mandates Companies
Portfolio Investment
Asset Investment
Owners Managers
Companies
Institutional Investors
People
C
Finance, Insurance, or
Guarantee, po
ra
Companies
Market Making te I
In v D
e st m e nt & F
Banks, Insurance
& Exchanges
FINANCIAL ECONOMY REAL ECONOMY
Governments
INVESTMENT CHAIN
Source: adapted from UN (2020)
25
One example is the ongoing 26
Interventions in the financial sector 27
It is important to note that the
debate about the role of central alone are regarded as a “second financial agents of the financial sector
banks and other financial regulators best policy approach” only. In order have the principle role of effective
in supporting SF, in particular in to be effective, the development of redistribution of capital by managing
their action against climate change. the required framework conditions an appropriate risk/return profile.
(Volz, 2017) Intensified through must create the “right” incentives A framework must be created in
the financial crisis of 2007/2008, for all economic activities, targeting which private financial agents identify
central banks increasingly go in their producers and consumers alike. This and receive a (financial) benefit to
actions beyond their traditional core includes the pricing of externalities contribute towards sustainability.
mandates of maintaining price and (such as CO2 emissions) as well
financial sector stability. (Park and as alignment of subsidies with the
Kim, 2020) Some central banks, sustainability agenda. The results
including Banco Central do Brasil of such interventions will be priced
are active in pursuing green central into the investment and financing
banking policies and explicitly decisions of the financial sector.
included sustainability in their
mandate. The increasing membership
of the Central Banks and Supervisors
Network for Greening the Financial
System (NGFS) has already
subsumed that the management of
climate-risks falls into its mandate.
FiBras - Finanças Brasileiras Sustentáveis 13Stakholder Mandates and Roles Interests Dependencies Potential Interventions in SF
Governments »» Prosperity and security »» Re-election »» National and »» Provide incentives to mobilise
of the population »» Satisfaction among international investors (sustainable) investments
»» (Sustainable) Economic population to finance public debts »» Set rules and regulation to promote
development »» Sustainable infrastructure »» Data and information sustainable economic practices
»» Define the policy from the economy »» Invest own funds more sustainably
environment and financial sector (including blended finance
intermediaries instruments; integration of ESG
»» Availability of (potential) criteria)
sustainable projects »» Support transparency, promote
and industries knowledge, common definition
Population »» Vote and behave as »» Personal current and »» Data and information »» Invest own funds more sustainably
consumer and market future well-being from financial sector »» Use own consumption to create
participant in a way that »» Potentially wider societal intermediary and/or positive impact for society and the
represents individual and well-being from investee environment (triple bottom line)
communal interests »» Safe and profitable »» Sustainable financial »» Request information on the utilisation
investments (taking into products and of their assets
consideration all relevant investment possibilities »» Vote for responsible political leaders
risks)
Regulators »» Maintain price and »» Understand, identify, »» Data and information »» Set rules, regulation and standards
and financial sector stability measure and integrate from the economy that promote long-term stability
Supervisors (some have broader risks that effect prices and and financial sector »» Integrating sustainability factors into
mandate including financial sector stability intermediaries own portfolio management
sustainability aspects) »» Support transparency, increase in
knowledge, joint understanding/
definition
Institutional »» Maximize shareholder »» Grow assets under »» Data and information »» Increase transparency and report
Investors value vs. stakeholder management and create from investees and on ESG-related aspects
value (i.e. create value financial return economy »» Invest own funds more sustainably
for individuals or »» Act solely in the client’s »» Instruments and models »» Integrate sustainability in advisory
solutions to societal best interest (fiduciary to integrate material to customers
problems and needs) standard) ESG information »» Engagement with investees
»» Understand and integrate »» Investable pipeline
all (material) risks and
opportunities related
to the investment
»» Concerned with
reputational risks related to
unsustainable investments
Banks, »» Maximize shareholder »» Interest in growing financial »» Data and information »» Increase transparency and report on
Insurers, value vs. stakeholder returns, assets and from investees and ESG-related aspects
Exchanges value transactions economy »» Invest own funds more sustainably
»» Provide financial services »» Understand and integrate »» Instruments and models »» Integrate sustainability in
all (material) risks and to integrate material advisory to customers
opportunities related to the ESG information »» Engagement with investees/
investment »» Investable/bankable borrowers
»» Concerned with pipeline
reputational risks related to
unsustainable investments/
credit provision
Foundations »» Pursue purpose of the »» Interested in economic, »» Data to evaluate and »» Invest own funds more sustainably
foundation (often for social and environmental report on ESG risks »» Support transition with capacity
societal benefit) return development, development of tools
and solution, data availability, etc.
Companies »» Maximize shareholder »» Growth and profitability »» External finance »» Provide ESG data to investors
value vs. stakeholder »» Concerned with »» Market for their products and clients
value reputational risks related and services »» Reduce and manage exposure
»» Provide goods and to unsustainable economic »» Data and information to ESG risks
services activities from investees and
»» May act as investor; economy
interest in financial return
14 Sustainable Finance: An OverviewDespite impressive growth rates of Green and Sustainable Investments, the amounts are far from what is necessary to allow for the required transition towards a sustainable economy. The complex collective action problem related to climate change and general sustainability requires coordinating actions among many players including governments, the private sector, civil society and the international community. Metropolitan Cathedral of Brasilia (Pixabay) FiBras - Finanças Brasileiras Sustentáveis 15
05 Further development
and outlook
There is a large and increasing interest for 4) relevant data, forecast and modelling
green and sustainable investments. This methods.
demand results from various factors, including
1) increasing public and private market There is an increasing international recognition
attention and sensitized asset owners of the importance of the topic as well as
valuing triple bottom line returns in SF28, international coordination and exchange.
2) increasing awareness that ESG-risks have Nevertheless, commitment and coordination
a direct and increasing effect on financial with respect to the general transformation
performance, leading to the integration of towards sustainability is still lacking.
the above-mentioned risks in financing and Fragmented local or regional solutions remain
investment decisions, insufficient to tackle the common challenge
3) public policies and regulation stimulating in a highly interconnected global financial
sustainable investments and system. This is of particular importance in
4) financial industry’s voluntary self- times of global free flow of capital to avoid a
commitments and self-regulations. “race to the bottom” of a decreasing number of
irresponsible investors, looking for investment
The increasingly rising demand for sustainable opportunities in countries with least restrictions.
investment opportunities itself can be
interpreted as a promising sign to help close The complex collective action problem related
the financing gap. However, current levels of to climate change and general sustainability
green/sustainable investments are far from requires coordinating actions among many
what is necessary to allow for the required players including governments, the private
transition towards a sustainable economy. sector, civil society and the international
This in turn leads to amplified risks for the community.
financial sector in the future, when climate
change impacts and other ESG-related risks It remains to be proven in how far the
materialize at an increasingly severe scale, financial industry, international community and
delayed policy actions are abruptly taken, and individual Governments manage to uphold
social unrest may unfold. the sustainability agenda in their attempts
to deal with the socio-economic results of
Prevailing challenges in the attempt to increase the COVID-19 epidemic. There is a growing
the amount of SF include understanding that the answer to the crisis
1) a clear and universal understanding of requires sustainability-aligned stimulus
which economic activities contribute packages to increase future resilience.
towards a green/sustainable environment
28
“Triple bottom line” refers to
and therefore qualify as sustainable finance,
the combination of potential
environmental, social and
2) development of a comprehensive set
economic returns. of stringent and coherent policies and
29
Within the design of a suitable regulations that create a suitable and level-
policy and regulatory environment,
the topic of a “just transition” plays playing field for the required transition29,
an increasing role. Policy changes
must not only be technically and 3) a general lack of a pipeline of investable
politically feasible, but also socially
acceptable to be successful. sustainable projects,
16 Sustainable Finance: An OverviewAnnex 1
International and Brazilian initiatives, networks,
standards and goals
The emergence and rapidly growing consumption patterns require a transformation.
recognition of sustainable finance is closely From a market and therefore financial sector
connected to the international awareness of perspective, these changes result in an
the sustainability agenda as a whole with a uncertain landscape of risks and opportunities.
special focus on climate-related aspects. It
requires not only national, but international Both, private and public sector stakeholders
cooperation and the development of common have reacted accordingly by integrating
objectives, goals and standards. sustainability issues in existing structures and
activities as well as by the establishment of
The centrepiece and orientation of various new initiatives, networks, standards
supranational dialogue are the ambitious and goals that have emerged particularly over
targets, as outlined in both the United Nations the past 5-10 years.
(UN) Sustainable Development Goals (SDGs)
and the Paris Agreement on climate change. The following table lists selected international
In order to reach these goals many aspects and Brazilian measures which are supporting
of the economy, including production and the further development of SF:
International initiatives
Name Participants /
Type / Institution Objective and Approach
includes hyperlink Members
Coalition of Finance Inter-governmental Finance Ministers, initially The Coalition intends to help
Ministers for Climate from more than 20 countries mobilize and align the
Action (CFMCA) countries. (currently 51 financial resources needed to
members as a result of implement their national climate
Santiago Action Plan) action plans; establish best practices
(Without Brazilian such as carbon pricing, climate
participation) budgeting and strategies for green
investment and procurement; and
factor climate risks and vulnerabilities
into members’ economic planning.
Santiago Action Plan Inter-governmental 51 countries covering 30 Detailed plan on how to achieve the
(under the CFMCA) percent of global GDP Helsinki Principles: to accelerate
(Without Brazilian national climate action; especially
participation) through carbon pricing, macro-
economic and fiscal policy (e.g. green
budgeting), financial sector policies
(e.g. transparency and disclosure of
climate-related financial risks, risks to
financial stability), and development of
(own) competencies and tools.
FiBras - Finanças Brasileiras Sustentáveis 17International initiatives
Name Type / Participants /
Objective and Approach
includes hyperlink Institution Members
European Union Inter-governmental Member states of The EU Action Plan on Financing Sustainable
the European Union Growth, published by the European Commission
EU Action Plan (Without Brazilian in March 2018, has 3 main objectives: 1) reorient
on Financing participation) capital flows towards sustainable investment
Sustainable for sustainable and inclusive growth; 2) manage
Growth financial risks stemming from climate change,
environmental degrading and social issues,
and 3) foster transparency and long-termism in
financial and economic activity. These objectives
are supported by 10 actions, which include:
(i) establishing an EU classification system for
sustainable activities; (ii) creating standards and
labels for green financial products; (iii) fostering
investment in sustainable projects; (iv) incorporating
sustainability when providing financial advice; (v)
developing sustainability benchmarks; (vi) better
integrating sustainability in ratings and market
research; (vii) clarifying institutional investors’
and asset managers’ duties; (viii) incorporating
sustainability into prudential requirements; (ix)
strengthening sustainability disclosure and
accounting rule-making; and (x) fostering sustainable
corporate governance and attenuating short-
termism in capital markets.
International Inter-governmental Authorities from Founded in October 2019, the objective of the IPSF
Platform on the EU, Argentina, is to scale up the mobilization of private capital
Sustainable Canada, Chile, towards environmentally sustainable investments.
Finance (IPSF) China, India, The IPSF will deepen international cooperation and,
Kenya, Morocco, where appropriate, coordination on approaches
Switzerland, and initiatives for the capital markets (such as
Indonesia, Norway taxonomies, disclosures, standards and labels),
and observers such that are fundamental for investors to identify and
as EIB, UNEP FI and seize environmentally sustainable investment
the NGFS. (Without opportunities globally.
Brazilian participation)
Central Banks Inter-governmental 63 members and 12 The Network’s purpose is to help strengthen the
and Supervisors / regulators / observers, including global response required to meet the goals of the
Network for supervisors / central banks and Paris Agreement and to enhance the role of the
Greening the standard setters regulatory authorities. financial system to manage risks and to mobilize
Financial System Representative capital for green and low-carbon investments
(NGFS) from Brazil: Central in the broader context of environmentally
Bank of Brazil (since sustainable development.
04/2020)
G20 Sustainable Interg-overnmental G20 Finance Aims to identify institutional and market barriers to
Finance Study Ministers and Central green finance, and based on country experiences,
Group Bank Governors, develop options on how to enhance the ability of the
initiatives and work financial system to mobilize private capital for green
streams. investment. The Sustainable Finance Study Group
(No information on focuses on green finance-related topics but will also
Brazilian input) take into account other sustainability co-benefits
such as job creation and income equality. Initiated
by China under their presidency in 2016, followed
through by Germany (2017) and Argentina (2018).
Less engagement with the topic during Japan
(2019) and Saudi Arabian (2020) presidency.
International Supranational 22 financial centres A partnership between leading financial centres
Network for (UNEP) / interg- globally (Without and the United Nations Environment Programme.
Financial overnmental / PPP Brazilian participation) Objective: to enable financial centres to exchange
Centers for / private financial experience, drive convergence, and take action
Sustainability networks on shared priorities to accelerate the expansion of
(FC4S) green and sustainable finance.
18 Sustainable Finance: An OverviewInternational initiatives
Name Type / Participants /
Objective and Approach
includes hyperlink Institution Members
Centre of Green Inter-governmental OECD member The Centre’s mission is to help catalyze and
Finance and countries (and support the transition to a green, low-emissions and
Investment beyond) climate-resilient economy through the development
(CGFI) (Without Brazilian of effective policies, institutions and instruments for
participation) green finance and investment.
(by OECD)
Climate Action Investors initiative 370 investors Initiative by investors (with a combined $41 trillion
100+ signatories assets under management) that works with the
(Without Brazilian investee companies to communicate the need
investors as for greater disclosure around climate change risk
signatories; three and company strategies aligned with the Paris
Brazilian corporations Agreement.
as focus companies)
Green Bond Inter-governmental LAC countries Digital tool to promote transparency in the Latin
Transparency American and Caribbean’s green bond markets.
Platform
UN COP / Paris Inter-governmental 197 countries Making financial flows consistent with the
Agreement Representatives of commitment to limit global warming.
Brazil: MRE
Financial Inter-governmental Initiated by G7 and In June 2017, the Task Force on Climate-related
Stability Board / regulators / G20 Financial Disclosures (TCFD), established within
(FSB) – Task supervisors / Representatives of the FSB, published its report setting out some
Force on standard setters / Brazil: BCB, CVM, recommendations to provide guidance for
Climate-related industry (financial ME businesses and the financial sector to disclose
Financial and real market) climate-related financial risks and opportunities
Disclosures within the context of their existing disclosure
(TCFD) requirements. Supported by the project FiBraS,
TCFD has launched a Portuguese translation of the
recommendations in May, 2020.
Equator Voluntary standard 101 financial Developed in 2010, the Equator Principles establish
Principles institutions from 38 thresholds and criteria to determine, assess and
countries manage environmental and social risk in projects.
Representatives of They apply globally to all industry sectors and to
Brazil: Bradesco, four financial products: (i) project finance advisory
Banco do Brazil, services; (ii) project finance; (iii) project-related
Banco Votorantim, corporate loans; and (iv) bridge loans.
CAIXA, Itaú It is an international voluntary framework for
managing environmental and social risk in project
lending and the basis on which most instruments
for management of nontechnical risks have been
created in international lending.
The financial institutions that are signatories of
the Equator Principles undertake to conduct due
diligence on the projects they finance in accordance
with the World Bank environmental and social
standards and notably the International Finance
Corporation’s Performance Standards, and they also
undertake to ensure that the borrower analyses the
potential impact of their project and draws up action
plans to reduce these impacts as much as possible
and offset those that cannot be avoided.
FiBras - Finanças Brasileiras Sustentáveis 19International initiatives
Name Type / Participants /
Objective and Approach
includes hyperlink Institution Members
Sustainable Inter-governmental Hosted by IFC; Formally launched in 2012, SBN members are
Banking Network / regulators / voluntary community committed to moving their financial sectors towards
(SBN) supervisors / of financial sector sustainability, with the twin goals of improved ESG
standard setters regulatory agencies risk management (including disclosure of climate
and banking risks) and increased capital flows to activities
associations from with positive climate impact. It is a platform for
emerging markets. knowledge sharing (including a Global and individual
38-member countries Country Progress Reports, see link to document on
represent US$43 the right) and capacity building that facilitates the
trillion (85 percent) mobilization of practical support for members to
of the total banking design and implement national initiatives.
assets in emerging
markets.
Representatives
of Brazil: BCB,
FEBRABAN
Institute of Public and private More than 450 IIF is the global association of the financial industry.
International financial sector members from Its mission is to support the financial industry in the
Finance (IIF): organizations more than 70 prudent management of risks; to develop sound
Sustainable network countries. Members industry practices; and to advocate for regulatory,
Finance Working include commercial financial and economic policies that are in the
Group (SFWG) and investment broad interests of its members and foster global
banks, asset financial stability and sustainable economic growth.
managers, insurance The IIF joins the public and private sector through
companies, sovereign the Sustainable Finance Working Group (SFWG)
wealth funds, hedge to identify and promote capital markets solutions
funds, central banks that support the development and growth of green
and development finance. SFWG includes representatives from major
banks. institutional investors, commercial banks, ratings
Representatives of agencies and other interested stakeholders, as
Brazil: Bradesco, well as public sector collaborators. Broad themes
FEBRABAN, BOCOM covered by SFWG include scaling the green finance
BBM, Itaú market, collaboration with official sector initiatives
and translating political momentum to tangible
action that facilitates market development.
United Nations Interg-overnmental Advisors, asset The PRI aims to support its international network of
(UN) / regulators / owners, service investor signatories in incorporating the 6 principles
supervisors / providers; roughlt (1. We will incorporate ESG issues into investment
UN Principles standard setters 2.800 asset owners, analysis and decision-making processes. 2. We
for Responsible investment firms and will be active owners and incorporate ESG issues
Investments advisers with more into our ownership policies and practices. 3. We
(PRI) than USD 90 trillion will seek appropriate disclosure on ESG issues
AUM by the entities in which we invest. 4. We will
Signatories from promote acceptance and implementation of the
Brazil: 14 asset Principles within the investment industry. 5. We
owners, 7 service will work together to enhance our effectiveness in
providers and 27 implementing the Principles. 6. We will each report
investment managers on our activities and progress towards implementing
the Principles) into their investment and ownership
decisions. The PRI acts in the long-term interests
of its signatories, of the financial markets and
economies in which they operate and ultimately of
the environment and society as a whole.
20 Sustainable Finance: An OverviewInternational initiatives
Name Type / Participants /
Objective and Approach
includes hyperlink Institution Members
United Nations Inter-governmental 130 banks from 49 The Principles provide the framework for a
(UN) / regulators / countries sustainable banking system, and help the
supervisors / Signatories from Brazil: industry to demonstrate how it makes a
UNEP FI standard setters Bradesco (founding positive contribution to society. The Principles
Principles for member), Itaú help any bank to align its business strategy
Responsible with society’s goals.
Banking (PRB)
United Nations Inter-governmental 78 insurance companies, The PSI build on the foundation the
(UN) / regulators / insurance associations and insurance industry has laid in supporting
supervisors / regulators a sustainable society. The PSI use their
UNEP FI standard setters Signatories from Brazil: 12 intellectual, operational and capital capacities
Principles for insurance companies (e.g. to implement the Principles for Sustainable
Sustainable Itau, Bradesco, Caixa, etc.) Insurance (the ‘Principles’) across their
Insurance (PSI) spheres of influence, subject to applicable
laws, rules and regulations and duties owed to
shareholders and policyholders.
United Nations Inter-governmental 193 countries Launched in 2015 under the 2030 Agenda for
(UN) Representatives Sustainable Development, the SDG comprises
of Brazil: MRE in 17 different and complimentary goals
SDG – addressing global challenges like poverty,
Sustainable inequality, climate, environmental degradation,
Development prosperity etc.
Goals
Sustainable UN Partnership Organized by UNCTAD, UN Launched in 2009 by the UN Secretary
Stock Exchanges Programme Global Compact, UNEP General, the SSE’s mission is to provide a
(SSE) initiative FI and UN PRI. Partners global platform for exploring how exchanges,
Inter- are 93 exchanges and 16 in collaboration with investors, companies
governmental financial regulators. (issuers), regulators, policymakers and
/ private sector Representatives of Brazil: relevant international organizations, can
stock exchanges B3 (B3 launched the ISE enhance performance on ESG (environmental,
and financial (sustainable corporate social and corporate governance) issues
centres index) and encourage sustainable investment,
including the financing of the UN Sustainable
Development Goals. The SSE seeks to
achieve this mission through an integrated
programme of conducting evidence-based
policy analysis, facilitating a network and
forum for multi-stakeholder consensus-
building, and providing technical assistance
and advisory services.
Global Alliance Bank Network 62 financial institutions Founded in 2009, the Global Alliance for
for Banking on and 16 strategic partners Banking on Values is an independent network
Values (GABV) globally with over $200 of banks using finance to deliver sustainable
billion USD AUM economic, social and environmental
(Without Brazilian development.
participation)
Sustainable Inter-governmental Members include insurance The SIF aims to strengthen insurance
Insurance Forum / regulators / supervisors and regulators supervisors’ and regulators’ understanding of,
(SIF) supervisors / from different countries, the and responses to sustainability challenges and
standard setters EU and the International opportunities for the business of insurance,
Association of Insurance focusing on environmental issues such as
Supervisors (IAIS). climate change.
Members from Brazil:
SUSEP
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