Environmental considerations, such as the protection of biodiversity, the conservation of natural resources and pollution control, climate change mitigation and adaptation, and related risks (e.g. natural disasters), as well as Social considerations, such as issues of inequality, inclusiveness, labour relations, investment in human capital and communities, are becoming recently a concerning in the core of the financial system.

According to the European Commission’s Action Plan for Financing Sustainable Growth [1], Sustainable Finance refers to the process of taking due account of environmental and social considerations when making investment decisions, so that investments in longer-term and sustainable activities increase. To sum up, in strategic terms, a sustainable financial system supports sustainable development, which has been defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs” [2].

Sustainable finance is a more comprehensive concept, incorporating ESG factors (Environmental, Social and Governance factors), while green finance can be seen as a subset of the more strategic sustainable finance agenda [3].

This article presents an overview of the sustainable finance institutions, legislation tools, principles and actions in the EU and globally, and provides useful links for further reading.

Accelerating Sustainable Finance – The International Framework

The Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development, both from 2015, are two central policy and action frameworks that when adopted by governments commit them to choose a more sustainable path for our planet and our economy. Despite the recent turbulence caused by the U.S. presidential decision to draw out of it, the Paris Agreement (originally signed by 195 countries), remains highly important as it is the first-ever universal, global climate deal that builds consensus on the climate issue and contains commitments, in particular to limit global warming to well below 2°C.

Another important framework is the UN Sustainable Development Goals, which is a global initiative focused on ending poverty, protecting the planet and ensuring prosperity for all. The focal point is the establishment of 17 Sustainable Development Goals (SDGs) to be addressed by 2030. This provides a common framework for public and private stakeholders to set their agendas and define their policies and strategies over the next decade. An estimated $5-7 trillion per year are needed to realize the SDGs globally, paving the way for substantial investments under the umbrella of sustainable finance [4]. More than 1/3 of this is estimated to come from the private sector, including investments in infrastructure, clean energy, water and sanitation and agriculture¹.

The United Nations Environment Program Finance Initiative (UNEP FI)

Already in 1991, the concept of the UNEP Finance Initiative was launched. A small group of commercial banks, including Deutsche Bank, HSBC Holdings, Natwest, Royal Bank of Canada, and Westpac, joined forces with UNEP to develop the banking industry’s awareness of the environmental agenda. This partnership between the United Nations Environment Programme (UNEP) and the financial sector worldwide, is responsible for creating during the 1992 Earth Summit the “United Nations Environment Programme Finance Initiative (UNEP FI)”, with a sole mission to promote sustainable finance [5]. UNEP FI works closely with over 200 financial institutions, including banks, insurers, and investors, that are signatories to the UNEP Statement of Commitment by Financial Institutions on Sustainable Development, and a range of partner organisations, to develop and promote linkages between sustainability and financial performance. By signing up to the Statement, financial institutions openly recognize the role of the financial services sector in making our economy and lifestyles sustainable and commit to the integration of environmental and social considerations into all aspects of their operations.

Principles for Positive Impact Finance

More recently, in October 2015, UNEP FI released the Positive Impact Manifesto, which is actually a call to the financial world for a new financing, based on a holistic consideration of the three pillars of sustainable development. The Principles for Positive Impact Finance are a set of guidelines [6] for:

• financiers to identify, promote and communicate about Positive Impact Finance across their portfolios;
• investors and donors to holistically evaluate the impacts of their investments and orient their investment choices and engagements accordingly;
• auditors and raters to provide financiers, investors and their stakeholders with the verification, certification and rating services needed to promote the develop­ment of Positive Impact Finance.

Redefining How the Banking Industry Delivers a Sustainable Future

Currently, twenty-six of the UN Environment Finance Initiative’s banking members (amongst them one Greek bank – Piraeus Bank) are leading an ambitious initiative for banks worldwide to regain perspective and align the banking sector and its business practices with the SDGs. Convened by the UNEP FI secretariat, the banks are developing global banking standards (following the same path, asset managers develop accordingly their Principles for Responsible Investment), which will address the need for an umbrella framework to cover all aspects of sustainable banking.

The Principles for Responsible Investment (PRI)

It was back in early 2005, when Kofi Annan (the recently deceased, former United Nations Secretary-General) invited a group of the world’s largest institutional investors to assist in the development of the Principles for Responsible Investment (PRI). These Principles were launched in April 2006 at the New York Stock Exchange and to-this-day the number of signatories has raised from 100 to over 1,800. The PRI is an international network of signatories with a mission to put the Principles into practice. These six Principles for Responsible Investment form a voluntary and aspirational set of investment principles, developed by investors, for investors. They cover a spectrum of possible actions for incorporating ESG issues into investment practice, ensuring that by implementing them, signatories contribute to developing a more sustainable global financial system.

The Equator Principles

The Equator Principles (EPs) is an acclaimed risk management framework, that most financial institutions worldwide use in order to determine, assess and manage environmental and social risks in projects. Its primal goal is to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. The EPs apply to every industry sector globally and to four (4) financial products:

1) Project Finance Advisory Services

2) Project Finance

3) Project-Related Corporate Loans and

4) Bridge Loans

The Equator principles have officially been adopted by 93 Equator Principles Financial Institutions (EPFIs) in 37 countries, and this applies to the majority of international project finance debt within developed and emerging markets. The EPFIs are committed to implementing the EPs in their internal environmental and social policies, procedures and standards for financing projects and will not provide Project Finance or Project-Related Corporate Loans to projects where the client will not, or is unable to, comply with the EPs.

Financing Sustainable Growth in the EU

The European Union (EU) has been leading globally the shift on the sustainable financing agenda, taking ambitious steps towards decarbonisation and the transition to a sustainable economy. Already a fifth of the EU budget for 2014-2020 has been earmarked for climate change, setting the issue as top priority. The next step will include that the European Fund for Strategic Investments (EFSI) allocates at least 40% of its funds to climate action. On top of that, record shows that, between 2007 and 2015, issuance of Climate Awareness Bonds for renewable energy and energy efficiency projects has grown from €600 million to €42.4 billion.

In September 2016, the European Commission decided to establish a High-Level Expert Group (HLEG) on sustainable finance. Two years after that, in January 2018, that Expert Group published its final report [7] offering a comprehensive vision on how to build a sustainable finance strategy for the EU. The Report states that sustainable finance is a matter of two imperatives of utmost importance:

1. improving the contribution of finance to sustainable and inclusive growth by funding society’s long-term needs;
2. strengthening financial stability by incorporating ESG factors into investment decision-making.

The “Financing a Sustainable European Economy” Report proposes eight (8) key recommendations, targeted at specific sectors of the financial system.

Among those priority recommendations and actions is the introduction of a common sustainable finance “taxonomy” to ensure market consistency and clarity. Introducing a sustainability taxonomy, starting with climate-mitigation around mid-2018, will enhance market efficiency and help to channel capital flows towards assets that contribute to sustainable development, by providing clear guidance and helping inform investors on activities qualifying as contributing to climate change mitigation and adaptation, environmental and social objectives. It will be a first step towards tackling “greenwashing” [8] and will make it easier for investors to identify the criteria applied when classifying a financial product as “green” or sustainable.

Epilogue

From natural resource scarcity to changing governance standards, from supply chain and labor management concerns to evolving regulatory landscapes, it has become increasingly important for Socially Responsible Investment (SRI) professionals to understand the ESG profile behind the assets they are managing [9].

It is obvious that there is a growing global demand for sustainability financing, in order to mobilise capital to help solve society’s key challenges that require long-term finance: creating good quality jobs (especially for young people), improving education and retirement finance, tackling inequality, delivering inclusive growth and accelerating the shift to a decarbonised and resource-efficient economy [10].

Some financial institutions play a leading role, while others follow that pace. I personally feel extremely lucky to be part of an inspired “sustainability team” in Piraeus Bank, dedicated in turning economic development into quality of life by focusing on human dignity without endangering future environmental and social indices [11].

References

[1] European Commission (2018), “Action Plan: Financing Sustainable Growth”, Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions.

[2] Brundtland, G.H. (1987), Our Common Future, Oxford University Press, Oxford.

[3] European Commission (October 2017). Directorate-General for ENVIRONMENT. Authors: Kahlenborn, Walter (adelphi), Annica Cochu (adelphi), Ivo Georgiev (COWI Denmark), Frederik Eisinger (adelphi), Dominic Hogg (Eunomia), “Defining “green” in the context of green finance (final report)”.

[4] UN Environment Finance Initiative (2017), “The Principles for Positive Impact Finance. A Common Framework to Finance the Sustainable Development Goals”.

[5] http://www.unepfi.org/about/background/

[6] http://www.unepfi.org/positive-impact/principles-for-positive-impact-finance/

[7] The High-Level Expert Group on Sustainable Finance – Secretariat provided by the European Commission (2018). “Financing a Sustainable European Economy”.

[8] Greenwashing refers to the practice of gaining an unfair competitive advantage by marketing a financial product as environment-friendly, when in fact it does not meet basic environmental standards.

[9] Laermann, Michael, The Significance of ESG Ratings for Socially Responsible Investment Decisions: An Examination from a Market Perspective (July 27, 2016).

[10] The High-Level Expert Group on Sustainable Finance – Secretariat provided by the European Commission (July 2017). “Financing a Sustainable European Economy” (Interim Report).

[11] From Piraeus Bank’s “Sustainability Statement”.