Changing Finance To Catalyze Transformation How Financial Institutions Can Accelerate The Transition To An Environmentally Sustainable Economy

Changing Finance to Catalyze Transformation:
How financial institutions can accelerate the transition

to an environmentally sustainable economy
Changing Finance to Catalyze Transformation

© 2021 United Nations Environment Programme
ISBN No: 978-92-807-3900-8
Job No: DEW/2398/NA
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Suggested citation: United Nations Environment Programme (2021). Changing Finance to Catalyze Transformation:
How financial institutions can accelerate the transition to an environmentally sustainable economy. UNEP, Nairobi.

Changing Finance to Catalyze Transformation:
How financial institutions can accelerate the transition
to an environmentally sustainable economy
Coordinating Lead Authors: Cary Krosinsky, (Yale and Brown University), James Vaccaro (Climate Safe
Lending Network),
Lead Authors: Ekaterina Grigoryeva, (World Bank), Malango Mughogho, (ZeniZeni Sustainable Finance)
A full list of acknowledgments can be found here.
About GEO for Business
The United Nations Environment Programme [UNEP] and its global partners are proud to offer this series of
stimulating briefs about the environmental challenges and business opportunities that demand transformational
change at a global scale. These business briefs are meant to communicate the science of the environment to a
broad business audience and provide possible pathways and roadmaps that business can follow to address these
environmental challenges. The audiences these briefs hope to reach include companies in the supply chains of
major multinationals, multinationals themselves as well as small to medium-sized enterprises. The themes of the
first five briefs include:
how to transform in a time of uncertainty,

how to transform business models towards a fully circular model,
how to transform global food systems,
how to build environmentally sustainable and resilient infrastructure,
and the role finance needs to take in a transforming world.

Key Messages
The financial sector has an essential role to play in addressing global environmental and social crises.
A dramatic transformation of energy, food and waste systems is needed to achieve the goals of the Paris
Agreement and Agenda 2030. This transformation requires a transition towards sustainable businesses
models and related production and consumption. How more than US$400 trillion in global financial assets
is allocated over the next decade will play a critical role in determining the alignment of companies with
the UN Paris Agreement objective of “holding the increase in the global average temperature to well below
2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-
industrial levels”, and the UN Sustainable Development Goals (SDGs). The stability of the climate, nature, the
economy, society and the financial system are at stake.
Financing is starting to be directed towards helping public and private markets make this sustainability
transition. This has two major consequences on company access to finance. First, financing of new
projects (debt and/or equity) will be more readily available for sustainable projects, and second, existing
financial portfolios will be restructured to favour companies with environmentally sustainable business
plans and performance.
Sustainability in business strategies is becoming an additional decisive factor, and an imperative for
businesses to access third-party financing for debt and equity. This represents a paradigm shift in the
private sector and will result in winners and losers across and within sectors during the transition to an
environmentally sustainable economy.
As sustainable finance becomes mainstream, financial institutions increasingly require companies
across sectors to integrate sustainability into their operations and supply chains. Non-financial companies
need to understand how the financial system is changing to address environmental challenges, and
how their businesses are positioned for the shift in capital allocations to transition to an environmentally
sustainable economy.
To align financing with the SDGs and goals of the Paris Agreement, the financial sector needs:
To accelerate the transition to an environmentally sustainable economy through financial products
and services. Approaches to align with global goals include developing and scaling sustainable financial
products and supporting clients that are transitioning to sustainable business models. Key areas for
financing transformation include shifting food systems to regenerative agriculture, developing future-
proof infrastructure, and transitioning to circular economy business models across sectors. Levers for
change include scaling up sustainability performance-based financial products, integrating sustainability
data into financing solutions, and company engagement. Channeling sustainable financing to small-
and-medium-sized enterprises and considering gender equality performance indicators are important
aspects of ensuring financial inclusion.
Public support can be directed to catalyse private finance through multilateral development banks
(MDBs) to de-risk investments in developing countries. Making financing more commercially viable and
growing technical capacity to support operational commitments can lead to product innovation within
private financial institutions to create ‘blended finance products’ that provide complementary finance.
Unlocking the huge potential for financial institutions will require greater liquidity and increased uptake of
these financial instruments.

Greater capacity to integrate environmental sustainability factors into core business processes and
decision making. Collective action by banks, insurers and investors through voluntary initiatives is
driving change in financial systems by developing the frameworks, strategies, tools and expertise to
solve challenges and develop common approaches to address sustainability-related financial risks and
opportunities. Alliances are ratcheting up ambition and developing pragmatic guidance to align financing
with the goals of the Paris Agreement. Industry-wide uptake of resulting approaches is required to
align the financial system with the 1.5 degrees limit. Financial institutions need to ensure staff have the
requisite knowledge, skills to drive transformation in the economy.
Transformational leadership is needed to embed sustainability in governance, incentives, skills,
resources and culture across operations. Effective integration requires embedding environmental
and social sustainability objectives in roles at senior organizational levels, with effective governance
to steer the alignment of financing with environmental and social priorities. Environmental and social
sustainability-oriented outcomes need to be at the core of executive incentive plans. Leadership needs to
ensure ambitious and pragmatic mind sets to deliver strategies with environmental and social outcomes
across portfolio sectors, to implement targets to align portfolios with the UN Paris Agreement and the
SDGs.
Transparency and accountability for environmental impacts. Corporate disclosure frameworks using
performance indicators based on science need to enable financial institutions to measure and manage
the environmental impacts of lending, investment and underwriting portfolios. Disclosure requirements
on companies are increasing as expectations are growing for financial institutions to understand and
address the environmental and social impacts of lending, investment and underwriting portfolios through
the companies they are financing. Transparency and accountability are critical to ensure global financial
assets contribute to positive impacts aligned with sustainable development and climate stability, and
reduce negative impacts such as environmental degradation, pollution and waste.
To ensure responsible advocacy to catalyze the requisite enabling environment for financing aligned
with sustainable development. The financial sector needs to support an enabling environment to
address environmental sustainability challenges through policy and regulatory frameworks in finance
and specific market sectors. They can prepare their organisations for monitoring by financial regulators
of climate- and nature-related risks to the financial system and management of a stable transition to an
environmentally sustainable economy.

Table of contents
About GEO for Business 4

Key Messages 5
1. The scale of the challenge 8
2 The role of the financial sector 9
3 Financing change 10
3.1 Finance as a catalyst to change the impacts of economic activity 10
3.2 Financial products and services 11
3.2.1 Financing solutions 11
3.2.2 Financial inclusion and digital technology 13
3.3 SME access to sustainable finance 14
3.4 Gaps in financing and responses 15
3.4.1 Public financing to mobilize private finance 15
3.4.2 Blended finance 17
4 Changing finance 18
4.1 Building capacity 18
4.1.1 Voluntary industry approaches 18
4.1.2 Upskilling for sustainable finance 19
4.2 Transformational leadership 20
4.3 Accountability for impacts 20
4.4 Advocacy for enabling policy and regulatory frameworks 22
4.4.1 Aligning policy engagement with purpose 22
4.4.2 Enabling role of financial regulators 23
5 Conclusions, outlook and recommendations 26

5.1 Recommendations for financial institutions 26
5.2 Recommendations for regulators and policymakers 26
References 27
Glossary 27

1. The scale of the challenge
The sixth Global Environment Outlook (GEO-6), Sea level rise, which will damage protective walls,
published in 2019, before the global pandemic, create more flooding and salt-water intrusion, and
assessed the state of the global environment, the inundate low-lying, coastal cities.
effectiveness of the policy responses in addressing Temperature increases on land, which will
these environmental challenges and the outlook for negatively impact food production through
the future if we stay on the path that we are on versus lengthier and more frequent droughts.
if we decide to achieve the environmental goals that More frequent and intense wildfires, damaging or
countries have already committed to. Unfortunately, destroying properties and homes.
GEO-6 paints a bleak picture of the future if we More frequent and intense hurricanes and
continue providing energy using today’s fossil-based cyclones, damaging or destroying infrastructure
energy sector, producing food through today’s food with the financial cost borne by national
system and managing waste the way we currently economies and the insurance industry.
manage it.[1] Some key facts include: Antimicrobial resistance in humans, mainly as a
result of overuse of antibiotics in our food system,
Air pollution currently causes 6-7 million premature could be the leading cause of death in 2050.
deaths each year.
Global greenhouse gas emissions have increased In its summary for policy makers, the GEO 6
every year since the UN Framework Convention recommends that environmental issues are best
on Climate Change (UNFCCC) was negotiated and addressed when dealt with in conjunction with related
global average temperature is now more than 1°C economic and social issues, including consideration of
above that in pre-industrial times. gender equality and equity. A dramatic transformation
The Living Planet Index, a measure of global of energy, food and waste systems is needed to:
biodiversity, has declined by more than 60 per cent
since the 1970s. Eliminate about 90 per cent of fossil fuel use by
8 million tons of plastics enter our oceans each 2050.
year, mainly from land-based sources. Reduce the environmental impact of the global
50 per cent of habitable land is used for food food system by about two-thirds.
production and 77 per cent of that land is used for Design circular economies to achieve near-zero-
meat production. waste by 2050.
70 per cent of all freshwater extraction is used for
food production. This scale of transformation requires a dramatic shift
About 1/3 of food is lost or wasted globally. in the models of businesses and related production
Deforestation rates have declined, but they are still and consumption. These models are influenced
at about 3 million hectares per year by what is financed and how it is financed, so the
1.4 million people die each year from pathogen financial sector has a very important role to play in
polluted water and 2.3 billion don’t have access to addressing these challenges.
safe sanitation services.
Between 7-10 billion tons of municipal waste is
generated each year.
If we stay on the path we are on, by 2050:
The global population will reach between 9-10

billion.
50 per cent more food will be needed to feed a
larger, more affluent population.
Global average temperature could increase to
8 between 2.5 and 3°C, leading to:

2 The role of the financial sector
Crises such as COVID-19 [2] demonstrate the impact The core purpose of the financial system is to ensure
of significant shocks to the global economy and, at that financial flows support long-term needs and
the same time, heighten awareness of vulnerabilities ‘balanced, sustained growth’.[5] However, there is
created by climate change, biodiversity loss and an important risk that the financial sector will not
pollution stressors caused by the impact of human catalyze the business transformation needed fast
activities on nature. This has led to further calls to enough to solve the climate and nature crises. There
integrate environmental and social elements into is also a lack of transparency around the sustainable
economic stimulus packages and to direct private development and climate impacts of global financial
sector finance to more environmentally sustainable assets. The United Nations Secretary General has
businesses.[3] Green economic recovery measures called for more transparency to ensure that all finance
can represent significant investment opportunities for - public and private – supports the United Nations
the financial sector as these stimulus packages can Sustainable Development Goals (SDGs) and the Paris
also increase the bankability of green projects and Agreement on Climate Change.[6]
enterprises.
Urgent and significant action is essential for all parts
Initially designed to be fulfilled by governments and of the financial system to play their role in addressing
multilateral banks, it is now widely acknowledged that these crises. This brief explores ways in which the
financing of the Sustainable Development Goals (SDG) financial sector is starting to play a catalytic role in
cannot be delivered without private capital. A global financing businesses to transition towards delivering
effort among countries, international organizations, environmentally sustainable food, energy and waste
and financial institutions to mobilize capital towards systems as discussed in GE0-6. It provides insight
the achievement of the SDGs is critical to achieve the into how the financial sector is changing to better
transformations outlined in the GEO-6 main report and contribute to the UN Paris Agreement goals and
the other Business briefs. SDGs. The report includes recommendations on
how financial institutions can accelerate this shift in
Transitioning to circular business models, regenerative order to more rapidly transform public and private
food systems, low-carbon energy systems and companies into businesses which contribute to
resilient and sustainable infrastructure, outlined in achieving the SDGs while avoiding environmental
previous GEO for Business briefs, will require both degradation, restoring ecosystems and eliminating
public and private sector finance to be redirected in pollution. An in-depth assessment of the role of
the real economy to avoid the environmental impacts specific asset classes or types of financing is outside
of existing models that fuel over-exploitation of of the scope of this brief.
natural resources and generate excessive waste and
pollution.
Finance has the potential to be a major driver of

the transformation to a nature positive and net-zero
carbon economy. Estimated at more than US$400
trillion, global financial assets are at their highest value
since before the global financial crisis in 2008-09.[4]
The global financial system – through banks, insurers
and reinsurers, asset owners such as pension funds,
and asset managers – is in a position to play a critical
enabling role to catalyze the business transformation
needed to help solve climate change and other
environmental challenges outlined in Brief 1 of this
series.
9

3 Financing change
3.1 Finance as a catalyst to change the

There is growing awareness of the positive impacts
impacts of economic activity
of regenerative agriculture on soil health, biodiversity
and climate, with new carbon and biodiversity markets
A transformed global economy that is circular, emerging linked to agricultural policy and enhanced by
inclusive, generates decent employment, and does monitoring via new technologies.[8] Specific finance in
not result in environmentally degraded ecosystems this area remains nascent, with the need to transform
requires a significant shift of financing towards mainstream financing of production, processing and
renewable, circular and non-polluting technology sourcing across forestry and agricultural value chains
business models. The private financial system to build in nature-positive impacts and benefits.[9]
facilitates the exchange of funds, goods and services
between individuals, businesses and governments, For financial flows to help future proof infrastructure,
including by allocating capital, diversifying risk and financial institutions are starting to scale up financing
mobilizing and pooling savings. The financial system’s for “green/new infrastructure” (community solar,
main environmental and social impacts are indirect microgrids, wind farms) and include transformation
and result from the actions of the businesses that of grey/traditional infrastructure where feasible
receive financing. In this way, financing can support (pipelines, older utilities, airports, etc.) . Including
the transformation of economic sectors towards a climate adaptation criteria in the financing for water
nature-positive economy in which climate is stabilized, and urban infrastructure is critical for resilient cities
critical ecosystems are protected and restored and facing longer term water shortages, more frequent
pollution is eliminated to increase the natural system’s and severe storms and sea-level rise. Financing new
resilience. infrastructure that will still be in place in 2050 needs
to include enabling infrastructure such as renewable
Financial institutions are also developing approaches energy, nature-based solutions or electric vehicle
to food systems transformation through initiatives charging stations.[10]
such as the Good Food Finance Network, which
is developing financial instruments and strategies Financial institutions are starting to provide financing
to generate food systems that sustain the health with circular economy criteria for assessing business
of people, nature, and economies, and includes a models, technologies or projects that enhance
pledge, launched during the COP 26, by 30 financial circularity and the resource efficiency of material
institutions with USD 8.7 trillion in assets to eliminate flows while promoting restorative and regenerative
agricultural commodity-driven deforestation in their business practices. Recently analyses show that
portfolios by 2025 [7]. Financial institutions are starting the total amount of assets managed through public
to contribute to food systems transformation (brief 3) equity funds with a circular economy focus increased
by: 6-fold to over USD 2 billion in 2020, with a potential
for significant scale up.[11] Moreover, the circular
allocating financing to catalyze new businesses, economy could stimulate savings of USD 700 billion
such as companies providing plant-based foods; in global consumer good materials,[12] while shifting
scaling up sustainable, organic and regenerative from a linear approach of “take, make, waste” to
agricultural loans and investments; circularity could produce additional economic growth
undertaking engagement to transform existing of as much as USD 4.5 trillion by 2030.[13] Analyses
business, such as upstream companies which such as these help identify the risks associated with
can strengthen practices in supply chains to stop continuing to rely on linear economy models and
deforestation through minimum standards and the opportunities related to shifts towards circular
transparency; and business models.
raising awareness and developing policies to
advocate for more sustainable decision-making However, market practice is still at the early stages of
across stakeholders. circular economy financing and is likely to accelerate
10 as financial institutions integrate financing for the

transition to a circular economy into decarbonization 3.2 Financial products and services
plans.[12] By adopting circular economy principles,
indicators and metrics, companies can generate new
3.2.1 Financing solutions
sources of revenue, reduce costs, spur innovation,
increase resource security, and mitigate risks from
material use, pollution and waste. Companies A paradigm shift is under way in the private sector,
across sectors that apply the 9-R circularity concept with sustainability becoming a decisive factor in
of Refuse, Reuse, Reduce, Redesign, Repurpose, financing and an imperative for businesses to access
Remanufacture, Repair, Refurbish, Recycle [14] will third-party financing (debt or equity). Companies
increasingly be well positioned for capital raising, with sustainable projects and those transitioning
direct financing and investment as financial to sustainable business models stand to gain from
institutions recognise their competitive advantage increased access to financial products and services
during the transition to a low carbon, circular that favour environmentally sustainable projects,
economy. strategies and performance. The range of financing
products and services that financial institutions can
Exploring innovation and new business models creates deploy to drive the transition to an environmentally
challenges for financial institutions which typically sustainable economy and implement targets is wide
base decisions on experience with existing clients in and varied, and includes short-term working capital
familiar industries. They need to overcome a ‘familiarity and trade finance, risk management products such
bias’ that favours incumbents and potentially as insurance, guarantees and hedging instruments,
hinders more transformative and disruptive financial and longer-term financing such as equity and debt.
innovation, while incurring unintended social impacts Approaches to providing this finance also vary,
such as increasing the gender gap.[15] Creativity on including project finance, syndication, collateralized
environmental sustainability issues is needed to shape obligations and private placements, with certain
a financial sector that will transform the economy financial institutions choosing to provide a wide
fast enough to deliver the positive environmental and range of financing products and becoming so-called
social benefits that are urgently needed. ‘universal banks’.
For example, in terms of the long-term dynamics for Financial institutions are starting to deploy financial
addressing climate change, data on the cost of carbon products and service offerings to clients to transform
abatement demonstrates the underlying financial companies in areas such as decarbonizing energy
benefits of energy efficiency business models and systems; resource-efficient circular economy business
the relative advantage of solar and wind over fossil models; nature-positive, regenerative food and
fuel energy with carbon capture and storage (CCS). agricultural production; and green infrastructure.
These insights should normally spur a rapid shift
from investors in traditional technologies and sectors Developing innovative financial instruments and
towards those long-term profitable investments in realigning existing financial instruments are key to
sustainability technology. However, the familiarity bias supporting sectoral transformations.[16] Financial
that pushes financial institutions towards incumbents products that aim to catalyze change include:
and traditional investments can often be reinforced by
regulatory capture (for example, in the form of fossil Environmental, social and governance (ESG) funds;
fuel subsidies). The result is that fewer transactions green mortgages;
in emerging sectors and business models are made, sustainability-linked loans;
and less transformative investments happen in new sustainability-, green-, social impact-, gender and
business sectors and technologies. However, there transition bonds;
is potential to use the close relationship with existing impact investments; and
clients to encourage the allocation of “business nature-based financial solutions.[17]
as usual” capital towards “green” projects or "new
business" to finance transformative change. Issuance of green, social, sustainability and
sustainability-linked bonds is set to reach
USD 1 trillion in 2021.[18]
Banks can also directly influence environmental

performance through covenants and conditions that 11

are in place for the duration of the loan. For example, performance across the system, leading to greater
this could apply to the monitoring and enforcement resilience. As risk managers, insurers and investors,
of non-financial risks: in the case of fisheries, banks the insurance industry plays an important role in
could insist that borrowers were using sustainable promoting environmental sustainability and tackling
fishing practices to prevent the risk of regional risks, including climate change, biodiversity loss and
overfishing; or in the case of agriculture, farmers in pollution. Insurance products are likely to play an
drought-prone areas could be encouraged to use good important role in providing collateral to open up new
water management practices. environmental markets, while providing opportunities
for innovative ways to close the gender gap by
Financial institutions can provide incentives for targeting their products to women.[20] Initiatives
companies to invest in business opportunities for such as the insurance Sustainable Development
transformative innovation. Linking financial product Goals (iSDGs) aim to develop approaches that utilize
features to environmental and social performance insurance products and solutions to support the
is an emerging practice which enables financial SDGs.
institutions to directly influence the behaviours and
performance targets of companies and individuals. For businesses, compliance is the minimum
For example, sustainability-linked loans offered by expectation for a social license to operate. Financial
banks to companies may vary the interest rate based institutions need to consider management of positive
on sustainability performance measured by ratings environmental impacts alongside integration of ESG
agencies, certifying bodies or audited environmental factors within their overall risk management. Across a
/social performance indicators, including those healthy future-oriented portfolio, financial institutions
on gender equality. To support emerging business may have to consider a balance between investments
models, banks may reconsider what they can accept and loans that are either:
as collateral – for example in valuing what might be
previously considered as ‘waste’ streams, instead as ‘compliant’ –subject to ESG risk assessments and
considered as ‘feedstock’ in circular business models, from a sustainability point of view are seen to ‘do
or using future income streams from carbon credits in no harm’;
project finance transactions. ‘incremental’ - contributing to the transition but
still part of today’s mature business-as-usual
As intermediaries, financial institutions must often economy; or
consider multiple client groups. Green mortgages ‘transformative’ – catalyzing business models
can incentivize property owners by linking interest and technologies that are capable of propelling us
rates and amounts that may be borrowed to towards a regenerative and circular economy in
energy performance labels and commitments on the decades ahead. Not only are these the areas
energy retrofits. Financial institutions can structure where most financing gaps presently exist, they
environmentally and socially focused financial arguably represent the most fertile area to develop
products for retail customers, or green bonds for the industries of the future.
institutional investors. Advantageous pricing can
incentivize clients to improve environmental or social Financial institutions may need to co-innovate with
performance. These differences in pricing are already standard setters to advance common taxonomies
showing up in bond issuance.[19] for sustainable economic activities and standards
for comparability and transparency in sustainable
Meaningful engagement with companies by investors finance product development. Common classification
and banks can take to drive positive environmental systems for sustainable economic activities can
and social impacts across portfolios. Financial enable different types of financing to be shifted
institutions have influence through channeling finance towards new catalytic companies that seek to
to corporations that sit at the top of value chains that deliver positive impacts or shifted towards existing
can foster environmentally sustainable production transitioning companies that are moving towards
through their supply chains and environmentally environmentally sustainable business models.
sustainable consumption across consumers.
Financial institutions need to create mechanisms
Insurers are integrating ESG metrics into underwriting that scale up sustainability financing at a pace that
practices and developing insurance solutions to matches the needs of society, while reducing the
12 enhance environmental, social and governance financing of unsustainable activities. For example,

where potential investments are too small or risky, the new range of crowdfunded municipal green
financial institutions can use strategies such as bonds offered by Abundance (UK). Crowdfunding
financial engineering and blended finance (see section can also demonstrate the link between investments
3.4.2) to make them more feasible.[21] and the SDGs – such as with La Bolsa Social (Spain).
Integrating environmental and social sustainability
into digital transformation initiatives is important
3.2.2 Financial inclusion and digital technology
for addressing risks such as digital exclusion,
unconscious bias, lack of transparency and privacy
Financial inclusion initiatives by banks and asset as well as environmentally unsustainable data-mining
managers can be accompanied by financial education costs.
programs to improve financial health and build the
capacity of clients to avoid unsustainable debt. Banks Given the increase in the range of sources and
are increasingly setting targets to address social granularity of data for assessing the environmental
issues, include financial inclusion and financial health and social performance of companies, artificial
and gender equality[22] that will contribute significantly intelligence (AI) can play an increasing role in
to the overall sustainability of the financial system. environmentally and socially sustainable asset
allocations. For example, The Singapore government
In addition, the financial sector has used needs-based has launched a national AI platform to identify
research to develop several solutions to address ‘greenwashing’ and assess the environmental impacts
gender equality. These include non-financial support of companies. In pension funds, where beneficiaries
alongside financial services to women’s businesses express preferences for sustainable investments,
that deliver sustainability outcomes, equity funds fintech and artificial intelligence opens up the
dedicated to investing financial institutions that possibility of meeting investor requirements through
invest in women’s businesses (Women’s World active or passive investment funds.
Banking), sustainability bonds that include a gender
focus (International Finance Corporation (IFC), Often the rules of the financial system, which are
while also working towards gender parity at all designed to control traditional business practices,
decision-making levels in the institution (EDGE). The can be a barrier to innovation. Therefore, the role of
International Capital Market Association, the World regulatory sandboxes, where regulators work in an
Bank’s International Finance Corporation (IFC) and explorative collaboration with fintech entrepreneurs
UN Women published a guide to using sustainable and innovators can help address these challenges.
debt for gender equality in November 2021.[23] Organizations such as Fintech for Good and Finance
Research in the venture capital industry, where many Innovation Lab help support and incubate new
opportunities for sustainable investing lie, shows entrepreneurs and approaches which go beyond
that gender-balanced teams have better returns and transactional efficiency and help achieve social and
that female partners invest in almost twice as many environmental goals.
female entrepreneurs than male partners.[24] Yet
“women hold only 10 per cent of all senior positions in In some cases, technology can be applied within
private equity and venture capital firms globally, and market sectors that open up new possibilities for
women-led enterprises received less than 3 percent sustainable investment. For example, companies
of global venture capital in 2017”.[22] Additionally, there such as Earthbanc and Landcore both employ satellite
is a need to scale up provision of sustainable, gender- imagery to determine the carbon sequestration of
responsive digital finance including for micro-, small agricultural land – enabling the potential to structure
and medium-sized enterprises. investment products based upon the availability of
carbon credits and other environmental and social
Financial technology (fintech) has also been a key sustainability outcomes. In these cases, blockchain
disruptor by revolutionizing how payments are made technology opens up the possibility of reducing costs
and has contributed to greater financial inclusion. of transactions and facilitating more distributed
Digitalization has particularly increased financial investment.[26]
inclusion in Africa and Asia. Technology can support
more diverse and inclusive investment, enabling more New financial technology need not only be considered
people to access positive environmental and social as competition for existing financial institutions
impact products. Crowdfunding is frequently applied but as an opportunity for partnership. Most fintech
to support community investment, for example in companies lack scale, therefore partnering with 13

established, well-trusted financial institutions can be In many instances, financial institutions have been
beneficial. Such partnerships have emerged across gradually developing relevant policies and tools for
a range of different products and services, including the SME sector, including financing with criteria for
apps that help clients of financial institutions to environmentally and socially sustainable factors.
reduce their own carbon footprints. Some multilaterals, such as the European Bank for
Reconstruction and Development, and the Dutch
entrepreneurial development bank FMO, [25] have
3.3 SME access to sustainable finance
actively supported this process and influenced such
strategies in the commercial financial sector.
Fintech solutions such as advances in mobile
money, fintech services, and online banking have Financial institutions play a role in supporting both
helped small- and medium-sized enterprises (SMEs) job creation and environmental sustainability in line
to access finance.[27] SMEs are a cornerstone of with the SDGs. Recovery programs for COVID-19 have
economies in most countries and the prospering illustrated the trend toward “building back better”,
SME sector is often a key actor for environmentally which in some cases has meant supporting SMEs
sustainable, inclusive economic growth. These that are more environmentally and socially resilient
enterprises are also an important sector in emerging and that have met relevant conditions to access
market economies, representing between 30 to 37 per to recovery finance. Additionally, finance is being
cent of all SMEs (8 million to 10 million women-owned channeled towards “greener” SMEs that embraced
firms) in emerging markets.[28] However, access to environmental and social innovation.[31]
finance, accompanied by limited financial education
and lack of regulatory measures to support expanded In the long run, this may mean some creative
access, are limiting SME growth. destruction, where not all SMEs will survive if they
are not able to adapt their business models to this
Although many financial institutions have integrated new reality. Therefore, regulators must also think
finance for SMEs in their strategies, the diversity about programs that would allow for job creation in
of SMEs within national economies needs to be emerging sectors by providing support for training and
supported by a similarly diverse ecosystem of livelihood restoration programs (similar to education
financial institutions [29] focused on local and market- for workers made redundant so they can shift to a
specific needs. Retail banks can provide products new career), to facilitate a just transition to a low-
such as green lending to SMEs to make progress carbon, nature-positive, gender-responsive, inclusive
on key sustainability issues such as energy-efficient economy.
buildings and operations.
Gender equality is particularly relevant when looking
Beyond access to products and services, SMEs also at the financing of SMEs. According to the World
require adequate support through a relationship Bank, there is a significant gap of between US$260
approach - which can often entail adapting billion and US$320 billion a year in the provision of
approaches with local knowledge and providing financial services to SMEs with female ownership,
access to advice on business transformations (such restricting their growth and development.[32] Women
as how to integrate environmental practices). and women’s businesses form a critical element of
supply and value chains within the circular economy
Expanding SME access to finance without and applying a so-called ‘gender lens’ can result
consideration of sustainability performance has in improved environmental and social outcomes.
contributed to worsening environmental and For example, women are estimated to make up
social impacts, especially in developing countries, 43 per cent of the agricultural labour force and are
associated with the cumulative impacts of SMEs on “profoundly involved in the production of food and
climate change, biodiversity loss, pollution, child labor, cash crops worldwide, as well as in fisheries, forestry
and other issues.[30] These issues can be mitigated in and livestock”.[33] Interconnectivity across SDGs
countries with strong regulatory systems that ensure means that gender equality is also related to other
environmentally and socially sustainable SME growth, outcomes, including education and environmental
however in many countries such a regulatory system performance. The economic empowerment of women
is weak. also significantly improves household development
statistics such as education and health, both of which
14 are important SDGs.[34]

In the SME, microfinance, and housing finance Around US$1.9 trillion of some US$3.5 trillion per year
sectors, the trends are to leverage local financial in SDG financial flows on average come from private
sectors in targeted regions or countries and, so far sources, however, financial systems vary from country
there has been limited space for global investors to country, resulting in varying degrees of financial
to participate. This potential can be unlocked by sector development and therefore varying ‘gaps’ in the
creating favourable conditions for investment enabling provision of financing products and approaches. The
multilaterals to shift toward supporting governments lowest-income countries tend to have the largest SDG
in enacting corresponding reforms as well as financing gaps. Regionally there is a particularly large
spearheading sustainable innovation in the SME financing gap for Africa of US$1.3 trillion per year.[38]
sectors to increase the “supply side” of sustainability
investments beyond infrastructure. As countries’ financial systems develop, they can
gain access to a broader variety of actors, tools
and instruments across public, private, domestic
3.4 Gaps in financing and responses
and international finance to support financing the
transformation towards achieving the 2030 agenda,
3.4.1 Public financing to mobilize private finance using what is called transition finance.[39] The World
Bank assesses financial sector development in
Before the 2020 COVID-19 crisis, efforts to ensure terms of depth, access, efficiency and stability.[40]
adequate financing levels for the 2030 Agenda were Shortcomings in any of these areas of a country’s
insufficient, with a persistent annual financing gap financial system creates gaps that could hamper the
for the SDGs of US$2.5 trillion.[35] Since the crisis, system’s ability to deliver sustainability financing.
this financing gap has increased to US$4.2 trillion in
developing countries.[36] Yet, this still means that shifting The gap in developing countries may be due to
just 1.1 per cent of the total assets held by banks, inherent country-risk which is not being sufficiently de-
institutional investors or asset managers would be risked through public or philanthropic sub-commercial
sufficient to fill this gap in SDG financing (Figure 1).[37] investment. It can also be a function of the lack of
experience and familiarity with investing in emerging
Figure 1: SDG financing gap is only about 1% of and frontier markets, leading to a lack of risk appetite
global assets to make investments to adapt to climate change or
address biodiversity loss or pollution and/or increase
resilience to these impacts.There may also be a
lack of understanding of the opportunities to deliver
multiple benefits, such as decentralized renewable
energy.
To help solve some of these challenges, public

support can be directed through flows of funds
from governments, multilateral development banks
(MDBs) or other public agencies that help to de-risk
investments. This can lead to product innovation
within private financial institutions to create ‘blended
finance products’ that provide complementary finance.
This process could provide huge potential for financial
institutions in the future. However, many of these
instruments will require greater liquidity volumes (i.e.
more cash) to increase uptake.[41]
Regional investors in emerging markets are

also raising ambition in developing countries for
environmentally sustainable and inclusive growth
Annual SDG financing gap Global and can play a pivotal role in tackling climate change
(in developing countries): financial assets:
and other global environmental challenges such
USD 2.5tr USD 378.9 tr as biodiversity loss and pollution. Multilateral and
bilateral finance institutions are well placed to provide 15

finance for achieving the SDGs while unlocking private Sustainable Finance Roadmap released in 2021[43]
finance. Having often compartmentalized support to sets out actions to enhance the role of international
the financial sector in the past in their private sector financial institutions, including multilateral
financing arms, development finance institutions development banks, and public policy incentives
(DFIs) are increasingly developing new strategies for mobilizing private investment to support the
to enable collaboration and co-investment between implementation of the Paris Agreement and the 2030
public and private sectors, thereby creating a stronger Agenda. Multilateral banks, in their effort to maximize
foundation for leveraging private sector finance finance for development in the environmental and
towards a number of critical SDG areas. This is being social sustainability space, are now scaling up
achieved through both mainstreaming environmental capital flows for the commercial financial sector in
and social sustainability in financing of large industry developing countries through many avenues and
sectors and facilitating private sector engagement in strategies, such as:
specific areas such as climate adaptation, disaster
risk financing, and biodiversity loss. Creating markets and enabling environments
(regulatory & policy reforms, supporting industries/
Another link between private sector investors and services);
multilaterals that could be exploited is capital Developing platforms and business models that
mobilization via treasury operations, e.g. issuance can be scaled across regions and sectors;
of green and – more recently – SDG bonds, by Developing early stage projects and ventures;
multilateral financial institutions that benefit from the Supporting country-level PPP programs;
fact that the entirety of multilaterals’ portfolios can be Providing public and concessional resources for
classified as “environmental and socially sustainable risk instruments and credit enhancements; and
finance”. A variation on this is assistance provided Providing concessional financing (also known as
to governments to structure sovereign sustainable “blended” financing).
development bonds for various targeted thematic
areas (e.g. “blue infrastructure”) where there is Priority operational areas of intervention range from
potential for investors to take part. Fiscal measures large infrastructure to SME finance and affordable
can provide additional support for environmentally housing. There is the potential for infrastructure
and socially sustainable investment – for example finance to move from the provision of multilateral-
by providing tax advantages for certain types of backed sovereign guarantees to investors toward
sustainability investments or removing fiscal support creating multi-investor vehicles and funds where
for polluting fuels. multilaterals will provide “start-up” capital.
The ability of multilateral financial institutions To mitigate the risk of over-estimating the costs
to leverage their long-standing strength in of developing new approaches, targeted public,
mainstreaming and deeply integrating environmental philanthropic and specialist impact investment
and social issues across their entire portfolios – companies can play a role in priming the sector.
combined with their ability to provide technical This can help create the mechanisms for de-risking
support on the ground – can attract private sector and appropriately structuring transactions to create
investors to place capital in emerging markets and momentum for new sectors to the point at which
developing countries with challenging conditions, they have the critical mass to grow on their own,
where lack of regulatory oversight on environmental thereby reducing costs to a point where finance
and social issues would normally be a factor for is commercially feasible. Impact investing has
sustainability-minded financial institutions. Support recently brought the commercial financial sector and
from DFIs to enable the financial sector to contribute traditional development finance closer together to
to achieving the SDGs can include making project maximize these benefits.
financing more commercially viable, and growing
their internal technical capacity to support operational
commitments.
In July 2017, G20 finance ministers approved a set of

principles that give multilateral development banks
a framework for increasing private investment to
16 support country development objectives.[42] The G20

3.4.2 Blended finance
As the landscape for blended finance evolves, there
will be major opportunities for financial institutions
Blended finance has emerged as a tool to address to co-create new markets in areas where previously
risks and facilitate private financing that can risks were too high. This opportunity is dependent
contribute toward the SDGs. Blended finance on creativity and collaboration with partners in
combines concessional financing—loans that order to design effective solutions for patient and/
are extended on more generous terms than or catalytic capital that address the world’s most
market loans— and commercial funding. In urgent environmental and social challenges. Many
these arrangements, relatively small amounts commercial financial institutions are embracing the
of concessional donor funds mitigate specific SDG finance concept, by:
investment risks and help rebalance risk-reward
profiles of pioneering investments that may not be mapping their portfolios to SDGs;
able to proceed on strictly commercial terms.[44] making voluntary commitments; and
adopting SDG frameworks across asset classes
In this process, both public and private capital flows including equities, fixed income, real estate and
toward supporting environmentally sustainable and commodities.
inclusive global growth in line with the SDGs. This
means that financial institutions need to be mindful As commercial financial institutions scale-up
that investment to support the achievement of their SDG-related investments, they will need to
SDGs does not automatically equal meeting their maintain the connection to environmental and social
commitments to integrating ESG and environmentally sustainability issues. Any SDG investment framework
and socially sustainable finance into their operations. must be looked at through a lens of channeling
finance to true sustainable development activities
with specific conditions attached to such financing to
achieve sustainable development outcomes.
17

4 Changing finance
Cross-cutting approaches are needed to transform Early voluntary initiatives focused on risk management
the financial sector and realize the potential to frameworks, such as the Equator Principles. These set
stimulate the innovation and transformation that is out guidelines for banks’ operational processes (for
desperately needed. In forming an integrated strategy, example to integrate environmental and social risks in
management teams can consider collaborating due diligence processes for project finance) while also
with peers to drive industry-wide capacity 45] while providing criteria for a minimum level of compliance.
developing the skills needed to drive this economic In the insurance sector, for example, 'Climate Wise'
transformation. This section outlines approaches requires insurance members to annually disclose
that financial institutions can take to accelerate the their firm’s response to climate change through the
transition towards long-term sustainability. ClimateWise Principles framework.
Given the urgency of the need to transform to a Voluntary approaches have played an important
nature-positive global economy, transformative role in informing and testing new paradigms for
rather than incremental change is needed in the incorporating sustainability considerations across
world’s financial system. Creating individual “green” financial institutions. The United Nations-supported
instruments on the sidelines of the traditional Principles for Responsible Investment (PRI), launched
financing is not enough. However, shortcomings in by the UNEP Finance Initiative and the UN Global
many areas of the financial system and the wider Compact in 2006, has catalyzed organization-wide
economy within which it sits create barriers to change across institutional investors, such as
accelerating the transformation to address the GEO-6 insurers and pension funds, which own the majority
findings (see Section 1). These barriers include but of public companies[50] and seek specific risk/return
are not limited to: a lack of the necessary knowledge expectations across asset classes on behalf of
of environmental issues and green investment skills beneficiaries.
in the financial sector, weak oversight mechanisms,
short-termism and information asymmetries.[46,47,48,49] The PRI founders coined the term environmental,
social and governance (ESG) investments and
Understanding how the financial system can provided the framework to mainstream this type of
transform to reach a state of 'environmental and responsible investment. More than 3,000 institutional
social sustainability’ ', where the financial system investors with assets under management of more
is constantly adapting and responding to the ever- than US$120 trillion have signed the Principles and
changing needs of the environment and society, is an are working to incorporate ESG issues into investment
important step. To achieve sustainable development, analysis and decision making. Institutional investors
the financial system needs to have four main that are PRI signatories undertake active ownership
characteristics: sufficient capacity, transformational through shareholder engagement with companies to
leadership, accountability, and effective advocacy.[41] encourage investees or clients to improve ESG risk
management and develop more sustainable business
practices and contribute to catalyzing transformation.
4.1 Building capacity
Stock exchanges are also collaborating to create
4.1.1 Voluntary industry approaches and develop sustainability investment instruments.
The Sustainable Stock Exchanges (SSE) initiative,
Financial institutions participating in voluntary convened by UNCTAD, the UN Global Compact, UNEP
initiatives are playing a critical role in providing FI and the PRI, provides a global platform for exploring
frameworks and building momentum across the how exchanges can enhance corporate disclosure on
financial sector to align financing with the goals of the ESG (environmental, social and corporate governance)
UN Paris Agreement and SDGs. issues and encourage environmentally sustainable
investment.[51]
18

In the insurance industry, more than 100 insurers, a 1.5-degree pathway. These approaches are being
covering quarter of world insurance premiums, are developed to achieve adequate scale across the
working to embed ESG issues into decision-making financial system.
in the insurance business using the UN Principles for
Sustainable Insurance, launched in 2012. The UN-convened Net-Zero Asset Owner Alliance
launched in 2019 set the gold standard for net-zero
The nature of voluntary agreements in the financial commitments, with asset owners committed to
sector is evolving to focus increasingly on impact. achieving net-zero investment portfolios by 2050,
The Global Alliance for Banking on Values, launched and establishing intermediate targets every five
in 2009, created a network of banks committed years in line with the Paris Agreement’s goal of
to accelerating social, cultural, environmental limiting warming to 1.5°C. This paved the way for the
and economic transformation, with criteria for Glasgow Financial Alliance for Net Zero (GRANZ), [55]
membership based upon ‘social and environmental launched in the run up to the 26th Conference of the
impact and sustainability [being] at the heart of the Parties (COP 26) as a global coalition of 450 financial
business model’.[52] institutions. This ‘Race to Zero’, with over USD 130
trillion of private capital, is committed to transforming
Voluntary initiatives are shifting from risk-based the economy to net zero emissions by 2050. GFANZ
approaches to sustainability integration, allowing will build on the pioneering work of the Net-Zero
them to focus on aligning financing with the needs Asset Owner Alliance as well as the UN-convened
of society. More recent initiatives such as the UN Net-Zero Banking and Insurance Alliances, and the
Principles for Responsible Banking (PRB), launched Net-Zero Asset Managers initiative. Together these
in 2019 by the UNEP Finance Initiative, combine initiatives are working to significantly strengthen the
process and content by committing signatories information, tools and the markets needed for the
to align their business strategy with the SDGs and financial system to support the transformation of the
the Paris Climate Agreement, to increase positive global economy to achieve net zero carbon by 2050.
environmental outcomes while reducing negative Implementation approaches are being co-developed
ones, and creating a cycle of accountability by to achieve adequate scale across the financial system
requiring banks to set targets and report publicly on and ensure the credibility of pathways to drive change
their progress. More than 260 banks or 40 per cent in the real economy.
of the industry, financing both private and public
companies and individuals, are signatories to the PRB Initiatives such as the Science-Based Targets Initiative
and have committed to target setting as an important (SBTi) and Partnership for Carbon Accounting
lever to ensure transformation in areas of significant Financials also help guide financial institutions to
impact such as climate change, biodiversity loss, set targets or performance metrics needed to meet
financial inclusion and health, and gender equality. the requirements of the Paris Agreement from an
The report entitled ‘Guidance on Gender Equality emissions perspective. Commitments are also being
Target Setting’[53] sets out approaches to achieving established for ecosystem restoration, including,
gender equality goals under the Principles throughout among others, the Finance for Biodiversity pledge.
portfolios. The PRB has sparked a shift in sustainable
finance towards alignment with the Paris Agreement
4.1.2 Upskilling for sustainable finance
and SDGs based on target setting that is an evolution
for the industry.
Commitments to leadership initiatives such as
These sustainable finance frameworks have helped net-zero alliances can build momentum and know-
spawn, and today host, many of the latest voluntary how for change across the industry. However,
leadership initiatives in the financial sector that target accelerating sustainable finance will also require
the climate crisis. The alliances are ratcheting up the requisite skills and available time to make these
ambition to catalyze change across the financial changes in financial institutions. For example,
system, in response to Article 2.1c of the Paris many private financial institutions do not have the
Agreement, which gave financial entities a mandate to environmental, social and gender specialists that
align financial flows with a pathway towards achieving development finance institutions employ to inform
low greenhouse gas emissions and climate-resilient their sustainability strategies and carry out due
development.[54] Financing institutions are establishing diligence and risk assessments across portfolios.
science-based approaches to align financing with These financial institutions also don’t yet link 19

executive incentive plans to environmental and social influencing relationships’
sustainability performance, making it impossible for navigating power dynamics; and
them to adopt performance metrics in these areas. creating enabling organizational structures.
To place sustainability at the core of finance, basic
levels of knowledge and competency in the area of Making real progress in these areas determines the
environmental and social sustainability need to be eventual success of organizations in achieving real
developed across all departments within financial change.[59]
institutions. The finance sector needs sustainability
bankers, insurers, investors and regulators who are Business leaders need to ensure environmental and
fully conversant and competent in understanding and social sustainability is embedded in core strategies,
managing environmental and social sustainability operational processes and learning and development
issues. These specialists should not just be in programs that underpin the company’s competencies,
sustainability roles but should be active across the values and culture. Environmental sustainability
whole institution. needs to be addressed in the governance systems
of financial institutions, with adequate resourcing to
A growing number of environmental and social ensure internal capacity to integrate environmental
sustainability finance courses are being developed by sustainability into decisions and operations across
universities and institutes worldwide, which can be areas including management, risk, legal, corporate or
built into comprehensive programs for sustainability retail banking, asset management, underwriting and
education. For example: communications.
The Chartered Banker Institute's Certificate in Sustainability-focused capacity building initiatives

Green and Sustainable Finance (now delivered in need to become commonplace in the sector.
35 countries) Decision-makers need to align time horizons and
The Cambridge Institute for Sustainable risk assessments more closely with stakeholder
Leadership and expectations. Financial institutions motivated by
The CFA Institute's Certificate in ESG Investing. short-term financial gain at the expense of long-term
environmental impacts can harm business strategies
4.2 Transformational leadership that are focused on a nature-positive future. Short-
term linear use of finite resources is incompatible with
Ethical and transformational leadership of financial sustained longer-term growth.
institutions requires that inspirational, ethical
leadership is added to the skills of supervisory and
4.3 Accountability for impacts
strategic management leadership within financial
sector organizations.[56,57] Such leadership results in
change because transformational leaders Financial institutions need to understand the
environmental and social sustainability impacts of
“inspire people without using coercive power and companies they invest in, lend to or insure, as well
authority – they are enablers who engage with people, as the impact of environmental and social risks on
giving them headroom to perform”.[58] companies in their lending, investing and underwriting
portfolios. Continuing to allocate trillions in private
At the same time, ethical leadership helps ensure sector financing towards business as usual practices
that this change reflects the sustainability values risks driving more environmental degradation and
and norms inherent in a company’s accountability worsening social impacts such as inequality [60]
framework. Intent is a central aspect of initiatives that current economic models treat as
such as the ‘Operating Principles for Impact externalities.[61] Failure to adequately identify and price
Management’, and transformative, ethical leadership these externalities, along with a focus on short-term
is required for such initiatives to be pervasive returns, can undermine long-term value creation
across a financial institution’s operations. The way and result in marginalizing or even excluding social
in which financial institutions are trying to integrate and environmental effects. The risks that business
sustainability through personal leadership include: activities pose to the environment and society,
known as ‘double materiality’, can be recognized as
shifting mindsets; material over the longer term, through the effects
20 building buy-in; of sustainability issues such as climate change,

biodiversity loss, pollution and inequality on economic Given the financial industry’s demand for reliable
activity.[5] sustainability information to integrate into decision-
making, coupled with low internal capacity, the
Banks, insurers and investors involved in voluntary past few years have seen exponential growth in
industry initiatives are increasingly demanding the production and analysis of environmental and
decision-useful sustainability information from social sustainability data. Regulators are increasingly
corporate disclosures, as they increase their own focusing on disclosure and ESG data quality as a
accountability and transparency around portfolio critical part of ESG integration, which will increase
impacts. Through cycles of monitoring and disclosure, expectations for companies on accountability
financial institutions can ensure more meaningful and disclosure of relevant environment and social
stakeholder engagement to drive continuous sustainability information.
improvement. Disclosed information will also
likely be scrutinized by stakeholders – employees, To support this disclosure, the International Financial
investors, clients, regulators, peers and NGOs. The Reporting IFRS Foundation Trustees created a
extent to which impact and environmental, social new standard-setting board—the International
and governance (ESG) reporting provide insight Sustainability Standards Board (ISSB) in November
into decisions and stakeholder inputs will be key 2021. This effort is intended to help meet demand
factors in determining how a financial institution from international investors for high quality,
constructively engages in dialogues that could lead transparent, reliable and comparable reporting by
to productive co-creation. These dialogues could help companies on climate and other environmental,
a financial institution define its sustainability strategy social and governance (ESG) matters. The ISSB aims
– whether towards the achievement of SDGs or to deliver sustainability-related disclosure standards
setting a net-zero carbon target to support the climate that will provide financial institutions with information
transformation. about companies’ sustainability-related risks and
opportunities to help them make informed decisions.
Full accountability in the financial sector requires
science-based performance parameters, transparency The financial sector needs relevant, timely and readily
and independent oversight of financial sector players, available information to be disclosed by companies
and a system of sanctions discourage business to quantify their SDG impacts. Banks can also request
as usual approaches while providing rewards for information on sustainability key performance
transformative performance.[62] Value driven and indicators from clients. Reporting of this type is an
science -or evidence-based performance metrics are outcome of stronger internal systems and processes,
the starting point for accountability since they provide and voluntary and principles-based approaches (see
the guiding ‘north star’ for decision-making. At a section 3.4) which will continue to play a critical
minimum, to be effective, the metrics should be: role in supporting the sector in building harmonized
information systems and technical capacity. Moreover,
objective and achievable; harmonization of ESG disclosure through mandatory
developed through a multi-stakeholder process; standards is likely to be followed by common
encourage continual improvement; and methodologies around ESG ratings.[63]
include an independent, third-party verification
process (ISEAL). In the meantime, sector-based initiatives such as the
World Benchmarking Alliance’s planned ‘Financial
Such parameters are already present in the financial systems benchmark’ [64] and UNEP FI’s SDGs & Impact
system, due to both voluntary and regulatory efforts. resources, and initiatives focused on harmonizing
approaches to measuring and managing impacts,
Identifying and quantifying the sustainability impacts such as the Impact Management Project (IMP), are
of particular approaches to financing is a critical important to strengthen the ability of the financial
first step in enabling financial institutions to increase sector to understand the nature and extent of the
capital that supports positive environmental and environmental and social impacts of their financing
social impacts (including gender equality) and activities in a consistent and uniform manner.
decrease capital allocated towards activities that
cause negative impacts.
21

Box 1: Impact Management Project (IMP) into environmental performance across peers within
Structured Network a sector.
This collaboration of standard-setting
organizations is coordinating efforts to provide Integration of environmental data and outlooks from
complete standards for sustainability impact sources such as GEO-6, IPBES, the International
measurement, management and reporting. Resources Panel and the IPCC into scenario analysis
These include: the Global Reporting Initiative, can help ensure science-based alignment of
Sustainability Accounting Standards Board investment portfolios will underpin the shift to a more
and International Integrated Reporting Council, inclusive and environmentally sustainable financial
Carbon Disclosure Project, UNEP FI, Principles system. Tools to support integration of greenhouse
for Responsible Investment, UN Global Compact, gas and climate data in assessments of related
Organisation for Economic Co-operation and financial risks and opportunities include Carbone 4’s
Development, United Nations Development Climate Impact Tool, which measures the impact of
Programme, International Finance Corporation, assessed portfolios on climate change. These are just
Global Impact Investing Network and World some of the tools which attempt to approximate levels
Benchmarking Alliance, among others. The of exposure and potential for future financial losses of
Network has issued a common vision for a managed portfolios.
system of disclosure standards, and in July
2021 released an Impact Management Platform However, it is a challenge for financial institutions
providing an authoritative overview of impact to achieve portfolio-wide alignment with the Paris
management and disclosure and how existing Agreement and SDGs without adequate environmental
standards and resources support and define policy and regulatory measures being applied
these elements. The members of the Structured to companies to mitigate their impacts, such as
Network and their joint work will feed into the internalizing the costs of pollution (e.g. carbon
global standards for sustainability disclosures. taxes).[66]
4.4 Advocacy for enabling policy and

While management of financial risk is necessary, if
environmental impacts are ignored then planetary regulatory frameworks
boundaries could be breached and environmental and
social outcomes undermined, which would increase 4.4.1 Aligning policy engagement with purpose
risk to the entire economy and therefore the financial
sector within which it operates. To respond to this,
the financial sector could integrate environmental and The final enabler needed to reach a state of
social sustainability into a holistic Impact, Risk environmental and social sustainability in finance
and Return framework as described by Sir Ronald is the existence of effective advocacy. Advocacy
Cohen.[65] This framework starts with normalizing - defined as “any action that speaks in favour of,
impact-adjusted returns in the way that allows for recommends, argues for a cause, supports or defends,
evaluating risk-adjusted returns today. or pleads on behalf of others” [67] - is particularly
important as the financialization of many economies
Financial institutions can manage these risks by increases. [68] Advocacy can mean that financial
gathering meaningful data about the environmental institutions are able to exert significant influence
and social performance of clients by engaging directly through lobbying and directing the operations of the
with companies and standard-setters or via industry companies in which they are shareholders, which
databases. Certification schemes such as the FSC can slow or accelerate the pace of change towards a
or RSPO can give good indicators of environmental nature-positive economy. [69] If sustainability is seen
and social performance based on audited outcomes. as a secondary ‘compliance’ check then it risks being
Initiatives such as the Partnership for Carbon perceived as a more perfunctory ‘bolted-on’ process.
Accounting Financials (PCAF) have helped financial If it is seen as a primary function, then it stands a
institutions normalize data collection and accounting better chance of being recognized in the context
principles for allocating greenhouse gas emissions of organizational purpose and of achieving ‘built-in’
impact data to a loan or investment. As data quality sustainability. This can be reinforced by the way in
improves on issues such as biodiversity loss and which a firm acts within the public policy arena: it
22 pollution, the information can provide greater insight can either proactively advocate for environmental

Figure 2: Particular features of a state of sustainable finance
Effective
advocacy
Transformative
Sufﬁcient
and ethical
capacity
leadership
Full
accountability
Science-based Transparency Independent oversight System of sanctions and

performance parameters of ﬁnancial sector players rewards for performance
and social sustainability legislation (in finance and in been the Financial Stability Board’s Task Force
specific market sectors) or it can be self-contradictory on Climate-Related Financial Disclosures (TCFD)
by taking lobbying positions which are not aligned recommendations to improve and increase reporting
with its own environmental and social sustainability on climate-change-related information to facilitate
profile. clear, comprehensive, high-quality information on
these risks and opportunities in financial markets,
The finance system needs to transition towards which are driven by both the physical impacts of
this state of environmental and social sustainability climate change and the transition to a low-carbon
(Figure 2), through advocacy for policy and regulatory economy. Adopting the TCFD recommendations
approaches that enable an orderly process of rapid can create normalized processes that strengthen
transformation, which GEO-6 shows is needed in the financial sector responses to environmental and social
business economy. Sustainability transitions and sustainability challenges, paving the way for eventual
transformations in general are complex processes mandatory action that creates a level playing field.
that involve social, economic, environmental and
political shifts. The financial sector can support Financial institutions and non-financial companies can
actions by policymakers and regulators to address use TCFD-aligned disclosures to understand potential
climate and environment-related risks and to enable exposure to risks such as stranded assets. These
sustainable finance to accelerate while also ensuring can come from investment in economic activities
financial stability. that are likely to be curtailed because they are leading
to planetary damage, such as climate change. For
example, a phase-out of fossil fuels may happen
4.4.2 Enabling role of financial regulators
because of:
Voluntary initiatives can provide steppingstones on Shifts in market preferences - consumers and
the adoption curve towards regulatory enforcement financial institutions already turning away from
while also enhancing the financial system’s resilience. certain types of activities such as coal and oil
A key driver for greater understanding of risks has sands extraction. 23

Regulatory costs - restrictions on activities or accountability mechanisms and create an enabling
direct carbon pricing that renders the activity environment for sustainable finance. However, only
uneconomical recently have financial regulators started to integrate
Changes in technology - decreases in costs of environmental and social sustainability mandates into
renewable energy or electrified vehicles that make agendas, spurred by global agreements, international
the environmentally damaging asset unexploitable. cooperation across organizations and industry’s
advances using voluntary approaches, standards,
These three factors could lead to major reductions in collaborative initiatives, and innovation think-tanks.
asset value or full write-offs that adversely affect the
financial position of the company holding them on its Current regulatory trends in the European Union
balance sheet. That can have knock-on consequences (EU) and elsewhere are pushing the commercial
for banks (defaults), investors (loss of value) and financial sector to fully embracing sustainable
insurers (claims). In capital markets, this is leading development mandates. Regulators initially focused
to divestment and revaluation at a faster rate than on environmentally and socially sustainable finance
longer term positions (for example bank lending). from the risk perspective and are increasingly
Organizations such as Carbon Tracker highlight the examining opportunities in this sector. Financial
risks of a ‘carbon bubble’ which is already leading to regulators are recognizing that the financial sector
significant write downs of companies based on risks must adequately manage climate-related and ESG
to their future income streams. The same logic could risks and that financial stability is impacted negatively
be applied to assets stranded due to the physical by environmental degradation.[75,76] Central banks,
impacts of climate change. More than half of the financial regulators and standard-setters that set the
climate tipping points identified in major climate ‘rules of the game’ governing financial and capital
assessments are now “active”, threatening the loss markets are starting to investigate the ESG impacts
of the Amazon rainforest and the great ice sheets of financial decision-making and the related risks
of Antarctica and Greenland, which are undergoing to the stability of the financial system, not least
unprecedented changes much earlier than through voluntary collaboration under initiatives such
anticipated.[70] as the Network of Central Banks and Supervisors
for Greening the Financial System (NGFS)– which
Investments and loans are also exposed to now includes 100 members and 13 observers.[77]
businesses and activities that lead to nature-related Banking supervisors and regulators in NGFS are
financial risks caused by deforestation, biodiversity developing strategies to integrate climate-related and
loss or pollution. The Task Force on Nature-Related environmental risks into financial stability monitoring
Financial Disclosure is developing a framework for and micro-supervision. Insurance supervisors and
enhancing understanding and action to address these. regulators are working together in the Sustainable
Large, abrupt or persistent environmental changes Insurance Forum to strengthen understanding and
can happen through a range of slow onset processes responses to sustainability issues. Policymakers
such as over-exploitation of resources or excessive and regulators are increasingly providing research
nutrient pollution that undermine resilience and push and guidance for the financial sector to more
systems closer to environmental tipping points.[71] systematically understand and address environment-
related financial risks and opportunities.
Financial regulators and supervisors are increasingly
seeking to understand how climate and other Financial policymakers and regulators are also
environmental risks could affect the stability of increasingly supporting alignment of financing with
the financial system. Environmentally and socially sustainable development (Figure 3). Core approaches
sustainable finance looks set to become one of the include creating an enabling environment, for example
biggest regulatory revolutions in the coming years.[72] in jurisdictions such as the EU, where there is also a
growing focus on aligning the financial system with
UNEP’s Inquiry [73] into the Design of a Financial environmental and social policy objectives. [78] The
System called for action to ensure that the rules European Commission’s Strategy For Financing the
governing the financial system are consistent with Transition to a Sustainable Economy aims to provide a
wider government policies, for example, aligning roadmap and enabling framework to increase private
the capital requirements for banks and insurers investment in environmentally and socially sustainable
with environmental and social factors.[74] This could projects and activities to support actions set out in
24 lead to ambitious regulation to ensure effective a European Green Deal which would help manage

Figure 3: Shifting focus of assets towards sustainability and developing countries
and integrate climate and environmental risks in the for scaling up sustainable financial products
financial system.[79] and services. Voluntary initiatives help ensure
approaches are compatible across jurisdictions
To support harmonization across financial products include the International Platform on Sustainable
and common understanding of sustainability Finance, which released a draft Common Ground
investment, policymakers are coordinating their Taxonomy to identify areas of commonality across
work on the development of taxonomies that green taxonomies in the European Union and China
provide classification systems to establish a list of in October 2021.[80] The G20 Sustainable Finance
environmentally sustainable economic activities. Working Group roadmap for sustainable finance sets
The creation by governments or financial sector out priorities including improving comparability and
regulators of environmental sustainability taxonomies interoperability of approaches to align investments to
and mandatory sustainability reporting standards various sustainability goals.
to support greater transparency are essential
25

5 Conclusions, outlook and recommendations
Financial institutions now need to reimagine how supports environmental and social sustainability by:
they can contribute to building a low-carbon, nature-
positive and inclusive economy. Not only could this Better allocating financing for improved low
approach be the best commercial opportunity for carbon and nature-positive and inclusive impacts,
value creation by financial institutions in the future, which can be measured, incentivized and reported,
it may be the only one to head off the sustainability including where this finance is most needed
challenges highlighted in GEO-6 while realizing the Strengthening engagement with public and
opportunities from the necessary transformations private companies to realise opportunities to
that GEO-6 and other outlooks propose. transform towards environmentally and socially
sustainable models
At a critical time for society and as industries face Collaborating with other financial sector actors
health, technological, social and environmental and key stakeholders to set and implement
disruption, the financial sector should engage with science-based targets and build consensus on
clients and stakeholders to re-assess the value it how finance can better deliver environmental,
creates and how it creates it, on the basis of openness societal and economic benefits simultaneously
and transparency about how money is being Ensuring transformational leadership, incentives
managed. Environmental and social sustainability and capacity are in place to develop and execute
impacts need to be a core part of investment, lending strategies which enable environmentally and
and underwriting decision-making moving foreward. socially positive outcomes, to help deliver a low-
To help achieve the SDGs through the transformation carbon, nature-positive and inclusive economy
of the global economy by 2030, the financial system Understanding the impacts of financing and
will need to have the strategies, cultures and identify opportunities to increase positive
incentives (or removal of disincentives) in place to environmental and social impacts through global
shift investment portfolios, at the necessary scale and collaborations
direction to achieve long-term sustainability goals. Engaging policy makers and regulators to
advocate for an enabling environment for
sustainable finance and to create a level playing
5.1 Recommendations for financial
field to address the environmental and social
institutions impacts of financing activities.
Financing needs to support the transformation of 5.2 Recommendations for regulators and
economic sectors towards a low-carbon, nature- policymakers
positive and inclusive economy in which critical
ecosystems are protected and restored to increase
the system’s resilience and mitigate and adapt Finance ministries and/or industry regulators and
to climate change. Banks, institutional investors supervisors are developing a toolbox of measures
and insurers have the power to enable the positive to catalyze the financial sector’s role in contributing
corporate transformations needed for better societal, to achieving the economic transformations needed
environmental and financial outcomes. to address the world’s pressing environmental and
social challenges. Recommendations on how they can
By taking the actions recommended below, financial further help include:
institutions, financial policymakers and regulators can
play a critical role in the transformations called for in Analyzing annual progress made by the financial
Agenda 2030, its Sustainable Development Goals and system to contribute to achieving the goals of the
major environmental assessments such as GEO-6. Paris Agreement and SDGs, including by enhancing
disclosure mechanisms [81]
Financial institutions can enhance their role in Providing enabling policies for environmentally
26 accelerating the transition to a financial system that and socially sustainable finance while removing

barriers, including developing taxonomies to
signal which businesses and practices are
environmentally and socially sustainable to inform
financial decision-making
Ensuring comparability and consistency in the
availability of relevant ESG data
Building on voluntary initiatives that have
amassed experience in bringing financial
institutions toward measurable environmental
and social action on a global scale, balancing
regulation and voluntary approaches
Creating accountability across the entire system,
for example through reporting on climate-related
risks and opportunities and progress towards
decarbonisation targets
Embedding values-driven, science-based
parameters within regulatory mandates.

References
A link to all of the references can be found here.
Glossary
A link to the glossary can be found here.
27

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Changing Finance to Catalyze Transformation:

How financial institutions can accelerate the transition

Changing Finance to Catalyze Transformation

ISBN No: 978-92-807-3900-8

Job No: DEW/2398/NA

Cover design: Joseph Shmidt-Klingenberg and Sebastian Obermeyer

Graphic Design: Joseph Shmidt-Klingenberg and Sebastian Obermeyer

Layout: Jinita Dodhia/ UNON, Publishing Services Section/Nairobi

© Maps, photos, and illustrations as specified

Changing Finance to Catalyze Transformation

 how to transform in a time of uncertainty,

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

About GEO for Business 4

1. The scale of the challenge 8

2 The role of the financial sector 9

5 Conclusions, outlook and recommendations 26

Changing Finance to Catalyze Transformation

If we stay on the path we are on, by 2050:

 The global population will reach between 9-10

Changing Finance to Catalyze Transformation

Finance has the potential to be a major driver of

Changing Finance to Catalyze Transformation

3.1 Finance as a catalyst to change the

Changing Finance to Catalyze Transformation

Banks can also directly influence environmental

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

To help solve some of these challenges, public

Regional investors in emerging markets are

Changing Finance to Catalyze Transformation

In July 2017, G20 finance ministers approved a set of

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

 The Chartered Banker Institute's Certificate in Sustainability-focused capacity building initiatives

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

4.4 Advocacy for enabling policy and

Changing Finance to Catalyze Transformation

Science-based Transparency Independent oversight System of sanctions and

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

Changing Finance to Catalyze Transformation

A link to all of the references can be found here.

A link to the glossary can be found here.

Changing Finance to Catalyze Transformation

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how to transform in a time of uncertainty,

The global population will reach between 9-10

The Chartered Banker Institute's Certificate in Sustainability-focused capacity building initiatives