SUSTAINABLE FINANCIAL SYSTEM
WHY THE PRI IS WORKING TOWARDS A SUSTAINABLE FINANCIAL SYSTEM
The financial system is not operating sustainably and it often fails society. We need to realign the system with sustainable, equitable economies.
As investors, we need to go beyond ESG integration to achieve a sustainable financial system. Investors have a central role to play. Find out about the PRI’s new SFS projects and how you can get involved.
The PRI’s mission statement calls for signatories to play a role in supporting a sustainable financial system by “addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation”. Responding to this, the PRI established the Sustainable Financial System programme to develop a framework for contributing to a sustainable financial system.
The financial system is an integral part of how modern economies develop – banking, savings, investment and insurance play a critical role in supporting and enabling economic growth and development. But the financial system can undermine sustainable economic development: it can damage the health of the natural environment and it can fail beneficiaries and savers. The financial system itself is also susceptible to sustainability challenges that can undermine the ability of fiduciaries and other institutional investors to fulfil their purpose, regardless of the investment decisions they make.
By understanding the linkages and interactions between different parts of the financial system, and how the financial system links with other parts of the economy and society, we can empower investors to understand the impact and operation of the financial system as a whole, including its purpose, its characteristics, its effectiveness, how the system may change over time and its resilience to risks and sustainability challenges, and enable them to support a more sustainable financial system.
- Collectively, financial actors including investors can have negative impacts on society and the environment, which risk undermining the purpose of the financial system.
- Risks in the financial system need to be addressed if it is to be resilient, as do many risks and sustainability challenges in society and the environment.
- A resilient financial system is necessary for investors to fulfill their duties.
- Individual responsible investment processes and decisions are insufficient for the financial system to be resilient or society sustainable.
"The financial system should support sustainable and equitable economic development. In doing so, it should enable everyone to access their income today and save for the future use. It should also provide capital to invest productively, innovate and provide for everyday needs”.
WHAT WE INTEND TO DO
The SFS programme focuses on nine key risks and challenges that could undermine a sustainable financial system:
- short-termism: short-term investment objectives;
- beneficiaries: attention to beneficiary interests;
- policy makers: policy maker influence of markets;
- lobbying: capture of policy by vested interests;
- service providers: brokers, rating agencies and advisors;
- principal-agent: relationships in the investment chain;
- culture: financialisation and rent-seeking;
- misaligned incentives: with sustainable economic development;
- investor practice: practices, capacities and competencies.
By addressing these we believe we can support a more sustainable financial system.
We are delivering a series of projects that will address key risks and challenges in the financial system. Our focus in the first phase work is addressing key blockages in the system and aspects of the system that will enable responsible investment.
In 2017/18 we will start with four priority projects:
- asset consulting services;
- trustee readiness for a sustainable system;
- macro risks - investor response to threats and instability;
- sustainable system linkages and the role of actors.
The remaining phase 1 projects will start from the end of 2017/18:
- sustainable finance Instruments and incentives;
- governments linking financial and sustainability policy;
- banking sector sustainability review;
- ESG investment/modern portfolio theory.
To measure success, we need to understand our impact against sustainability, system characteristics and economic well-being measures:
- sustainability: the financial sectors contribution toward the SDGs;
- characteristics: the system displaying the characteristics of a sustainable financial system;
- well-being: investment that supports wider economic well-being.
One of the key challenges for our work on a sustainable financial system is ensuring that our projects are relevant to the financial system of the future. This means being forward-looking in design and implementation. We are identifying and monitoring a short-list of driving forces that we expect to have a significant impact on the financial system. Our work will include examining each of the drivers, their potential impacts on the financial system, the UN's Sustainable Development Goals (SDGs) and the reaction from investors.
Drivers of change within the financial system: demographics; technology; rise of emerging markets; structural changes of design of pensions; mistrust towards financial industry; regulation after the global financial crisis; financial inclusion.
Drivers of change external to the financial system: rising inequality; environmental degradation; natural resource depletion; the erosion of multilateralism; the rise of nationalism; protectionism; systemic corruption; conflict.
As we start each project, we will invite signatories to participate in projects. Signatories may also propose additional projects at any time.
We are currently seeking signatory participation in the following projects:
- Asset Consulting Services Review Advisory Committee (more here);
- Macro Economic Risks Advisory Committee (more here);
- Trustee Readiness for a Sustainable System (more here).
Signatories interested in participating should contact firstname.lastname@example.org.