Supporting policy makers and regulators to build a sustainable financial system

A key challenge for sustainable and ‘green’ finance is that it is still often viewed as a niche, optional, thematic part of the global financial system. Since governments around the world pledged to decarbonise economies in line with their commitments to the Paris Agreement in 2015, as well as implement the Sustainable Development Goals (SDGs), this separate approach is increasingly recognised by policy makers and regulators as no longer fitting.

Government and policy maker interest in sustainable finance and investment has grown dramatically over the past decade. Across the world’s 50 largest economies, there have been over 730 hard and soft law revisions to some 500 policy instruments which support, encourage or require investors to consider long-term value drivers, including environmental, social and governance (ESG) factors.^[1] Of these 50 economies, 48 have some form of policy designed to help investors consider sustainability risks, opportunities or outcomes.

Yet policy makers and regulators, particularly those working in emerging markets, are struggling to know where to start and how to move from isolated policy interventions to more holistic strategy. To support governments and regulators transform their financial policy frameworks, the PRI and the World Bank have teamed up to develop a sustainable finance and investment policy toolkit. This toolkit aims to support government policy makers and regulators in implementing reforms to build a sustainable financial system. The rationale of such reforms is to align capital markets with the goals of the Paris Agreement and the SDGs.

Foundational policies to mainstream responsible investment

Investing sustainably is not investing in a specific asset class or using a specific ESG-related strategy. It refers to the strategy and practice of systematically and explicitly incorporating ESG factors in investment decisions and active ownership.^[2] It requires that underlying finance and investment regulatory frameworks mandate the necessary disclosures, policies and processes to guarantee systematic and explicit incorporation of all material value drivers, including ESG factors, in investment decision making.

The first part of the toolkit presents a high-level overview of five foundational sustainable investment policies and regulations, explaining why each is important, setting out their key features and presenting some examples of such policies in action. These policies include:

• corporate ESG disclosures, including alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);
• stewardship (engagement and voting);
• investors’ duties to incorporate ESG-related considerations in their investment decision making, to provide sustainability-related disclosures and to report on their ESG incorporation policies and performance targets;
• taxonomies of sustainable economic activities, defining common and clear criteria to classify projects or investments as green or sustainable,
• national/regional sustainable finance strategies, that encourage and enable the low-carbon transition and the delivery of the SDGs.

Sustainable finance is receiving additional attention as governments and policy makers discuss how to rebuild their economies in the wake of the COVID-19 pandemic. It has put many aspects of our economy and lives on hold, highlighting the social and economic consequences of inequality. The pandemic has not, however, stopped the climate emergency and will not prevent the risks from extreme weather events and other climate-related shocks that threaten us now and in the future. There is a growing consensus that economic recovery strategies must be sustainable and inclusive and deliver reforms that enable a more just and fair society.

Embedding sustainable finance and investment policies and regulations in traditional policy frameworks will reinforce a sustainable recovery through:

• supporting national policy goals on climate change and the SDGs;
• enhancing the resilience and stability of the financial system and the economy;
• improving market efficiency by clarifying and aligning investor and company expectations; and
• increasing the attractiveness of countries as investment destinations.

Adopting a broad policy framework is beneficial not only to policy makers, but also to the firms in the real economy – for example by helping to improve management and board oversight of performance on key ESG issues, as well as identify new opportunities in these areas. It also benefits the financial institutions which invest in them by providing material data and analysis for informed decision making and allowing portfolios to be effectively aligned with long-term goals.

The toolkit will assist the PRI and the World Bank to contribute to the creation of a common language on sustainable finance and investment policy design, implementation and monitoring. The toolkit can help adapt global good practice to fit local market context in an appropriate and proportional way. It provides the basis for a regulatory dialogue with counterparts in emerging markets, on the best path forward in aligning finance with sustainability. We look forward to continued collaboration on this growing agenda.

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.

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