In focus

How the world is warming to sustainable investing


The EU is considered by many to be the leader in sustainability regulation. This is true in the sense that the EU has been the first to set the foundations for a sustainable finance framework and has a head-start in developing the corresponding regulation. But others, particularly in Asia, are close at its heels and some use the EU framework as inspiration.

In this paper, we travel around the world (alas only digitally and in fewer than 80 days) and highlight key developments in sustainability regulation. We compare the evolution in regulation to that of the sustainable investment funds market. Different regions take different approaches, with some emphasising regulation and some leaving it to the market to grow more organically.

The million-dollar question is whether regulation or organic growth is the more effective means of creating a sustainable investment market. We believe that the recipe for success lies in confluence rather than collision between the two.

A necessary ingredient is regulation that is carefully drafted and implemented. Global alignment and avoiding duplicative and overlapping requirements are also key. Policymakers should remember that sustainability goes beyond climate change and requires government-led industrial policy alongside sustainable finance. Above all, policy should be driven by long-term strategic plans and less influenced by short-term politics.

The blueprint for sustainable finance policy

Generally, the blueprint for sustainability policy often starts with a government setting a goal for reducing carbon emissions. The Paris Agreement set at COP 21 in 2015 has been a major driver behind this.

Often the emissions goal is to achieve net zero emissions by 2050. This requires changing many aspects of the real economy, such as energy generation, developing new technology, greener transport and infrastructure etc.

An essential part of the blueprint is putting together a plan detailing how the financial sector can help fund this transition. This is what policymakers call “sustainable finance”. It means a framework for the financial services sector where climate change and environmental risks are considered in everyday business, operations, products and services. The ultimate intention is for this to become business-as-usual, so that private funding flows consistently towards projects and activities that support the transition to a greener economy.

 

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