Navigating the maze of Sustainable Finance

Mark Line - November 24, 2019

There is now plenty of evidence that businesses that align with sustainable and responsible business practices tend to outperform those that don’t. As a prime example, a 2017 study by the McKinsey Global Institute found that companies that manage for long-term value creation have consistently outperformed their industry peers on almost every significant financial metric, including revenue, economic profit and market capitalization.[1]  Yet, despite the growing business case, capital continues to pour into less-sustainable activities. In a recent investigation, the Guardian revealed the world’s largest investment banks and asset management companies had aggressively expanded into new coal, oil and gas projects since the 2016 Paris climate agreement. While, the governor of the Bank of England, Mark Carney, has warned that many of these assets will be left stranded, leading to bankruptcies and a growing risk of a global financial crash. 

 As the lending arm of the European Union, and one of the largest providers of climate finance, you might expect The European Investment Bank (EIB) to have the most progressive strategy.   To the contrary, the EIB has reportedly balked at a proposal to halt new investments in fossil fuels, raising concerns that some countries are plotting to water down what would be one of the financial sector’s most ambitious climate moves.  Between 2013-17, the EIB provided almost €12bn (£10.4bn) in loans to fossil fuel projects, almost all for gas.  The reasons why money continues to flow towards new investments in fossil fuels is that the associated risks remain opaque. Despite the groundswell of focus on the climate emergency, it was recently recognised that companies have not addressed ‘climate risk’ well in their financial disclosures. So how could investors understand this component of corporate risk? To help identify the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities, the Financial Stability Board established an industry-led task force: the Task Force on Climate-related Financial Disclosures (TCFD).

 The Task Force was asked to develop voluntary, consistent climate- related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks. The 32-member Task Force is global; its members were selected by the Financial Stability Board and come from various organizations, including large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies.  Notably, the Bank of England’s 2019 Stress Test on banks and insurance companies will include an exploratory examination of climate risk.  A recent report on progress to date in banking sector by BCS analysed the size and geographical distribution of the banks that have endorsed the TCFD framework as of July 1st, 2019.

 Key report findings include:

  1. Of the 76 banks that endorse the TCFD framework only 39 started disclosing
  2. Europe is leading TCFD framework implementation, US and Asia-Pacific are significantly lagging behind
  3. Momentum of new banks endorsing TCFD has slowed significantly since launch in 2017 – only 9 banks have endorsed in 2019 compared to 38 banks in 2017
  4. The most advanced area of disclosure is banks’ own environmental operational footprint, whereas carbon impact of services banks provide is the least mature

 So, the stakes are constantly being raised. $30 trillion of capital has already been pledged to Sustainable Finance and supporting outcomes aligned to Sustainability and Impact goals, such as the UN SDGs and this will only grow.  But, this huge volume of capital is only trickling from behind a dam created by uncertainty from lack of data, taxonomies, schemas, reporting and products, robust enough to satisfy the risk register of financial institutions. The result is a lack of confidence about viable options for investing in sustainable initiatives.

 To help navigate this maze, Challenge Sustainability is actively involved with a new Sustainable Finance initiative pioneered by Finextra Research and ResponsibleRisk.  Together, they will be running a thought-provoking series of editorial, research and experiential events to bring banking and technology ecosystems together, to collaborate on enabling this wave of change.

 Our first event will be held in London on December 4th 2019, aimed at Commercial Banks, followed by others in the months ahead and culminating in Sustainable Finance summit in June 2020.  In the meantime, if you would like to learn more about our services in this area, please contact us.


[1] Barton, Dominic, James Manyika and Sarah Keohane Williamson. 2017. “Finally, Evidence that Managing for the Long Term Pays Off.” Harvard Business Review. Online at .