Sustainable Finance

Our patterns of production and consumption exceed the planetary boundaries. The consequences of this include climate change, water shortages, biodiversity loss etc. To ensure the functionality of ecosystems for the generations of today and tomorrow, the real economy needs to transition to a resource-efficient and future-proof economy in the foreseeable future. The financial sector can help to accelerate this transition.

Sustainable Finance 

A financial system is defined as sustainable if its finance and investment decisions promote economic activities that take the scarcity of limited natural resources and the regeneration capacity of renewable resources into consideration. To increase sustainability and exploit the associated business opportunities, financial actors must take sustainability factors into account in their financial and investment decisions as a matter of course. Examples of relevant sustainability factors, known as ESG factors (environment, social, governance), include CO2 emissions, water consumption, child labour, the effectiveness of management structures when it comes to ensuring good corporate governance etc.

Many investors and financial advisors cling to the belief that sustainability can only be achieved at the cost of yields. Studies (University of Oxford and Arabesque, University of Hamburg and Deutsche Asset Management, University of Geneva and Swiss Finance Institute) show, however, that sustainable investments perform at least as well as traditional forms of investment.

International community sends strong signals

2015 was marked by major achievements on the part of the international community in the area of sustainability and its financing:

  •  Agenda 2030:  at the sustainability conference in New York, agreement was reached on 17 universally valid goals for sustainable development, known as the Sustainable Development Goals (SDG);
  • Addis Accord: the Addis Ababa Action Agenda on the financing of sustainable development;
  • Paris Agreement, COP 21: the international community agreed, among other things, on the goal of making financial flows more consistent with a low carbon pathway (Article 2.1.c).

Sustainability on the agenda of international financial bodies

The financing of the Sustainable Development Goals and the Paris climate objectives cannot be ensured using public funding alone, and the mobilisation of private funding is urgently required. Hence the alignment of the financial system with these goals and objectives is gaining in significance. The international financial bodies have recognised this:

  • under the Chinese Presidency the G20 made the topic “Developing Green Finance” a priority in 2016 and established the G20 Green Finance Study Group (GFSG) in the context of the G20 Finance Track;
  • the GFSG is being continued in 2017 under the German Presidency;
  • the industry-led Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) published recommendations on the voluntary disclosure and reporting of climate-related financial risks;
  • international organisations like the IMF, the OECD and UNEP are strengthening their initiatives in the area of sustainable finance.

Biodiversity and financial markets

Biodiversity is in sharp decline all over the world, primarily because of economic activities that are detrimental to nature. Financial institutions also have a negative impact on biodiversity when they finance companies which engage in damaging activities.

As an estimated 50% of global economic output is moderately to heavily dependent on biodiversity, both the real economy and the financial sector are exposed to massive risks from biodiversity loss. In its Global Risks Report, the World Economic Forum (WEF) identifies biodiversity loss as one of the greatest environmental risks. The loss of biodiversity is also accompanied by the loss of essential ecosystem services. Companies that depend on fertile soils, insect pollination or water supply, for example, are directly exposed to the risks of biodiversity loss. Financial institutions that invest in such companies are also exposed to the same biodiversity risks.

The ENCORE tool allows financial institutions to take account of biodiversity aspects in their financial decisions. This means that financial flows can be directed away from economic activities that are harmful to biodiversity and towards economic activities that promote biodiversity. The biodiversity conservation goals defined by the Convention on Biological Diversity serve as a guide.

An initial version of the ENCORE tool, which was supported by SECO, allowed biodiversity risks associated with economic activities to be identified. The latest version now also incorporates biodiversity impacts, with support from the FOEN. A range of indicators show the extent to which a given investment portfolio is detrimental to biodiversity and how far it is in line with international biodiversity goals. On this basis, the portfolio can be adjusted to make it more biodiversity-friendly. The tool was developed in cooperation with major banks and insurance companies. It is freely accessible and provides a useful aid for financial institutions in Switzerland and in other countries to increasingly align themselves with global biodiversity goals.

Water and financial markets

Globally, 90% of all natural disasters are water-related. The water crisis and associated risks are expected to accelerate due to climate change, increased demand for freshwater as well as population and income growth; the effects will be felt by civil society, private companies and investors alike.  

We are already seeing significant stranding of assets being stranded due to their exposure to different types of water risks. This report exposes specific recent examples of stranding events that recently occurred in four of the most water-dependent sectors: coal, oil and gas, energy as well as metals and mining.

Water risks are strongly interlinked with other environmental risks. If water risks are not addressed properly, climate and biodiversity risks could accelerate. Therefore, addressing water risks helps mitigate biodiversity risks and achieve the goals of the Paris Agreement as well as the Convention on Biological Diversity (CBD).

While water-related risk is being recognised by few investors, even fewer take into account the effects of their investment and financing decisions on water quantity and quality in the longer term or engage actively with investee companies. Investors have the possibility to play an active role in contributing to solving the water crisis at scale.

This guide focuses on how investors can engage with investees to achieve SDG 6 through basin water security.

Basin water security refers to fostering sustainable water quantity and quality of freshwater resources for all users in a water basin in the long-term.

The ‘understand-design-act’ framework for basin water security
Figure 1: The ‘understand-design-act’ framework for basin water security

The guide is designed as a practical step-by-step framework.

Four principles of basin water security
Figure 2: Four principles of basin water security

With case studies and resources such as tools, methodologies and data sources.

To identify water risks see also Southpole’s technical background report.

Digitisation as an opportunity

As a component of digitisation (big data, the internet of things, blockchain and artificial intelligence), financial technology (fintech) creates opportunities for the faster, wider and cheaper integration of environmental criteria into finance and investment decisions. Thanks to digital financial technology, relevant, reliable, recent and robust environmental data can be integrated into the analysis, modelling and evaluation of environmental risks and opportunities. In its report “Fintech and Sustainable Development. Assessing the Implications“ , which was published in late 2016, the UNEP Inquiry into the Design of a Sustainable Financial System identified fintech as presenting an opportunity for accelerating the integration of the financial and real economies and improving the transition to a resource-efficient economy.

Switzerland’s involvement in the UNEP Inquiry into the Design of a Sustainable Financial System

By launching the UNEP Inquiry into the Design of a Sustainable Financial System in 2014, the United Nations Environment Programme (UNEP) drew attention to the historical challenge of financing the transition to a resource-conserving economy. The goal of the UNEP Inquiry is to collect examples of best practice and experience from different countries and to define strategies for improving the alignment of the financial system with the needs of sustainable development.

The global report “The Financial System We Need: Aligning the Financial System with Sustainable Development” was presented at the annual meeting of the World Bank and International Monetary Fund on 8 October 2015 in Lima. In the report, UNEP developed a “Framework for Action” that categorises promising practices adopted by the participating countries. Accordingly, the work of the UNEP Inquiry provides a solid basis for the next stages in the establishment of a sustainable financial system at national and international levels.

The FOEN supported the UNEP inquiry. The Swiss Team for the UNEP Inquiry, which was responsible for developing content on behalf of Switzerland, included experts from the financial sector, academic institutions, non-governmental organisations and the federal authorities. The topics discussed by the Swiss Team included the two core questions of the UNEP Inquiry:

  • In view of the abundance of private funds available globally, why are sufficient investments not made that would facilitate the transition to a green economy?
  • What are the conditions necessary for a financial system that serves the needs of a resource-efficient and future-proof economy?

The Swiss Team’s initial findings were presented at the symposium “Swiss Finance in a Changing World”, which was held on 6 May 2015 in Bern. They were highly regarded by the financial sector at both national and international levels and were incorporated into the work carried out for the UNEP Inquiry’s Global Report.

In addition, the Swiss Team developed the “Proposals for a Roadmap towards a Sustainable Financial System in Switzerland”, which contains 20 measures for rendering the Swiss financial system more sustainable. The report was presented on 14 June 2016 on the occasion of Swiss Sustainable Finance Members’ Assembly.

Further information

Last modification 07.07.2022

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