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.
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.
Water risks and financial market
Water risks are not only felt in the real economy but also lead to implications in the financial system due to decreased revenues and increased costs within invested companies, and interdependency of affected financial institutions. We can distinguish between physical, regulatory and reputational water risks. These can have ripple down effects to individual securities and portfolios across all asset classes. However, the challenge is to understand materiality and timing of water impacts on specific asset classes, sectors and industries.
According to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), companies and investors alike should consider water-scenario analyses in their long-term strategy, growth and cost considerations. However, holistic scenarios and related water-risk associated mitigation paths are currently inexistent. Several multilateral environmental agreements have water at their core and water is highly ranked within the 2030 Agenda for Sustainable Development with a dedicated Sustainable Development Goal 6 ("Ensure availability and sustainable management of water and sanitation for all"). Therefore, water is connected across sectors and other natural resources
The amount as well as the variety of data and tools on water risks for actors both in the real economy as well as in the financial market is evergrowing.
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.
Water risks and financial market: Overview and analysis (PDF, 1 MB, 24.05.2018)Commissioned by FOEN
Overview of the ”Green” Swiss Financial Market (PDF, 1 MB, 31.10.2014)Study commissioned by the Federal Office for the Environment (FOEN)
Last modification 10.12.2019