Sustainable finance is the set of practices, standards, norms, regulations and products that pursue financial returns alongside environmental and/or social objectives.
The long-standing concept was promoted with the adoption of the Paris Climate Agreement, which stipulates that parties must make "finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
"[2] In addition, sustainable finance has a key role to play in the European Green Deal and in other EU International agreements, and its popularity continues to grow in financial markets.
The United Nations Environment Programme (UNEP) defines three concepts that are different but often used as synonyms, namely: climate, green and sustainable finance.
[8] Therefore, this requires a high degree of coherence between the different capital market frameworks and tools that are essential for investors to identify and seize green investment opportunities.
[9][10] The founding members of the IPSF are obviously the European Union, but also the competent authorities of Argentina, Canada, Chile, China, India, Kenya and Morocco.
However, since its foundation, the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR), Indonesia, Japan, Malaysia, New Zealand, Norway, Senegal, Singapore, Switzerland and the United Kingdom have also joined IPSF.
Hong Kong’s financial secretary, Paul Chan, delivered the 2023–24 budget on 22 February 2023 with the promotion of a green economy, sustainable development and China’s “3060 Dual Carbon Targets” at the forefront.
[24] The main project under this initiative is the Recovery and Resilience Facility (RRF) which provides grants and loan funding to EU member states to support reform and investment.
Disbursement is gradual, with 13% received after the contract is signed, and the remainder on the basis of a bi-annual evaluation based on a report submitted and a payment request.
[26] The Paris agreement on climate change highlighted a desire to standardize reporting practices related to green bonds, in order to avoid greenwashing.
This project promises an investment of 750 billion euros in grants and loans (at 2018 prices), by the European Commission, aiming to revive the post-covid-19 economy in the 27 EU member states.
[33] Empirical studies show that the risk of greenwashing is present and may wrongly induce investors to accept lower rates of return than for brown investments.
[42] However this approach is generally being opposed by central bankers[43] and nonprofits organisations, which propose instead the adoption of higher capital requirements for assets linked with fossil fuels ("Brown-penalizing factor").
In France, the 2015 Energy Transition Law requires institutional investors to be transparent about their integration of Environmental, Social and Governance Criteria into their investment strategy.
Priorities for the NGFS include sharing best practices, advancing climate and environmental risk management in the financial sector, and mobilizing mainstream finance.
[50] During the United Nations Climate Change Conference (COP 26), in July 2021, under the leadership of Christine Lagarde and after pressure from NGOs, the ECB committed to contributing to the implementation of the Paris Agreement's aim of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.
[53] The action plan includes measures to integrate climate-risks metrics in the ECB's collateral framework and corporate sector purchase programme (CSPP) referred to bonds.
In accordance with its recent decisions, the ECB commits to contributing to the Paris Agreement goals and NGFS initiatives within its mandate by taking the following specific actions:[52] There are a few concerns and limitations that can be attributed to sustainable finance.
Instead, there are a large number of NGOs working independently to develop standards for sustainability reporting, alongside new regulations in many markets, which has historically created complexity and confusion for companies and investors.
[64] If the incentives to greenwash are quite high, it is partly correlated to the fact that rated ESG firms enjoy lower capital and debt costs for doing so.
[67] Lastly, it is important to mention that much focus has been on the European Union, at an international level, the lack of homogeneity on sustainable finance norms and standards is even larger.
Those who do are confronted to the multiplicity and divergence of regulatory frameworks around the world with specific market access prerequisites, disclosure standards, compliance supervision, authorities, etc.
[70] As global supply chains expand, it is harder to find a common guideline on ESG factoring and face the subsequent “red tape” and costs, especially for SMEs.
It was argued that MSCI worked in the interest of big S&P 500 corporations to get a higher score of ESG rating to help them lower their cost of capital and attract more investors.
[76] This kind of post hoc adjustments were meticulously observed and linked to the thorny question of data manipulation to make ESG raters look more accurate.
[79] However, according to many researchers, the pursuit of such promotional goals in monetary policy decisions raises serious questions about the legitimacy of independent central banks (Fontan et al.
[80] By way of illustration, Greenpeace protestors claimed in March 2021 that the European Central Bank's (ECB) monetary policies subsidise fossil fuel companies (Treeck, 2021).
[83] As a result, according to the previous authors, their pursuit of green monetary policies puts central banks in a tough spot, casting doubt on their legitimacy.
[84] Whether it's through working with a green investment bank to reduce their carbon footprint or forming joint committees of central bankers and members of parliament to influence the types of assets they purchase (Fontan et al.