Integrating climate change and the environment into financial decision-making is a necessary condition for addressing the environmental challenges facing humanity: it will make capital less likely to flow to investments that are incompatible with sustainability and more likely to flow to assets that are. There is a large and growing interest in better aligning finance and investment with environmental sustainability. Unfortunately, we aren’t there yet. But rapid progress is being made: what is considered sustainable finance best practice or good routine practice is constantly improving.
The growth and development of sustainable finance has many global benefits, but there are three big reasons why taking account of sustainability and the environment in finance makes sense:
First, environment-related risks (particularly those related to climate change) will impact the value of investments, loans, and portfolios. These risks could also have financial stability implications. Measuring such risks will help financial institutions appropriately manage them, improving the resilience of the financial system as a whole.
Second, the transition to an environmentally sustainable global economy is a capital-intensive process that will create specific investment opportunities. Since 2010 approximately USD2,860 billion has been invested in clean energy projects cumulatively 1. In addition, the stock of cumulative investment in clean energy looks set to increase annually by at least USD300-350 billion over the next decade and will have to increase by much more if we are to meet the commitments implied in the Paris Agreement on Climate Change. This investment need in the power sector is replicated in other sectors as well, creating massive investment opportunities across the global economy.
Third, we need to ensure that investment decisions taken today don’t ‘lock-in’ pollution and negative environmental impacts for decades to come. This is particularly important in Asia as China moves forward with plans for the belt and road initiative. Cumulative investment in BRI-related projects has been estimated at between USD4 and USD8 trillion. The successful implementation of the Paris Climate Change Agreement and the Sustainable Development Goals will be difficult to achieve if the huge amount of capital invested under BRI is inconsistent with tackling climate change and ensuring sustainable development. ‘Greening’ BRI is therefore a priority of global significance.
These three areas – risk management, new investment opportunities, and a ‘green’ BRI – are individually and collectively massive opportunities enabled by sustainable finance.
To support these areas the Oxford Sustainable Finance Programme at the University of Oxford is working to define best practice in sustainable finance; ensure that best practices improve and improve quickly; and socialise their adoption across the financial system as quickly as possible. As part of this, we have been in Southeast Asia in March meeting with banks, asset managers, and asset owners as part of the Asia Sustainable Finance Initiative (ASFI). We have also designed and delivered sustainable finance training in Kuala Lumpur together with Oz Ahmed, CEO of HSBC Amanah Malaysia Berhad, as well as the Climate Bonds Initiative.
Demand and interest in sustainable finance is not a passing fad. Environmental challenges are getting worse, societal concern for the environment is growing, and as countries develop there will both be more assets to be invested, as well as more concern for sustainability-related issues. Policymakers, regulators, financial institutions, and the ultimate owners of wealth – citizens – are coming together in Malaysia and elsewhere to ensure finance becomes more sustainable. Not only is aligning finance with sustainability a great opportunity, it is also a necessary condition for saving our environment.
Dr Ben Caldecott is founding Director of the Oxford Sustainable Finance Programme at the University of Oxford and Co-Chair of the Global Research Alliance for Sustainable Finance and Investment.
1Bloomberg New Energy Finance (2018), “Global trends in clean energy investment”
2PwC (2016) ‘China’s new silk route The long and winding road’, PwC Growth Markets Centre. (Accessed: 16 April 2017).