AUTHOR: Nora Hiller

This blog post reflects on the year in sustainable finance together with colleagues of Think Sustainable Europe, the pan-European Network of sustainability think tanks coordinated by IEEP.

The year 2021 brought on several new initiatives for sustainable finance in the EU and globally. Just recently, as an agreement resulting from COP26, the Glasgow Alliance for Net Zero was announced, bringing together financial institutions to accelerate the low-carbon transition. It is a step but has met questions over vague commitments and the need for signatories to implement carbon reduction targets.

The COP outcomes are not alone in being in the spotlight of questionable progress – a Court of Auditors report exemplified how efforts from EU institutions on redirecting financial flows are not sufficient. It is clear that science-based criteria are key to support the EU long-term climate and environmental goals and that actions that reflect the social and environmental cost of unsustainable economic activities must accompany the Sustainable Finance Action Plan.

Shifting financial flows is anchored in the Paris Agreement and is part of the EU Sustainable Finance Agenda. It can play an integral part in minimising the ecological debt, particularly in redirecting private finance. As the European Commission highlighted in its reflection paper ‘Towards a sustainable Europe by 2030’, the current generation is running an ecological debt that future ones will have to pay back – with interest. To address intergenerational justice requires, among others, to apply the precautionary principle for the effect of pollutants on future generations, to share the carbon budget equitably and to pay attention to carbon lock-in effects and resilience in investments.

In front of this background and our previous work on the science-policy interface, this blog post summarises short interviews with TSE colleagues, looking at how sustainable finance should evolve to better integrate the elements of intergenerational justice and equality. Short interviews on the topic took place with David Uzsoki and Matthew Gouett (IISD), Timothy Suljada (SEI) and Tim Gore (IEEP).

The conversations started with an overview of sustainable finance’s connection to equality efforts, including environmental and social equality, with particular regard for gender considerations. This includes the international level of power relations and regional equality considerations. While environmental factors are a starting point in finance and investment matters, one should not lose sight of the social dimension, as Timothy Suljada (SEI) pointed out in connection to the EU Taxonomy.

Interlinking these two dimensions of environmental and social was also a key position for the TSE colleagues at IISD. As part of their work, David Uzsoki and Matthew Gouett perform second party opinions for green, sustainability, and sustainability-linked bonds. When writing these opinions, they analyse the bond frameworks to ensure that social projects for which bond proceeds will be used are ambitious in their targeted social outcomes and that social risks associated with green projects are highlighted. This work is the less flashy and more unseen side of sustainable finance: working with traditional issuers and investors to incorporate social and environmental standards in financial decision-making processes. They indicated that both the environmental and social considerations, especially those related to gender, are integral when assessing a green, sustainability, and sustainability-linked bond and that there is a check of the environmental criteria from a social perspective and vice versa. Every sector that employs green bonds, or other financial instruments, cannot lose sight of the social aspects and the entire industry should be involved in addressing this point.

The question of who benefits from financial flows and the distributional and other social implications on a national level arose with Tim Gore (IEEP). We discussed the link with the EU Taxonomy and the need for technical screening criteria to support human rights and social justice, specifically when it comes to the proposed social taxonomy and the do-no-significant-harm principle. David and Matthew from IISD see responsibility for the EU Taxonomy to contribute to providing a directional framework for financial market participants and ensuring that these two sides talk to each other. When private finance funds are unlocked for sustainable finance, fulfilling these science-based criteria is the only way to go. If not both dimensions are equally satisfied in the criteria, then it might be a step in the right direction but not long-term sustainable development.

In all interviews, it was clear that there is a need to step up the game for sustainable finance to support intergenerational justice – meaning to prevent carbon-lock in effects and add an element of resilience in investments. All interviewed TSE colleagues argued similarly to the IEEP think piece on sustainable investments and the science-policy interface. For IISD’s David and Matthew, it seems that ESG criteria (environmental, social and governance) were accepted by mainstream financial players, but they now see the need for better accountability measures as well as transparency in relation to sustainability performance to counteract greenwashing. One existing solution to support the allocation of capital are second opinions, which more issuers are using to demonstrate the credibility of the financial product. Others are policy leavers with incentives (in relation to green bonds and taxation), as well as creating a track record and usable financial analysis to demonstrate the benefits of nature-based solutions as an asset class. These and other tools must hold a central role, as Tim from IEEP warns against the pressure that is put on civil society to hold financial institutions and companies to account, thereby creating an enormous power imbalance. Lastly, Tim from SEI added – both in relation to the EU Taxonomy but also in a wider sense – the importance of keeping the scientific background up in all criteria and measures for sustainable finance.

Sustainable finance has come a long way and has experienced a shift in the last years. Twenty years ago, it was brushed aside as a non-viable option and efforts were not genuine. Then the space started to grow, with investors and other financial market participants pushing for sustainability in the sector. Conscious investors, building on value-based investing with a strong connection to ESG criteria, have taken to the mainstream stage in the past years. Pressure on asset managers is growing to create environmentally and socially responsible investment portfolios in order to curb this generations ecological debt. Putting the needs of future generations at the centre of the financial system can only be achieved through a strong connection between the social and environmental dimension, grounded in a strong science-based foundation.