Financial institutions hold the key to the sustainable revolution. From financing new sustainability projects, products and services, to pricing in climate and sustainability risks, to supporting companies transitioning to more sustainable business models, they’re the enablers of society’s sustainability transformation.
Growth in demand for ESG investments has continued through the COVID-19 pandemic. Asset owners and managers with $90tn of assets under management had already committed to integrate environmental, social and governance (ESG) criteria into their investments by signing up to the UN Principles of Responsible Investment by January 2020. Further, Blackrock said in a research note in May 2020 that 88% of sustainable indexes did better than their non-sustainable counterparts in the first four months of 2020.
For investors, understanding what is a sustainable financial product is not always straightforward. In March 2020 the EU Technical Expert Group on Sustainable Finance published its final report on EU Taxonomy . This creates a regulatory framework against which financial services institutions can clearly define whether an initiative is truly ‘sustainable’. It will also require them to start reporting consistently for the first time.
The EU Taxonomy provides a foundation that can underpin how financial institutions set up their sustainability risk frameworks and identify and assess their business opportunities, as well as comply with regulation. In practice, this means defining an opportunity identification and evaluation model that guides them to opportunities that naturally align with regulation and evolve with them over time.
In our experience, there are five steps to building an effective model:
While the EU Taxonomy presents challenges for financial institutions looking to take advantage of the significant and growing opportunity within sustainable finance, it can also provide a clear roadmap to unlocking potential as the market matures. The size of the opportunity and its ability to support economic recovery depends on the successful development and integration of an appropriate opportunity evaluation model. This kind of innovation will also support internal cooperation, strengthening organisational resilience and preparedness to navigate future crises.