SB'24 San Diego is open for registration. Register early and save!

Finance & Investment
Sustainable Finance Is More Than a Trend

Climate change is an issue of global concern; more and more prominent investors, businesses and institutions are calling for the incorporation of climate-related financial disclosures — and the US financial sector is uniquely positioned to take action.

In the era of climate change and greater public engagement on topics such as corporate governance, environmental stewardship and social impact, the role of finance in enabling a climate-centric economic model is vital. 

It is not surprising therefore that the topic of sustainable finance has been gaining traction over the last decade. Sustainable finance can be defined as the integration of environmental, social and governance (ESG) factors into traditional financial planning and investment decisions. Global challenges are driving the public sector, private sector, and civil society to work together to leverage the potential of all available resources to address growing issues such as climate change. How we leverage finance is crucially important; and at South Pole, we have been working with stakeholders across these sectors to initiate discussions and facilitate decisions through platforms such as the Nordic Platform for Mobilising Climate Finance

Fig 1. Total Global Climate Finance Flows 2013-18.

The US context

The US is the world's largest capital market. It has an important role to play in scaling up the practices of sustainable finance and encouraging ESG disclosures. Sustainable finance is not a completely new concept for the US market — a recent biennial report about sustainable investing in the US finding that the total US-domiciled assets under management using sustainable-investing strategies grew 42 percent from $12 trillion in 2018 to $17.1 trillion in 2020. To underscore this trend, BlackRock CEO Larry Fink stated in his 2021 annual letter to shareholders that “no issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.

Regulation, finance, and the environment: An alliance decades in the making

“Emitting carbon dioxide into the atmosphere does allow you to produce electricity more cheaply, but there's a whole other set of people who are being punished or penalized. It's a poor idea of economics."

Michael Greenstone, Milton Friedman Professor of Economics at the University of Chicago and the director of the Energy Policy Institute of Chicago

When specifically looking at the environmental aspect of ESG issues, it is clear that regulatory and market pressures must come to terms with the fact that business as usual has a negative impact on the natural world. We have been brought to the brink of catastrophic climate change as a result of an economic system that has failed to account for externalities that have negative environmental impacts. Without straying too much into the discussion on the viability of free market economics, it is not difficult to see that both market actors and government both have a role to play to correct this problem. 

The new US administration has realigned the country’s political views on business and the environment. Just four months into its tenure, we see that the government is again closely aligned with the global attitude towards climate change — a global crisis that needs the coordinated support of major governments and markets across the world. While the implementation of policy so different to that of his predecessor may take some time, the Biden administration’s early decisions are encouraging from an environmental perspective. It is now time for market actors to follow suit; and the US must now take a pivotal first step in the establishment of climate-related financial disclosure regulations if it is to take a prominent role in the global fight against climate change.

Climate-related financial disclosure in the US 

When it comes to mature climate-related financial disclosure regulations, the US is suffering from its time spent away from climate-focused policymaking. For example, the Securities and Exchange Commission (SEC) — in charge of regulating the federal financial disclosure requirements for US public companies — has been constrained in its adoption of climate-related financial disclosures, especially in the last four years. Recently, however, Acting SEC Chair Allison Herren Lee requested public comments on potential climate-disclosure policies and was also planning a broader mandatory ESG-disclosure regulation, as current voluntary frameworks are not meeting investors' information demands.

To accompany promising regulatory actions like these, the market is also showing positive trends. Some of the key trends in sustainable finance that are already impacting the private sector in North America include:

  1. Sustainability performance data: As stakeholder pressure, regulatory requirements and a general market-wide push for more transparency in ESG-associated accounting rises, organizations are scrambling to gather relevant, consistent and trustworthy data. 

  2. Sustainable bonds and loans: These financial instruments direct the proceeds raised towards the (re)financing of environmental and/or social projects. More and more organizations realize that debt financing their “green” projects is a safe way to meet climate targets and achieve positive reputational and financial outcomes.

  3. Transparency and corporate reporting: Standards are gathering around the efforts of the Sustainable Accounting Standards Board (SASB) to define materiality and accounting rules for sustainability data. Agreement on global reporting standards will likely lead to making reporting mandatory. In the EU, regulators have already published an outline of a reporting framework, as well as an approach to climate-related disclosures. It is expected that the US will release its own set shortly.

Given the trends and the speed with which the current US administration is moving to bring sustainable finance regulations to the fore, the US can very quickly become a leader in sustainable finance and climate-positive regulation. Indeed, in recent discussions with European law makers, US climate change envoy John Kerry suggested that a development of a common US-EU Green Taxonomy would be a natural next step in establishing baseline regulations on sustainable finance and low-carbon activities.

Task Force for Climate-related Financial Disclosures (TCFD)

Frameworks such as the TCFD and the CDP questionnaire — along with standards such as the Global Reporting Initiative (GRI) and the EU Sustainable Finance Disclosure Regulation (SFDR) — are slowly being adopted across the world and becoming a mainstream reporting requirement. 

In the near future, reporting guidelines will be mandatory in many regions across the world — some countries have already taken this step. Within this context, the TCFD has become a benchmark and the global standard for climate-risk disclosure. The Financial Stability Board (FSB), the body responsible for the creation of the TCFD, seeks to improve climate-related financial reporting and provide financial markets with transparent data about the impacts of climate change. To this end, the development of the TCFD has been crucial in helping governments and policy makers across the world create their own regulatory frameworks or indeed adopt the TCFD itself directly.

Broadly, the TCFD makes recommendations across four areas:

Globally, almost 1,700 organizations have already declared support for the TCFD, including many major financial institutions. While the disclosure requirements started off as voluntary, many countries are now adopting the standard as mandatory. New Zealand has already made the TCFD a mandatory standard from 2023, while large pension funds and financial institutions in the UK will need to do the same by 2025. Hong Kong is in the process of making mandatory climate disclosure regulations, and the EU's SFDR and Taxonomy is derived largely from TCFD’s suggestions. While the US begins to consult on the issue, it’s neighbor to the north, Canada, has not only tied pandemic-bailout funding to TCFD-aligned disclosures, it is also in the process of developing its own Green Taxonomy.

Prominent investors, businesses and institutions are calling for the incorporation of climate-related financial disclosures. It’s safe to say that with global alignment on climate-related disclosure, it is a matter of when — not if — climate-related standards are adopted by US regulatory bodies.

Fig. 4 TCFD Journey

How South Pole can help

With over 15 years of expertise, South Pole is helping the financial sector on its path to becoming climate resilient. As we help you navigate through the veritable storm of regulations, metrics and targets, it is important to know that meeting your net-zero targets is a journey and not simply an end goal. 

To do this, it is important to first set the context. What this means is that by aiding you in measuring and identifying the requirements for TCFD-based reporting and portfolio alignment with the Paris Agreement goals, South Pole will help set the context for your organization’s climate journey. Once this is clear and a baseline climate strategy is defined, our team will help you achieve your net-zero ambitions and SDG goals, and stay prepared for future climate risks and opportunities.

Net-zero expectations are here to stay and climate-related financial disclosures such as the TCFD are the first step in starting your climate journey. South Pole’s Sustainable Finance team’s expertise in working with investors across the world enables us to help you build climate-resilient portfolios that cover your risks and leverage your opportunities.