CHAPTER 1

Sustainable Finance

In recent years governments have debated and established ambitious public policy initiatives such as the 2030 Agenda for Sustainable Development and its broad range of Sustainable Development Goals (SDGs) including reducing poverty worldwide and promoting sustainable economic growth and the Paris climate agreement of 2015. Funding these initiatives would require the deployment of massive amounts of external financing, much of which would need to come from governments in the form of “official development assistance,” which has been defined as government aid that promotes and specifically targets the economic development and welfare of developing countries. Multilateral development banks (MDBs), which are created by governments including the World Bank and International Monetary Fund, also play a significant role in stimulating and channeling aid into developed, low-income and emerging companies. Other significant forms of external financing assistance in the development sector include philanthropic assistance through foundations, international sovereign bond issuance across various multilateral institutions including MDBs, development institutions and supranational organizations, and climate finance through public–private partnerships. Capital for development projects is also being provided by financial institutions, insurance funds, pension funds, and impact investors, and organizations active in the startup community are ramping up their support for sustainable entrepreneurship. More and more companies are issuing financing instruments based on specific promises of use of the funds for environmental and/or social projects and stock exchanges are facilitating these offerings by mandating more robust environmental, social, and governance disclosures. The actions of all of these actors are influenced by the priorities identified by nonprofit think tanks, philanthropists, social change activists, and enablers and civil society.1

Sustainable finance has been explained to be a long-term approach to finance and investing, emphasizing long-term thinking, decision-making and value creation, and has also been described as the interrelationships that exist between environmental, social, and governance (ESG) issues on the one hand, and financing, lending, and investment decisions, on the other and long-term-oriented financial decision-making that integrates ESG considerations.² On its webpage describing “sustainable finance,” the European Commission (EC) explained that the term generally referred to the process of taking due account of environmental and social considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities. Examples of environmental considerations offered by the EC included climate change mitigation and adaptation, as well as the environment more broadly and the related risks (e.g., natural disasters), while social considerations refer to issues such as inequality, inclusiveness, labor relations, investment in human capital, and communities. The EC also noted that the governance of public and private institutions, including their management structures, employee relations, and executive remuneration practices, played a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process. The EC’s view was that all of the components of ESG were integral parts of sustainable economic development and finance, and that sustainable finance should be understood as financing that can support economic growth and the reduction of pressures on the environment while simultaneously taking into account social and governance aspects.3

Sustainable finance has emerged in parallel to policy initiatives mentioned above as it has become clear that they cannot be realistically undertaken and completed without innovative private sector financing models that allow a wide range of potential investors to participate in high-growth, albeit risky and uncertain, opportunities. According to BNP Paribas, capital for sustainable finance is available from investors who want to take part in financing enterprises involved in projects with high environmental or social value, including projects that will have an impact that the investors may experience directly; socially responsible investment funds capitalized by institutional and private investors; pension funds and private banking and wealth management sources expected to grow significantly in the coming decades due to wealth transfers from Baby Boomers and Generation X to Millennials who surveys indicate have a strong commitment to incorporate social change into their investment decisions.⁴ Sustainable finance is just not about “doing good,” in fact consultants such as McKinsey have argued that companies with a robust ESG framework are more likely to add value as compared to companies that have not developed sustainable practices and that ESG creates value in several different ways including top-line growth, cost reductions, reduced regulatory and legal interventions, employee productivity uplift, and investment and asset optimization as key enablers in generating a long-term advantage.⁵

The interest of the EC in sustainable finance has been driven by the European Green Deal, which is a growth strategy announced in December 2019 that seeks to make Europe the first climate-neutral continent by 2050. The EC has acknowledged that the scale of the investments necessary to achieve the desired transition to a climate-neutral, green, competitive and inclusive economy is beyond the capacity of the public sector alone (e.g., in January 2020, the EC presented its European Green Deal Investment Plan that called for the mobilization of at least €1 trillion of sustainable investments through the period ending in 2030) and has committed to an action plan on sustainable finance in which the financial sector (e.g., asset managers, insurance companies, and investment or insurance advisors) supports the European Green Deal by reorienting investments toward more sustainable technologies and businesses; financing growth in a sustainable manner over the long term; and contributing to the creation of a low-carbon, climate resilient, and circular economy.6

The financial services industry has taken notice of importance of sustainable finance and the market for sustainable investment opportunities has been growing steadily as more and more industry participants are recognizing the long-term benefits of a more sustainable economy and incorporating sustainability considerations into their strategies and operations. According to data from the Global Sustainable Investment Alliance (GSIA), global sustainable investment assets reached $30.6 trillion at the start of 2018, a 34 percent increase from 2016, and the volume of global sustainable investment assets as a percentage of all assets under management around the world increased from 28 to 35 percent over that same period.⁷ Reports based on data collected by the GSIA noted that the number of signatories to the Principles for Responsible Investing (PRI) had grown to 2,450 by June 2019, compared to 63 signatories at the time that the PRI was launched in 2006, and that aggregate assets under management for the group was $82 trillion. In October 2019 the International Monetary Fund reported that ESG funds accounted for around $850 billion in assets. While early adoption of ESG factors among funds has been primarily on the equity side there have been indications that fixed income investors are becoming more comfortable with the concept as demonstrated by the growing rate of issuance of sustainability-linked bonds (“green bonds”).8

Principles for Responsible Investment

The six UN Principles for Responsible Investment (“Principles”) (unpri.org) are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. The Principles were developed by an international group of institutional investors, for investors, through a process convened by the UN Secretary-General, and signatories are required under the Principles to make the following commitment:

“As institutional investors, we have a duty to act in the best longterm interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.”

The Principles include a menu of possible actions for incorporating ESG issues for each of the six Principles listed above. For example, with respect to “active ownership” (Principle 2), investors are asked to consider developing and disclosing an active ownership policy consistent with the Principles; exercising voting rights or monitoring compliance with voting policy (if outsourced); developing an engagement capability (either directly or through outsourcing); participating in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights); filing shareholder resolutions consistent with long-term ESG considerations; engaging with companies on ESG issues; participating in collaborative engagement initiatives and asking investment managers to undertake and report on ESG-related engagement.

Source: https://unpri.org/pri/an-introduction-to-responsible-investment/what-are-the-principles-for-responsible-investment

Consistent with its leadership in other areas of sustainability and corporate social responsibility, Europe had the largest pool of sustainable investment assets globally as of 2018 and commentators have noted that sustainable investing has been broadly adopted in Europe and has reached the highest level of maturity compared to any other region. The United States trails slightly behind Europe and data indicates that Asia is progressively catching up and that sustainable investing is gaining more traction in Asian countries outside of Japan, which was one of the earliest adopters of ESG-based investing. China has been particularly aggressive—it had the second biggest green bond market in the world as of the end of 2018—and Australia, Hong Kong, and Singapore have launched initiatives to promote sustainable investing.9

At the same time, there has been a surge in regulatory focus on sustainable finance and developing approaches to integrating sustainable finance into the mainstream frameworks of governments, multinational enterprises, and the global financial services industry. For example, in May 2018 the EC released its Sustainable Finance Package, a set of legislative proposals focusing on driving more capital toward sustainable investment projects and encouraging participants in the financial sector to change their operations so as to reduce environmental risks. Key features of the package included adoption of an EU-wide classification system for sustainable investments and “environmentally sustainable economic activity,” requiring asset managers and institutional investors to demonstrate how their investments are aligned with ESG objectives and disclose how they comply with their duties and creation of a new category of benchmarks of standard indices and standardization of formatting for reporting of ESG disclosures. In Asia, stock exchanges in China and Hong Kong have mandated disclosures of ESG matters by their listed companies and countries such as China and India have begun to require that asset managers must incorporate ESG methodologies, strategies, and benchmarks into their investment decisions as opposed to the voluntary guidelines that have applied in the past.¹⁰

BNP Paribas noted that businesses have a key role to play in the evolution and growth of sustainable finance by embracing ESG-focused financing instruments and related practices such as more robust disclosures of their ESG performance. For example, Apple has issued green bonds to finance energy efficiency projects and Starbucks used a sustainable bond to raise $500 million to underwrite ethical coffee production.¹¹ Between September 2016 and June 2020, Mitsubishi UFG Financial Group issued seven Green Bonds, one Social Bond, and one Sustainability Bond for a total amount of $3.2 billion equivalent, and noted that the net proceeds from the Green Bonds were allocated to projects that address environmental issues, such as renewable energy or energy efficiency projects, the proceeds from Social Bonds were allocated to projects that tackle important social issues such as affordable housing, health, and education and the proceeds from Sustainability Bonds were allocated to a combination of both environmental and social projects.12 Verizon’s $1 billion green bond offering in February 2019 was the first by an American telecom company. It was way oversubscribed and the proceeds were earmarked for projects in renewable energy, energy efficiency, green buildings, sustainable water management, and biodiversity and conservation.¹³

A great deal of analysis has been undertaken in order to support the business case for sustainable finance by demonstrating risk-adjusted outperformance of sustainable investments and, in fact, the Swiss Finance Institute (SFI) cited a comprehensive analysis released in 2015 that covered the results of more than 2,000 academic studies on the link between ESG questions and found that the overwhelming number of the studies identified a significantly neutral or positive correlation between ESG and financial performance at the level of the firm.¹⁴ However, the SFI went on to argue that “sustainable finance ought to play a prominent role in financial markets even in the absence of risk-adjusted outperformance” given that the financial sector plays an important and pivotal role in the future structure of the economy through the decision it makes in allocating capital to projects that contribute to sustainable development (e.g., energy efficiency, pollution reduction, humane work conditions, and reduced biodiversity loss).15 According to the SFI’s assessment of future priorities for participants in the Swiss financial system, “business as usual is no longer a valid option for most players, at least in the medium to long term” and financial institutions and regulators will need to pay attention to anticipated high demand for sustainable finance products driven by factors such as generational differences in preferences and changing societal expectations for finance.¹⁶

Sustainable finance has made significant progress and the percentage of assets that were professionally managed according to sustainability principles increased steadily over the first fifteen years of the twenty-first century, reaching about 30 percent as of 2015; however, a report prepared by the Global Sustainable Investment Alliance in that year declared that sustainable finance had not yet reached the core and mainstream of financial markets.¹⁷ There are several key issues and challenges that need to be addressed and overcome for the sector to continue to grow to the point where it can play the desired role in pursuit and achievement of SDGs and other environmental and social public policy initiatives. For example, many companies have been accused of “ESG washing” and while steps are being taken to create more rigorous and standardized measures of ESG criteria there is still much work to be done. There has also been concern that the focus on ESG has been driven primarily by a search for new forms of financial gain as opposed to a serious interest in environmental and social innovation and impact. In addition, although there is a movement to standardize the terms and conditions of financial instruments such as sustainable bonds and achieve a consensus on descriptors of impact and measurement tools, sustainable finance projects are necessarily complex and carry significant legal and other expenses that make it difficult to fund projects that are unlikely to scale. Additional work is needed to improve liquidity for sustainable financing instruments, a process that will require collaboration among stock exchanges, investment banks and multinational institutions. Also required by investors, as well as governments and other actors in the sustainable finance sector, is a robust and universally accepted framework of quantitative and qualitative benchmarks for measuring and reporting sustainable development performance.

Increasing attention is being placed on the roles of banks and other financial institutions in the transition toward a sustainable global economy. The SFI argued about the need to overcome several perceived barriers to more widespread adoption of sustainable financing among banks and other financial institutions including the complexity of the issue, knowledge gaps at all levels, cultural and generational conflicts, misconceptions about sustainable finance, a lack of standardization and terminology, and the difficulties associated with keeping up with the fast pace of product and policy innovation in the field.18 KPMG advised banks to take steps to understand the common ESG expectations of their key stakeholders and build awareness of leading ESG practices among senior management and board members; acquire and/or develop the right capabilities and process to monitor and manage ESG appropriately; dialogue with regulatory authorities to understand what will be expected of banks with respect to ESG and proactively participate in development of standards; integrate ESG factors into their existing assessments of credit and valuation risks in their portfolios; and develop an actionable and measureable strategy for addressing and mitigating ESG risks.¹⁹

Sustainable Investment Strategies

Sustainable investing was originally based on negative/exclusionary or screen approaches that excluded individual assets or sectors from consideration for inclusion in a portfolio based on moral or ethical considerations. While it has been estimated that negative/exclusionary screening continues to represent the largest category of sustainable investment,20 the market has gradually expanded to include additional categories based on classifications developed and used by organizations such as the CFA Institute and the Global Sustainable Investment Alliance (GSIA)²¹:

• Negative/exclusionary screening: Negative or exclusionary screening consists of avoiding specific assets due to consideration of specific ESG criteria including moral values (e.g., tobacco or gambling), standards and norms (e.g., human rights), ethical convictions (e.g., animal testing), or legal requirements (e.g., controversial armaments such as cluster bombs or land mines, excluded in order to comply with international conventions).²² Companies engaged in “negative” sectors, activities, or practices must be prepared to make significant modifications to their business models in order access capital from investors and lenders applying these types of screens.

• Best-in-class/positive screening: “Best-in-class” (positive) screening contrasts significantly with negative screening and calls for investment and lending decisions to be made based on demonstrated high ESG performance of sectors, companies, or projects. Investors can rely on a growing number of reference indexes to select projects that can improve both the risk and return aspects of their portfolio and companies need to be mindful of the criteria applied by the reference indexes and track their performance, although it should be understood that such indexes are not infallible and that it remains difficult to reliably measure ESG performance.

• Norm-based screening: Norm-based screening involves screening potential investments against minimum standards of business practice based on international norms relating to climate protection, human rights, working conditions, and action plans against corruption.

• ESG integration: ESG integration involves new and emerging methodologies intended to systematically and explicitly include ESG risks and opportunities into traditional financial-based investment analysis. ESG integration differs from ESG indexing mentioned above in that it does not rely on benchmarking ESG performance vis-à-vis peers. As with ESG indexing, companies need to understand the how investment analysis taking ESG risks and opportunities into consideration is conducted, not only to gain a better understanding of the expectations of investors but also to potentially improve their own risk-adjusted rate of return on assets and mitigate sustainability-related risks. ESG integration has become the second largest category of sustainable investment following negative/exclusionary screening.

• Impact investing: Impact investing is aimed directly at creating a positive environmental or social impact by identifying and solving a particular environmental or social problem and has been described as “investments made in companies, organizations, and funds with the intention of generating social and environmental impact (pursuit of positive externalities) alongside a financial return.” So far, impacting investing, which has often focused on microfinance and development investing for the benefit of underserved individuals or communities, has been available mostly through private markets from funds managed by specialized asset managers. Investment philosophies of impact investors range from market-driven risk-adjusted returns to concessional and capital preservation. Access to capital from impact investors may be limited for companies that lack scalable high-quality investment projects.

• Thematic investments: Thematic investments include investment activities focused on specific high-profile sustainability-related themes such as cleantech, infrastructure, energy-efficient real estate or sustainable forestry. Thematic investments are projected to become increasing important for certain long-term oriented investors such as pension funds, insurance companies and sovereign wealth funds.

• Active ownership: Active ownership, sometimes referred to as “corporate engagement and shareholder action,” takes a different approach to sustainable finance by focusing on engagement and dialogue with portfolio companies after an initial investment is made in order to influence ESG strategies and actions through exercise of ownership rights and being a visible activist for change. The growing role of activism can be seen by charting the increasing numbers of proxy votes relating to ESG issues, a trend that has materially impacted how boards and senior executives manage investor relations.

A difference lens on the landscape of investors interested in providing financing to companies engaged in the pursuit of business models that contribute to sustainable development was offered by BNP Paribas (BNP)23:

• Socially Responsible Investing (SRI): SRI is the most widely understood approach to sustainable finance and involves integrating ESG criteria, in a systematic and traceable manner, into decisions on financial management and investment and encouraging asset managers to consider extra-financial criteria when selecting asset values.

• Green Finance: Often viewed as a subset of SRI, green finance includes all transactions that are addressed toward energy transition and combating climate change. Green finance is often executed by the issuance of green bonds and the growing popularity of those instruments has led to global investors to take steps toward standardizing terms in order to make the capital raising process more efficient. Asset managers may also contribute by decarbonizing their portfolios in order to limit their ecological footprint.

• Social Impact Investing: Social impact investing, or social finance, includes investments into projects that have a social focus and seek to address a particular social or environmental challenge. Sometimes referred to as solidarity-based finance, investments in this area typically target unemployment, housing problems caused by increased poverty, environmental issues such as organic farming or clean energy and development of third world economies.²⁴

• Social Business: Social businesses were described by BNP as being primarily social in nature but following viable economic models—in other words, a shared value concept that seeks both profit and social impact. With the consent of investors, profits are reinvested to combat exclusion, protect the environment, or promote development and solidarity. Forms of social business include microfinance, impact investing, and Social Impact Bonds (i.e., bonds that are repaid upon maturation only if the social objectives of the project have been achieved).

Banks and Other Commercial Financing Institutions

Banks and other financial institutions become subject to environmental and social risks when they provide financial services to companies that are associated with illegal activities or controversial issues (e.g., hydraulic fracturing, arctic drilling, palm oil, soy, or coal-fired power plants), including business practices, sectors, projects, and/or countries that are directly or indirectly, or allegedly or actually, associated with detrimental environmental and social impacts.25 In order to act responsibly in relation to these risks, financial institutions need to implement a framework for conducting credit and operational risk assessments that integrate consideration of environmental and social issues and measures of ESG performance and risk. Financial institutions are referring to measures from credit agencies that are beginning to integrate ESG into their assessments; however, many have criticized the accuracy and utility of these ratings. Financial institutions are also conducting their own due diligence based on the Equator Principles, a risk management framework that was adopted in 2013 and originally developed to support financial institutions in determining, assessing, and managing the environmental and social risks related to project financing. In addition, given that all companies, including financial institutions, are subject to heightened scrutiny relating to their involvement with activities that have adverse human rights impacts, banks, and other financial institutions are voluntary adopting and implementing the human rights due diligence standards and protocols called for by the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.26 The various voluntary standards referred to above are likely to be supplemented by adoption of some form of sustainability-focused banking regulations given the potential broad adverse impacts of material environmental and social risks to the stability of individual banks and the financial system as a whole.²⁷

KPMG argued that ESG, particularly concerns about climate change, will become an increasingly important influence in the global economy in the wake of the COVID-19 pandemic and that banks and financial institutions will face increasing pressures from various stakeholders to embed ESG into their strategies. For example, KPMG predicted that regulators, oversight authorities, and policymakers would become more vocal about the need for greater adoption of ESG and that investors would show stronger interest in ESG-related projects and funds, particularly since data from the first quarter of 2020 provided evidence that 70 percent of responsible investment funds outperformed their peers and that the MSCI World ESG Leaders Index outperformed the regular index by 1.36 percent in that quarter. KPMG also noted that banks, like other businesses, would be feeling growing pressure from customers and the public at large to act in a manner that reflects their views and beliefs regarding environmental and social responsibility, and that consumers, particularly those in younger generations, would choose their banks based on their ESG credentials.²⁸

According to a global survey conducted by KPMG International in 2019, before the COVID-19 pandemic, almost three-quarters of bank CEOs acknowledged that the future growth of their institutions would be largely determined by their ability to successfully navigate the transition to a low-carbon, clean-technology economy.29 However, banks and industry policymakers recognize that in order for this to occur, there needs to be a coordinated and collaborative response from all parts of the banking industry and the broader financial system. There is some movement in this direction, such as the Principles for Responsible Banking launched in November 2018 and embraced by a third of the world’s largest banks, discussions involving banks and regulators relating to taxonomy and green finance and the creation of the Network for Greening the Financial System (www.ngfs.net), which is a group of central banks and supervisors willing, on a voluntary basis, to share best practices and contribute to the development of environment and climate risk management in the financial sector and to mobilize mainstream finance to support the transition toward a sustainable economy.

The Principles for Responsible Banking (PRB) are part of the United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between the United Nations Environment Programme and global financial sector to mobilize private sector finance for sustainable development. UNEP FI works with more than 300 members—banks, insurers, and investors—and over 100 supporting institutions—to help create a financial sector that serves people and planet while delivering positive impacts and supports global finance sector principles, such as the PRB, to catalyze integration of sustainability into financial market practice. The goal of the PRB was to create a unique framework for ensuring that signatory banks’ strategy and practice aligned with the vision society has set out for its future in the SDGs and the Paris Climate Agreement. The PRB that signatory banks commit to are³⁰:

1. Alignment: We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement, and relevant national and regional frameworks.

2. Impact: We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products, and services. To this end, we will set and publish targets where we can have the most significant impacts.

3. Clients and customers: We will work responsibly with our clients and our customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.

4. Stakeholders: We will proactively and responsibly consult, engage, and partner with relevant stakeholders to achieve society’s goals.

5. Governance and target setting: We will implement our commitment to these Principles through effective governance and a culture of responsible banking.

6. Transparency and accountability: We will periodically review our individual and collective implementation of these principles and be transparent about and accountable for our positive and negative impacts and our contribution to society’s goals.

As of July 2020, more than 170 banks had become signatories to the PRB and thus committed not only to adhere to the principles outlined above but also to continuously analyze their current impact on people and planet; based on this analysis, set targets where they have the most significant impact, and implement them; and publicly report on progress. Signatory banks must meet all of these requirements within four years of signing; however, with eighteen months of signature banks must begin reporting on their impact, how they are implementing the PRB, the targets they have set and the progress they have made.

Each bank needs to consider how to handle so-called transition risks (i.e., the risk associated with transitioning a bank’s portfolio away from “brown” assets to greener and more sustainable investments). For example, brown assets continue to be profitable for many banks and any decision to reduce investments in those assets must take into account fiduciary duties to shareholders. At the same time, reducing financing to businesses operating based on brown assets, such as coal mines, will improve a bank’s ESG-related disclosures but may also create unintended adverse consequences such as disruptions in communities if jobs are lost due to closures of businesses denied bank financing (which would also have an adverse impact on the bank’s retail lending in the community).

In spite of the challenges, large global banks such as Goldman Sachs and the Bank of America have announced significant commitments of capital and other resources to greener finance, often doing so in a way that makes it clear that the issues and opportunities associated with ESG have been elevated to the CEO-level and the boardroom. KPMG reported that new products and models are continuously being created, tested, and commercialized, noting specifically that wealth managers had been moving toward ESG-informed investing; retail banks were creating new sustainable banking and investing products and services, such as green home-improvement loans, carbon neutral banking, and a variety of ESG-linked funds such as sustainable exchange-traded funds (ETFs), aimed at millennials; capital markets were moving toward “green underwriting” and syndicates of commercial banks were collaborating on sustainability-linked financing transactions that offered borrowers lower rates if they achieved certain ESG-focused operational targets.31

Even before the COVID-19 pandemic, policymakers around the world were pushing for business and regulatory initiatives to expand the footprint of banks and other financial institutions in offering sustainable financing. In Switzerland, for example, the majority of the larger financial market players still regard sustainable finance as a niche/specialized area and adopt strategies in which traditional and sustainable finance products coexist, and only a few institutions have opted for a full integration of sustainable finance and proactively adopted it as their unique selling proposition.³² The SFI has called for a credible commitment to, and stronger support for, sustainable finance from the upper echelons of the Swiss financial sector (i.e., board and executive level), recommending expanded sustainable finance-related education for senior management, board members, and (chief) executives; reducing investment barriers for pension funds and other institutional investors and an official endorsement of sustainability as a core principle of the Swiss financial marketplace and a priority for policymakers. The SFI has suggested that financial institutions prioritize sustainable finance education, training, and development at all hierarchical levels and build more in-house expertise on sustainability issues and approaches that is integrated throughout all core divisions (i.e., by integrating expert sustainability teams throughout the organization as opposed to compartmentalizing sustainable knowledge in a separate, often marginalized, team or group).33

Blended Finance

Blended finance has been widely touted as being critical to achievement of the target of SDGs by 2030 and as an innovative strategy to pool in commercial capital to aid risk-adjusted return for development projects. Blended finance offers private investors a “first loss guarantee” through the use of mezzanine or senior debt instruments, which provide them with priority over other actors in the development space (i.e., multilateral development banks, development finance institutions, foundations, governments, etc.) who make the initial investment in a project by taking subordinated debt or junior equity positions in the project and then seek to attract private and commercial investors to purchase senior debt by undertaking to cover their losses through guarantees, grants, and insurance. The initial investment is generally referred to as a “concessional investment” and is intended to provide capital and technical assistance to get the project up and running. Concessional investments are typically very high risk and offer below-market rates of return and the goal of such investments is to absorb a sufficient amount of the overall risk associated with the project to make it viable to investors who seek market-rate returns but will only do so when risks have been lowered and managed.

Brodsky noted that blended finance has the advantage of bringing capital to developed areas and to projects that would otherwise be overlooked by many investors wary of investing in lower-income markets and projects that are below investment grade and that blended finance also allows governments and development agencies to correct market failures without requiring them to finance development projects entirely with public funds. However, Brodsky cited an analysis of 117 blended finance deals that found that in only forty-three cases was more than half the funding for projects provided by private sources, suggesting that blended financing may not be leveraging as much private capital as is needed for long-term, sustainable investing. Moreover, the availability of a blended finance structure will not attract investors unless they can be convinced that the project can be scaled up and will ultimately achieve commercial viability and the anticipated social impact.34 While blended finance appears to be a promising strategy that has attracted the attention of numerous big players in the financial sector, OECD data indicates that only $81 billion of blended finance was raised for development work during 2015–2019, with much of that capital being deployed for infrastructure and climate change in Africa and Asia.³⁵

Sustainable Bonds

The first sustainable bond was launched in 2007 by the European Investment Bank and since then sustainable bonds have played a significant role in scaling up the financing of investments that provide environmental and social benefits and attracting private investors to supplement the funding available from governments to pursue the ambitious public policy initiatives mentioned above. Sustainable bonds are generally broken out into three categories—Green, Social, and Sustainability Bonds—and have been described as any type of bond instrument where the proceeds will be exclusively applied to eligible environmental and/or social projects. Their common trait is specifically targeting positive environmental and/or social impact. Also relevant are so-called Sustainability-Linked Bonds, which are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives.36

BBVA reported that the size of the global sustainability bond market as of June 30, 2019, was $584 billion, representing about 5 percent of a total global outstanding bond market estimated to be about $100 trillion, and that the percentage of sustainability bond issuances versus total bond issuances had continued to increase to an average of 2.6 percent in 2018 vs. 2 percent in 2017, despite a slight reduction in issuance of sustainability bonds in 2018 due to market volatility that impacted bond issuance globally.³⁷ Data from Environmental Finance’s Sustainable Bond Insights showed the following levels of interest in various types of sustainable bonds in the first half of 2019 (with percentage change in each category over the first half of 2018): Green Bonds ($126 billion, increase of 35.7 percent), Social Bonds ($8.8 billion, increase of 63 percent), and Sustainability Bonds ($18.2 billion, increase of 98 percent). Green Bonds dominate issuance among sustainability bonds on a relative basis (approximately 83 percent); however, both Social and Sustainability Bonds increased their relative contributions to overall issuance from 2015 through 2018 and as of June 30, 2019, their percentages of the sustainability bond market stood at 6.3 and 10.6 percent respectively.³⁸

As noted above, the first sustainable bond came out of Europe and European issuers have continued to dominate the market since then. According to BBVA, the relative sizes of the sustainability bond markets as of the end of 2018 in Europe, the United States, and China were $290 billion, $140 billion, and $90 billion, respectively. BBVA noted several important differences among these markets: Europe is highly diversified with banks contributing 21 percent of total sustainability bond issuance in 2018 and no other single sector contributing more than 15 percent of total issuance and legislative efforts are afoot to develop EU taxonomy and harmonize standards across the EU; the US market is largely self-regulated and much less diversified than in Europe (91 percent of 2018 sustainability bond issuance was from banks, supranationals, utilities, and real estate); in China banks contributed 72 percent of total sustainability bond issuance in 2018 and efforts have been made by the People’s Bank of China to harmonize green bonds by issuing green bond certification guidelines.39

Green Bonds

Green Bonds have been described as including any type of bond instrument where the proceeds will be exclusively applied to finance or refinance, in part or in full, new, and/or existing eligible green projects (e.g., funding new and existing mortgages for energy-efficient residential buildings in Norway).⁴⁰ As the data referred to above indicates, Green Bonds is by far the largest segment among the various sustainability bonds and target projects relating to a number of themes included in the SDGs such as climate mitigation involved in the reduction of carbon; clean water and sanitation (SDG6); affordable and clean energy (SDG7); buildings and transport (SDG9); city infrastructure (e.g., low carbon buildings and transport (SDG11) and agriculture (SDG15). Although they are popular, some have expressed doubts about their impact. For example, in September 2020, The Economist reported on a study by the Bank for International Settlements of over 200 issuances of Green Bonds by larger companies from 2015 to 2018 and noted that the evidence appeared to be that the issuances did not seem to lead to de-carbonization and that the Green Bond marketplace did not significantly lower the cost of borrowing.41

The ICMA’s Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds (GBP) are intended to promote integrity in the Green Bond market through guidelines that recommend transparency, disclosure, and reporting. It is anticipated that setting the structure and terms of Green Bonds in alignment with the GBP will provide the underlying investment opportunity with transparent “green credentials” and that widespread adoption of the GBP will ultimately increase capital allocation to green projects. The ICMA has noted that the GBP are collaborative and consultative in nature based on the contributions of members and observers of the Green Bond Principles and Social Bond Principles, and of the wider community of stakeholders. The GBP are typically updated once a year to reflect the development and growth of the global Green Bond market and the discussion below is based on the version of the GBP that went into effect as of June 2018.⁴²

The GBP begin by defining Green Bonds as “any type of bond instrument where the proceeds will be exclusively applied to finance or refinance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP.” The GBP recognized four types of Green Bonds, noting that additional types may emerge as the market develops⁴³:

• Standard Green Use of Proceeds Bond: a standard recourse-tothe-issuer debt obligation aligned with the GBP

• Green Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds goes to related or unrelated Green Project(s)

• Green Project Bond: a project bond for a single or multiple Green Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP

• Green Securitized Bond: a bond collateralized by one or more specific Green Project(s), including but not limited to covered bonds, ABS, MBS, and other structures; and aligned with the GBP. The first source of repayment is generally the cash flows of the assets.

The GBP explicitly recognize several broad categories of eligibility for Green Projects based on their contribution to environmental objectives including climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control. These categories include, but are not limited to, the following44:

• Renewable energy (including production, transmission, appliances and products)

• Energy efficiency (such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances, and products)

• Pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling, and energy/emission-efficient waste to energy)

• Environmentally sustainable management of living

• Natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart farm inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes)

• Terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine, and watershed environments)

• Clean transportation (such as electric, hybrid, public, rail, nonmotorized, multimodal transportation, infrastructure for clean energy vehicles, and reduction of harmful emissions)

• Sustainable water and wastewater management (including sustainable infrastructure for clean and/or drinking water, wastewater treatment, sustainable urban drainage systems and river training, and other forms of flooding mitigation)

• Climate change adaptation (including information support systems, such as climate observation and early warning systems)

• Eco-efficient and/or circular economy adapted products, production technologies, and processes (such as development and introduction of environmentally sustainable products, with an eco-label or environmental certification, resource-efficient packaging, and distribution)

• Green buildings that meet regional, national, or internationally recognized standards or certifications

The four components of the GBP are as follows:

• Use of Proceeds: The GBP explain that the cornerstone of a Green Bond is utilization of the proceeds of the bond for Green Projects, which should be appropriately described in the legal documentation for the security. The GBP require that all designated Green Projects provide clear environmental benefits, which will be assessed and, where feasible, quantified by the issuer.

• Process for Project Evaluation and Selection: The issuer of a Green Bond should clearly communicate to investors: the environmental sustainability objectives; the process by which the issuer determines how the projects fit within the eligible Green Project categories identified above; and the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.

• Management of Proceeds: The net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a subaccount, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for Green Projects.

• Reporting: Issuers should make, and keep, readily available up-to-date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments. The annual report should include a list of the projects to which Green Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.

The GBP include a recommendation to issuers of Green Bonds that they select and appoint external review providers to confirm the alignment of their Green Bond or bond program with the four components of the GBP. The GBP noted that issuers could seek advice from consultants and/or institutions with recognized expertise in environmental sustainability or other aspects of the issuance of a Green Bond and also commission one of more of the various types of independent external reviews that are offered in the marketplace including second party opinions, verification, certification, and/or Green Bond scoring/rating. The GBP recommend public disclosure of external reviews that include disclosures of the credentials and relevant expertise of the external review provider and the scope of the review conducted.

Social Bonds

The proceeds of Social Bonds are used for new and existing projects with positive social outcomes (e.g., to finance or refinance loans granted to clients whose activities contribute to local economic development across the employment conservation and creation category).45 Social Bonds provide capital for addressing issues in underserved or underprivileged sectors such as affordable housing, education, vocational training, and microfinancing, and are recognized as suitable for use in enabling, developing, and implementing new and existing projects with a positive social outcome for target populations with disadvantages including disabilities, marginalized communities, and lack of access to education. The first Social Bond, “Banking on Women,” was launched in 2013 by the International Finance Corporation, which also issued a Social Bond on “Inclusive Business.” While the market for Social Bonds has grown steadily, generally as a result of issuances by multinational organizations, it initially suffered from the lack of transparency and accountability and difficulties in defining and measuring social impact. While steps have been taken to address these issues, notably the development of Social Bond Principles by the ICMA, larger investors still prefer financial gains and corporations have been relatively slow to use Social Bonds as financing instruments.⁴⁶

The ICMA’s Social Bond Principles: Voluntary Process Guidelines for Issuing Social Bonds (SBP) are intended to promote integrity in the Social Bond Market through guidelines that recommend transparency, disclosure, and reporting. The SBP are updated when necessary to reflect the development and growth of the global Social Bond market and the discussion below is based on the version of the SBP that went into effect as of June 2020.47 The SBP begin by defining Social Bonds as “any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP.” The SBP recognized four types of Social Bonds, noting that additional types may emerge as the market develops⁴⁸:

• Standard Social Use of Proceeds Bond: a standard recourse-tothe-issuer debt obligation aligned with the SBP

• Social Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the SBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes and so on., and whose use of proceeds go to related or unrelated Social Project(s)

• Social Project Bond: a project bond for a single or multiple Social Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the SBP

• Social Securitized and Covered Bond: a bond collateralized by one or more specific Social Project(s), including but not limited to covered bonds, ABS, MBS, and other structures; and aligned with the SBP. The first source of repayment is generally the cash flows of the assets. This type of bond covers, for example, covered bonds backed by social housing, hospitals, or schools.

The SBP explains that Social Projects directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially but not exclusively for a target population(s) and describes a “social issue” as an issue that threatens, hinders, or damages the well-being of society or a specific target population. The SBP includes the following list of Social Project categories that seeks to capture the most commonly used types of projects supported by or expected to be supported by the Social Bond market49:

• Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)

• Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)

• Affordable housing

• Employment generation, and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, including through the potential effect of smalland medium-sized enterprise financing and microfinance

• Food security and sustainable food systems (e.g. physical, social, and economic access to safe, nutritious, and sufficient food that meets dietary needs and requirements; resilient agricultural practices; reduction of food loss and waste; and improved productivity of small-scale producers)

• Socioeconomic advancement and empowerment (e.g. equitable access to and control over assets, services, resources, and opportunities; equitable participation and integration into the market and society, including reduction of income inequality)

The SEP noted that examples of target populations include, but are not limited to, those that are:

• Living below the poverty line

• Excluded and/or marginalized populations and/or communities

• People with disabilities

• Migrants and/or displaced persons

• Undereducated

• Underserved, owing to a lack of quality access to essential goods and services

• Unemployed

• Women and/or sexual and gender minorities

• Aging populations and vulnerable youth

• Other vulnerable groups, including as a result of natural disasters

The four components of the SBP are as follows:

• Use of Proceeds: The SBP explain that the cornerstone of a Social Bond is utilization of the proceeds of the bond for Social Projects, which should be appropriately described in the legal documentation for the security. The SBP require that all designated Social Projects provide clear social benefits, which will be assessed and, where feasible, quantified by the issuer.

• Process for Project Evaluation and Selection: The issuer of a Social Bond should clearly communicate to investors: the social objectives; the process by which the issuer determines how the projects fit within the eligible Social Project categories identified above; and the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.

• Management of Proceeds: The net proceeds of the Social Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio, or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for Social Projects.

• Reporting: Issuers should make and keep readily available up-to-date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments. The annual report should include a list of the projects to which Social Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.

As is the case with Green Bonds, the SBP include a recommendation to issuers of Social Bonds that they seek advice from consultants and/or institutions with recognized expertise in social issues or other aspects of the issuance of a Social Bond and select and appoint external review providers to confirm the alignment of their Social Bond or bond program with the four components of the SBP. The SBP also recommends public disclosure of external reviews that include disclosures of the credentials and relevant expertise of the external review provider and the scope of the review conducted.

Sustainability Bonds

Sustainability Bonds encompass elements from both Green and Social Bonds and are used implement a combination of positive environmental and social impact and for both environmental and social projects in a variety of categories including food health and well-being, quality education, clean water and sanitation, affordable, and clean energy.50 When issuing its Sustainability Bond Guidelines in June 2018, the ICMA described Sustainability Bonds as bonds where the proceeds will be exclusively applied to finance or refinance a combination of both Green and Social Projects (as those terms are defined and explained in the GBP and the SBP), noting that a market has developed for bonds aligned with both the GBP and the SBP).⁵¹

The ICMA explained that Sustainability Bonds are aligned with the four core components of both the GBP and the SBP (with the former being especially relevant to underlying Green Projects and the latter to underlying Social Projects) and that those common four core components of the GBP and the SBP and their recommendations on the use of external reviews and impact reporting also apply to Sustainability Bonds. One form of Sustainability Bond is a Social Impact Bond, which is based on a “pay-for-success model” enabled by public–private partnerships. In a typical situation, a private sector investor provides funds to a local party that will be responsible for implementing a specific social project so as to achieve mutually agreed impact performance targets. At the end of the project, its impacts are measured by an outside outcome evaluator and if the targets are achieved the investors will be paid by the local government as provided under the terms of the bond.

Sustainability-Linked Bonds

In its Sustainability-Linked Bond Principles (SLBP) released in June 2020, the ICMA described Sustainability-Linked Bonds (SLBs) as any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives, which are measured through predefined Key Performance Indicators (KPIs) and assessed against predefined Sustainability Performance Targets (SPTs).52 The proceeds of SLBs are intended to be used for general purposes, thus the use of proceeds is not a determinant of its categorization; however, issuers can elect to combine the GBP/SBP approaches with their SLB.⁵³ There are five core components to the SLBP:

• Selection of KPIs: KPIs that can be external or internal; however, they must always be material to the issuer’s core sustainability and business strategy and address relevant ESG challenges of the industry that are under management’s control. Specifically, KPIs should be relevant, core, and material to the issuer’s overall business, and of high strategic significance to the issuer’s current and/or future operations; measurable or quantifiable on a consistent methodological basis; externally verifiable and able to be benchmarked using an external reference or definitions to facilitate the assessment of the SPT’s level of ambition.⁵⁴

• Calibration of SPTs: Issuers must calibrate and set in good faith one or more SPT(s) per KPI that represent their commitment to ambitious change and which represent a material improvement in the respective KPIs and be beyond a “business as usual” trajectory; where possible be compared to a benchmark or an external reference; be consistent with the issuers’ overall strategic sustainability/ESG strategy and be determined on a predefined timeline, set before (or concurrently with) the issuance of the bond. The SLBP provides that target setting should be based on a combination of benchmarking approaches: the issuer’s own performance over time on the selected KPIs (a minimum of three years, where feasible, is recommended); relative positioning versus the performance of the issuers’ peers or versus current industry or sector standards; and/or reference to the science, official country/regional/international targets (e.g., Paris Agreement on Climate Change and net zero goals, Sustainable Development Goals (SDGs), etc.) or recognized best-available technologies.

• Bond Characteristics: The SLB must describe when and how the bond’s financial and/or structural characteristics will vary based on whether or not the selected KPI(s) reach the predefined SPT(s). The SLBP noted that potential variation of the coupon was the most common example of variation, but that it was also possible to consider the variation of other financial and/or structural characteristics of the SLB.

• Reporting: The SLBP call on issuers of SLBs to regularly publish (at least annually) and keep readily available and easily accessible, up-to-date information on the performance of the selected KPI(s), including baselines where relevant; a verification assurance report relative to the SPT outlining the performance against the SPTs and the related impact, and timing of such impact, on the bond’s financial and/or structural characteristics; and any information enabling investors to monitor the level of ambition of the SPTs (e.g., any update in the issuers sustainability strategy or on the related KPI/ESG governance, and more generally any information relevant to the analysis of the KPIs and SPTs).

• Verification: The SLBP requires issuers of SLBs to seek independent and external verification (e.g., limited or reasonable assurance) of their performance level against each SPT for each KPI by a qualified external reviewer with relevant expertise (e.g., auditor or an environmental consultant), at least once a year, and in any case for any date/period relevant for assessing the SPT performance leading to a potential adjustment of the SLB financial and/or structural characteristics, until after the last SPT trigger event of the bond has been reached. Performance verifications should be made publicly available.

Disclosures regarding the processes used and assumptions underlying the KPIs and SPTs are obviously important. The SLBP calls on issuers to communicate clearly to investors the rationale and process according to which the KPI(s) have been selected and how the KPI(s) fit into their sustainability strategy, and to provide clear definitions of the KPI(s) that include the applicable scope or perimeter (e.g., the percentage of the issuer’s total emissions to which the target is applicable) and the calculation methodology (e.g., clear definition of the denominator of intensity-based KPIs and definition of a baseline, where feasible, that is science-based or benchmarked against an industry standard). With respect to calibrating and setting their SPTs, issuers are expected to disclose to investors any strategic information that may decisively impact the achievement of the SPTs and clearly refer to each of the following:

• The timelines for the target achievement, including the target observation date(s)/period(s), the trigger event(s), and the frequency of SPTs

• Where relevant, the verified baseline or reference point selected for improvement of KPIs as well as the rationale for that baseline or reference point to be used (including date/period)

• Where relevant, in what situations recalculations or pro-forma adjustments of baselines will take place

• Where possible and taking competition and confidentiality considerations into account, how the issuer intends to reach such SPTs (e.g., by describing its ESG strategy, supporting ESG governance and investments, and its operating strategy (i.e., the types of actions that are expected to drive the issuer’s performance toward achievement of the SPTs))

• Any other key factors beyond the issuer’s direct control that may affect the achievement of the SPT(s)

The SLBP also encourages issuers to position the information outlined above within the context of their overarching objectives, strategy, policy, and/or processes relating to ESG.55 Appendix II of the SLBP is a guiding, nonexhaustive checklist of elements that are recommended or required to be disclosed in the context of the issuance of an SLB with respect to selection of KPIs, calibration of SPTs, bond characteristics, reporting commitments, second party opinions, and post-issuance reporting and verification. The SLBP noted that disclosures may be included in the bond documentation and, where appropriate, in a standalone document such as a framework, investor presentation, external review, or on issuers’ website or annual sustainability or annual reports.

International and Regional Sustainable Finance Initiatives

In February 2020, the International Capital Markets Association (ICMA) published Sustainable Finance: Compendium of International Policy Initiatives and Best Market Practice (https://icmagroup.org/green-social-and-sustainability-bonds/sustainable-finance-initiatives/) with the goal of providing stakeholders with an easy reference point to the numerous international and regional developments in the field.

Among the international initiatives highlighted were the following:

• The Corporate Forum on Sustainable Finance: The Forum was established in January 2019 by sixteen European Union (EU) companies with the intent of becoming a permanent network of dynamic “Green Issuers” for exchanging views and ideas relating to upholding and developing sustainable finance as a critical tool to fight climate change and to foster a more sustainable and responsible society.

• The Global Green Finance Council: The Council was created in 2017 with the objective to bring together key global and regional associations and other stakeholders involved in the green financing to coordinate efforts to promote green finance, facilitate cross-fertilization between related markets and asset classes, and act as a representative counterparty to the official sector on green finance policy matters.

• The Green Loan Principles (GLP): The GLP were launched in March 2018 by the Loan Market Association (LMA), together with the Asia Pacific Loan Market Association (APLMA) and with the support of the ICMA, to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the wholesale green loan market.

• The Sustainability Linked Loan Principles (SLLP): The SLLP were launched in March 2019 by the LMA, together with the APLMA and the Loan Syndications and Trading Association (LSTA) and with the support of the ICMA, to promote and facilitate the use of the sustainability linked loan product.

• The Green Bond Pledge: The Green Bond Pledge is a simple declaration with broad and far-reaching impact that was developed and designed as a joint initiative by a wide range of international climate finance and environmental groups including the Climate Bonds Initiative, Mission 2020, Ceres, Citizens Climate Lobby, California Governor’s Office, California Treasurer’s Office, Global Optimism, NRDC, and The Climate Group.

• Network of Central Banks and Supervisors for Greening the Financial System (NGFS): The NGFS was established at the Paris “One Planet Summit” in December 2017 by eight central banks and supervisors to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.

• The Sustainable Stock Exchanges (SSE): The SSE initiative was launched in 2009 by the UN Secretary General and organized by UNCTAD, the UN Global Compact, UNEP FI, and the PRI to provide a global platform for exploring how exchanges, in collaboration with investors, companies (issuers), regulators, policymakers, and relevant international organizations can enhance performance on ESG issues and encourage sustainable investment, including the financing of the UN Sustainable Development Goals.

Other international initiatives mentioned included the Financial Stability Board—Task Force on Climate-related Financial Disclosures, the G20 Sustainable Finance Study Group, the Sustainable Banking Network and the Equator Principles.

As for regional developments, notice should be taken of a wide range of initiatives in the ASEAN Market including the issuance of Green Bond Standards, ASEAN Social Bond Standards, and ASEAN Sustainability Standards by the ASEAN Capital Markets Forum, which also produced a December 2018 document on Aligning Sustainable Finance with the Sustainable Development Goals. The Green Bond Guidelines (2017) were introduced in Japan in March 2017 to facilitate sustainable finance and Green Bond issuances in that country. The European Commission has announced work on developing an EU classification system to determine whether an economic activity is environmentally sustainable, an EU Green Bond Standard and guidance to improve disclosures of climate-related information by businesses. In addition, other countries that have issued guidelines relating to Green Bonds include Brazil, China, Kenya, Malaysia and the Philippines.

Swiss Sustainable Finance (www.sustainablefinance.ch) compiled a list of sustainable investing standards that included Eurosif Transparency Code, Febelfin Quality Standard and Label (Belgium), FNG-Label for Sustainable Mutual Funds, FNG Sustainability Profiles and Transparency Matrix Luxflag ESG label, Nordic Swan Ecolabel for Investment Funds, Greenfin Label (France) and Label ISR (France).

1 The discussion in this paragraph is adapted from Sustainable Finance (The Middle Road), https://themiddleroad.org/sustainable-finance-unleashed/

² Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? Zurich: Sustainable Finance Institute, 13 and 15. According to the CFA Institute, examples of environmental issues include climate change and carbon emissions, air and water pollution, biodiversity, deforestation, energy efficiency, waste management, and water scarcity; examples of social factors include customer satisfaction, data protection, and privacy, gender and diversity, employee engagement, community relations, human rights, and labor standards and examples of governance factors include board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions, and whistleblower schemes. Id. at 16.

³ https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/what-sustainable-finance_en

⁴ https://group.bnpparibas/en/news/sustainable-finance-about

⁵ Sustainable Finance (The Middle Road), https://themiddleroad.org/sustainable-finance-unleashed/ (citing Five Ways that ESG Creates Value, McKinsey Quarterly, November 14, 2019).

⁶ https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/what-sustainable-finance_en

⁷ 2018 Global Sustainable Investment Review (Global Sustainable Investment Alliance) (as reported in Changing Dynamics of Sustainable Finance: The regulatory push in the direction of sustainable growth, Sia Partners (February 25, 2020), https://sia-partners.com/en/news-and-publications/from-our-experts/changing-dynamics-sustainable-finance-regulatory-push) See also CNBC, Your complete guide to investing with a conscience, a $30 trillion market just getting started (December 14, 2019), https://cnbc.com/2019/12/14/your-complete-guide-to-socially-responsible-investing.html

⁸ Sia Partners. 2020. “Changing Dynamics of Sustainable Finance: The Regulatory Push in the Direction of Sustainable Growth.” February 25, 2020, https://sia-partners.com/en/news-and-publications/from-our-experts/changing-dynamics-sustainable-finance-regulatory-push

⁹ Id. See also Sustainable Finance (The Middle Road), https://themiddleroad.org/sustainable-finance-unleashed/

¹⁰ Id.

¹¹ https://group.bnpparibas/en/news/sustainable-finance-about

¹² https://mufg.jp/english/ir/fixed_income/greenbond/index.html

¹³ https://greenbiz.com/article/investors-scrambled-get-verizons-1b-green-bond-deal

¹⁴ Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? Zurich: Swiss Finance Institute, 21 (citing Friede, G., T. Busch, and A. Bassen. 2015. “ESG and Financial Performance: Aggregated Evidence From More Than 2,000 Empirical Studies.” Journal of Sustainable Finance and Investment 5, no. 4, p. 210). See also Clark, G., A. Feiner, and M. Viehs. March 2015. “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance.” Working Paper and Wang, Q., J. Dou, and S. Jia. 2015. “A Meta-Analytic Review of Corporate Social Responsibility and Corporate Financial Performance: The Moderating Effect of Contextual Factors.” Business & Society 27, no. 3, p. 1. The SFI cautioned that different types of sustainable investment come with varying levels of risk and return: “. . . thematic investments, which are often concentrated industry bets, are fundamentally different from screening approaches, ESG integration, or impact investing. A very strict exclusionary strategy could lead to a dramatically smaller investment universe that inhibits efficient risk diversification and might reduce investment performance. At the same time, the exclusion of certain unsustainable securities might have a positive impact on financial performance due to the better management of ESG risks or to the identification of mispriced assets.” Id.

¹⁵ Id.

¹⁶ Id. at 43.

¹⁷ Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand?. Zurich: Swiss Finance Institute, 13 (citing Global Sustainable Investment Review 2014. February 2015. Global Sustainable Investment Alliance).

¹⁸ Id. at 10.

¹⁹ Embedding ESG into banks strategies: Four key actions banks should be taking to prepare for the post-COVID-19 ESG mantra (KPMG, May 2020), https://home.kpmg/xx/en/home/insights/2020/05/embedding-esg-into-banks-strategies.html

²⁰ It has been estimated that, as of 2016 at least, that negative/exclusionary screening represented the largest category of sustainable investment: about two-thirds. See The Economist Explains: What Is Sustainable Finance?” The Economist, April 17, 2018, https://economist.com/the-economist-explains/2018/04/17/what-is-sustainable-finance

²¹ Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? Zurich: Sustainable Finance Institute, 18–19; Environmental, Social and Governance Issues in Investing: A Guide for Investment Professionals (CFA Institute, 2015); and Changing Dynamics of Sustainable Finance: The regulatory push in the direction of sustainable growth, Sia Partners (February 25, 2020), https://sia-partners.com/en/news-and-publications/from-our-experts/changing-dynamics-sustainable-finance-regulatory-push

²² For an example of a comprehensive statement of minimum standards and exclusions applicable to an impact investment program, see Triodos Minimum Standards and Exclusions, https://triodos.com/downloads/about-triodos-bank/triodos-banks-minimum-standards.pdf

²³ https://group.bnpparibas/en/news/sustainable-finance-about

²⁴ For further information on social impact investing, see the website of Finansol (https://finansol.org/en/index.php), a French organization that certifies certain social finance products and monitors trends in social finance.

²⁵ Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? Zurich: Swiss Finance Institute, 20.

²⁶ Id. (citing UN Guiding Principles on Business and Human Rights, Discussion Paper for Banks on Implications of Principles (Thun Group of Banks, 2015), 16–21).

²⁷ Id. (citing Policy Briefing: Financial Stability and Environmental Stability (Cambridge Institute for Sustainability Leadership and United Nations Environment Programme, September 2015) and The Financial System We Need: Aligning the Financial System with Sustainable Development (UN Environment Programme, 2015)).

²⁸ Embedding ESG into banks strategies: Four key actions banks should be taking to prepare for the post-COVID-19 ESG mantra (KPMG, May 2020), https://home.kpmg/xx/en/home/insights/2020/05/embedding-esg-into-banks-strategies.html

²⁹ Id.

³⁰ https://unepfi.org/banking/bankingprinciples/

³¹ Id.

³² Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? Zurich: Swiss Finance Institute, 10.

³³ Id. at 11 and 43–44.

³⁴ Brodsky, S. 2019. “What Is Blended Finance?” Impactivate (September 5, 2019), https://theimpactivate.com/what-is-blended-finance/ There is a large library of readily available resources on blended finance including information and analysis from the World Economic Forum (https://weforum.org/reports/blended-finance-toolkit); OECD (http://oecd.org/development/financing-sustainable-development/blended-finance-principles/); Convergence (https://convergence.finance/); USAID (https://usaid.gov/cii/blended-finance), and ODI (https://odi.org/publications/11303-blended-finance-poorest-countries-need-better-approach)

³⁵ Sustainable Finance (The Middle Road), https://themiddleroad.org/sustainable-finance-unleashed/

³⁶ https://icmagroup.org/green-social-and-sustainability-bonds/

³⁷ ESG Bond Market Key topics and trends for 2019 and beyond—getting the harmony right, BBVA (July 23, 2019), https://bbva.com/wp-content/uploads/2019/07/Green-Bonds-Getting-the-harmony-right.pdf

³⁸ Id.

³⁹ Id.

⁴⁰ https://icmagroup.org/green-social-and-sustainability-bonds/ and ESG Bond Market Key topics and trends for 2019 and beyond—getting the harmony right, BBVA (July 23, 2019), https://bbva.com/wp-content/uploads/2019/07/Green-Bonds-Getting-the-harmony-right.pdf

⁴¹ The Meaning of Green, The Economist, September 19, 2020, 70.

⁴² Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds. (Paris: International Capital Market Association, June 2018).

⁴³ For further information on specific issuances and instruments, see the ICMA’s extensive database of Green, Social and Sustainability Bonds at https://icmagroup.org/green-social-and-sustainability-bonds/green-social-and-sustainability-bonds-database/#HomeContent

⁴⁴ Explanation on how each of the Green Project categories can be mapped to the five overriding environmental objectives is provided in Green Project Mapping (Paris: International Capital Market Association, June 2019). In addition, reference should be made to Green and Social Bonds: A High-level Mapping to the Sustainable Development Goals (Paris: International Capital Market Association) as a frame of reference for demonstrating how the GBPs compliment the UN Sustainable Development Goals (SDGs) and evaluating the financing objectives of a Green Bond or Green Bond Program against the SDGs. For example, the GBP project category “climate change adaptation” compliments SDG 1 (No Poverty) with relevant indicators including the number of people provided access to clean energy as a result of the use of proceeds from the Green Bond.

⁴⁵ https://icmagroup.org/green-social-and-sustainability-bonds/ and ESG Bond Market Key topics and trends for 2019 and beyond – getting the harmony right, BBVA (July 23, 2019), https://bbva.com/wp-content/uploads/2019/07/Green-Bonds-Getting-the-harmony-right.pdf

⁴⁶ For additional information about Social Bonds and social impact investment generally, see The Social Bond market: towards a new asset class? 2018 (Impact Investment Lab, 2018), http://oecd.org/sti/ind/social-impact-investment.htm and https://ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_new/investor+relations/ir-products/socialbonds

⁴⁷ Social Bond Principles: Voluntary Process Guidelines for Issuing Social Bonds. (Paris: International Capital Market Association, June 2020).

⁴⁸ For further information on specific issuances and instruments, see the ICMA’s extensive database of Green, Social and Sustainability Bonds at https://icmagroup.org/green-social-and-sustainability-bonds/green-social-and-sustainability-bonds-database/#HomeContent

⁴⁹ The SBP noted that Social Projects include attempts to provide and/or promote the goals in one or more of the categories and all related and supporting expenditures such as research and development. Reference should be made to Green and Social Bonds: A High-level Mapping to the Sustainable Development Goals (Paris: International Capital Market Association) as a frame of reference for demonstrating how the SBPs compliment the UN Sustainable Development Goals (SDGs) and evaluating the financing objectives of a Social Bond or Social Bond Program against the SDGs. For example, the SBP project categories “access to essential services,” “affordable housing,” and “socioeconomic advancement and empowerment” compliment SDG 1 (No Poverty) with relevant indicators including number of products and services serving low-income groups and the number of people provided with access to financial services, including microfinance, as a result of the use of proceeds from the Social Bond.

⁵⁰ https://icmagroup.org/green-social-and-sustainability-bonds/ and ESG Bond Market Key topics and trends for 2019 and beyond – getting the harmony right, BBVA (July 23, 2019), https://bbva.com/wp-content/uploads/2019/07/Green-Bonds-Getting-the-harmony-right.pdf

⁵¹ Sustainability Bond Guidelines (Paris: International Capital Market Association, June 2018).

⁵² The discussion of the SLBP and SLBs in this section is adapted from Sustainability-Linked Bond Principles: Voluntary Process Guidelines (Paris: International Capital Market Association, June 2020).

⁵³ The SLBP noted that SLBs should not be confused with Sustainability Bonds, which require that the Use of Proceeds conform to the Sustainability Bond Guidelines.

⁵⁴ The SLBP encourages issuers, when possible, to select KPI(s) that they have already included in their previous annual reports, sustainability reports, or other nonfinancial reporting disclosures to allow investors to evaluate historical performance of the KPIs selected. When KPIs that have not been previously disclosed are used, issuers should, to the extent possible, provide historical externally verified KPI values covering at least the previous three years.

⁵⁵ The SLBP recommend that, in connection with the issuance of an SLB, issuers appoint (an) external review provider(s) to confirm the alignment of their bond with the five core components of the SLBP (e.g., a Second Party Opinion) and that external reviewers assess the relevance, robustness and reliability of selected KPIs, the rationale and level of ambition of the proposed SPTs, the relevance and reliability of selected benchmarks and baselines and the credibility of the strategy outlined to achieve them, based on scenario analyses, where relevant.