What Is Sustainable Finance?
What is the definition of sustainable finance?
Simply put, Sustainable Finance may be defined as:
- Integrating sustainability considerations into all relevant business and financial decisions.
- Aligning financial systems and services to promote long-term environmental and social sustainability, and economic prosperity.
The Canadian Expert Panel on Sustainable Finance provided the following more detailed definition:1
Capital flows, risk management activities and financial processes that assimilate environmental and social factors as a means of promoting sustainable economic growth and the long-term sustainability of the financial system.
ISF Primer Video Series
What is Sustainable Finance? With Susan Thompson and Samantha McDonald
ESG integration is “table stakes for investors.” ISF Research Director Ryan Riordan recently spoke with Susan Thompson, Director, Sustainable Finance & Corporate Transitions at TD Securities, and Samantha McDonald, Vice President, ESG Research and Engagement at TD Asset Management, about how investors can drive sustainable business practices, important developments in sustainable finance in Canada, and what the future looks like for ESG investing.
What is the role of sustainable finance?
The financial sector plays a critical role in our sustainable future since it is responsible for allocating funds to the most productive use. It is therefore well positioned to direct investments to sustainable corporations, organizations and projects, and assist in making strategic decisions on trade-offs among sustainable goals. By financing sustainable companies and endeavours, the finance sector can accelerate the transition.
Financial system participants, such as investors, have the power to exert their influence to drive sustainable business practices within companies that they invest in. Most importantly, finance can help certain sectors of the economy that are vulnerable to climate change shocks (i.e. transportation, insurance, reinsurance) in understanding and pricing risks associated with environmental issues. The Canadian Expert Panel report states that “Sustainable finance is both about building resilience to those widespread impacts and preventing further exacerbation.”
What does sustainable finance in action look like?
A wide range of actions exist. They range from actions as simple as providing financial incentives for individuals to purchase electric cars or make their homes more energy efficient, to more complex activities such as issuing green or transition bonds to finance activities designed to reduce a company or municipality’s carbon footprint.
There have been a significant number of collective sustainable finance actions undertaken in recent years. Some examples include:
- Many countries (including Canada) and an increasing number of companies are committing to “net zero” emissions targets by 2050 or earlier.
- In December 2017, global central bankers formed the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
- By November 2021, there were 2,700 supporters globally for the Task Force for Climate-related Financial Disclosures (TCFD) recommendations, (up from 1,500 in September 2020), including FIs responsible for over $150-trillion US.
- By Q4, 2021, 4,375 global investors responsible for over $121-trillion US in assets were signatories of UN-PRI (Principles for Responsible Investment), more than 20 times the 2006 figure of $6 trillion.
- The Climate Action 100+ initiative (2017) - by 2021, there were 615 signatory investors with $60-trillion US in assets supporting this initiative.
- The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 to bring together existing and new net-zero finance initiatives in one sector-wide coalition. By November 2021, GFANZ members included over 450 financial firms across 45 countries responsible for assets of over $130-trillion US.
- By the middle of 2021 there had been over $2-trillion US cumulative issuance of green, social and sustainability-linked debt, and it was estimated that green bond issuance could hit $1-trillion US annually by 2023.
What's happening in Canada?
There are several notable examples of sustainable finance in action in Canada:
- The Bank of Canada joined the NGFS in March of 2019 and identified climate risk as a key systemic vulnerability.
- 94 Canadian organizations were official supporters of TCFD by August 2021.
- As of Q1 2021, Canada had issued a cumulative total of $35-billion US of green, social and sustainability (GSS) debt, placing the country 11th globally (including $30-billion in green bonds and loans).
- During 2021, the Government of Canada announced intentions to issue its first sovereign green bond, with a target of $5-billion Cdn during 2022.
- By 2021, over 200 Canadian asset owners and managers were signatories of the UN-Principles for Responsible Investment (PRI).
- The Canadian Responsible Investment Association (RIA) reported that firms responsible for managing $3.2-trillion Cdn in assets engaged in “responsible” investing by the end of 2019 – over 60 per cent of the Canadian investment industry.
- In January of 2022, the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada released the results of a pilot project to use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy.
For individual companies, we can look at many recent actions and commitments of several large pension funds, banks and asset managers that have joined GFANZ, Climate Action 100+, or similar important initiatives, as well as being TCFD supporters. Similarly, numerous Canadian non-financial companies have also committed to reducing their carbon footprint, as well as incorporating sustainability considerations into their future decisions. For example, in June 2021 Canadian Natural Resources, Cenovus Energy, Imperial, MEG Energy and Suncor Energy announced the “Oil Sands Pathways to Net Zero” initiative. This work with the federal and Alberta governments is intended “to achieve net zero greenhouse gas (GHG) emissions from oil sands operations by 2050 to help Canada meet its climate goals.”
What's the outlook for Canadian investors and issuers?
As we increasingly experience the physical impacts of climate change, we will experience the financial impacts as well. The challenge for Canada is: how do we tap into unprecedented global investment opportunities while protecting Canadian assets, investors, and firms from risk in the context of climate change?
We need to grow and harness our capacity now if we want to captain our own ship through one of the most significant global economic transitions in history. The only way to do this is by investing in the research, education, professional training, and collaboration necessary to lift our current generation of professionals to the next level, while preparing an emerging generation to lead.