The need to finance a path to a sustainable future has never felt more urgent.

As a result, ESG standards are increasingly shaping the way investors choose to engage with companies and thus how companies do business around the world.

It is estimated that $60 trillion is needed to meet the seventeen Sustainable Development Goals outlined by the United Nations. No single entity can achieve these goals alone.

Responsible investment is an approach to investment that explicitly acknowledges the relevance of environmental, social and governance (ESG) factors to the performance and profitability of investment and to the long-term health and stability of the market as a whole. It recognizes that the generation of long-term sustainable returns is dependent on stable, well-functioning and well governed social, environmental and economic systems.

ESG is increasingly shaping the way both individual and institutional investors choose to engage with companies and thus impacting how companies do business around the world. As investors have aligned their investments with their values, brokerage firms and mutual fund companies have significantly increased their offerings of exchange-traded funds (ETFs) and other financial products to support investor and client needs. Inflows into sustainable investment funds have outpaced all flows and, importantly, investors increasingly believe that sustainable investments offer greater returns than conventional investing.

Climate Finance

Climate change is but one element of a sustainable future but poses significant economic and financial risks to the global economy. Efforts to mitigate against these risks and adapt to the changing climate will require a fundamental transformation of our global economy. The climate finance market structure must grow at an unprecedented scale, speed, and geographic scope, and this will require concerted and coordinated action by all stakeholders—the public sector, the real economy sectors, the financial sector, and the social sector.

In coordination with our global affiliate, GFMA, and member firms, SIFMA has provided a roadmap for how to accelerate the evolution of climate finance and define the roles capital market participants can play to facilitate this transition. Taken together, the recommendations enable the development of the climate finance market to grow to the $3-5 trillion+ of investment per year we estimate will be required to achieve the ambitions set out in the Paris Agreement. The banking and capital markets sector plays a critical role in this transformation as an intermediary between the supply and demand for capital—as a lender, arranger, and investor. Success in mobilizing both public and private capital by the sector to finance climate transition pathways will only be achieved by a holistic, complementary set of actions taken by the public sector, the social sector, the real economy, and the broader financial sector at an accelerated pace and large scale.

 

Moving to a Low-Carbon Economy

The transition to a low-carbon economy is critical to the fight against climate change. The financial services industry has been active on climate priorities for decades, helping clients reduce emissions and developing new business models. SIFMA, as a member of the U.S. Climate Finance Working Group, has published principles for a U.S. Transition to a Sustainable Low-Carbon Economy. The principles, developed in coordination with 10 other leading financial services trade associations representing the perspectives of banks, investment banks, insurers, asset managers, investment funds, pension funds and other financial intermediaries, build from that experience to create a useful policy framework for the transition to a low-carbon economy.

Scaling deep and liquid carbon markets will significantly accelerate carbon reduction. SIFMA’s global affiliate, GFMA, has published a report, Unlocking the Potential of Carbon Markets to Achieve Global Net Zero. The report finds that close to 80% of greenhouse gas emissions are not covered by regulated carbon pricing today. In order to meet the Paris Agreement goals, price levels need to increase to an estimated $50-150/tonne average by 2030 from the current global average of less than $5/tonne. To do this, the report highlights the role and importance of both compliance and voluntary carbon markets to the low-carbon transition.

Our Work Ahead

Today, SIFMA, SIFMA’s Asset Management Group and GFMA are engaged in discussions around the global on a multitude of issues including:

• How can we incentivize capital to move into those areas that need to transition?
• How can global guiding principles be used in the development of climate finance taxonomies? How to ensure
  that climate taxonomies are consistent, common, and comparable? What disclosures may be required?
• What should we consider for our rapidly changing regulatory and legislative agendas?
• How can we encourage participation in important collective efforts including the Net Zero Asset Managers Initiative and Net Zero Banking Alliance?

Much work lies ahead. Through it, our industry has the power to help set the world on the path to a sustainable future.