Ramy Zeid – Sustainable Finance Researcher
Laura Eoa Songue – Communications Consultant
In 2021, the G20 Sustainable Financing Working Group (SFWG) was revived to scale up sustainable finance, supporting the 2030 Agenda and the Paris Agreement. The voluntary and flexible G20 Sustainable Finance Roadmap created by the group, as well as the concentrated effort on three priority areas (Developing a Framework for Transition Finance; Improving the Credibility of Private Sector Financial Institution Commitments; Scaling up Sustainable Finance Instruments – which includes high-level principles and voluntary recommendations), were supported the same year by the G20 Leaders.
Using resources provided by various international organisations (IOs), networks, other initiatives, and G20 working groups, as well as input from members, or gathered during a series of stakeholder consultations, the G20 SFWG assessed the advancements made and current practices improved in these three areas. It also describes the improvements driven by the Roadmap as reported to UNDP, the SFWG’s secretariat. It might help identify gaps that call for extra technical support from IOs.
As more jurisdictions continue to submit their voluntary progress tracking and others keep updating them on the online dashboard, progress reporting remains a continuous process.
REPORTING PROGRESS ON THE SFWG’S 2021 PRIORITY AREAS
- Improving comparability and interoperability of approaches to align investments to sustainability goals
Over the last few years, significant efforts have been made to develop sustainable finance markets and create aligned sustainable financial investments. However, a lack of interoperability may result in market fragmentation and increased transaction costs, leading to higher risks of green and SDG-washing.
In this regard, some of the SFWG Knowledge Partners’ progress is as follows:
– The International Platform on Sustainable Finance (IPSF) reported working on coordinating approaches and developing coherent sustainable finance frameworks/tools in areas that enable investors to identify sustainable investment opportunities across the globe.
-The International Organization of Securities (IOSCO) published a Consultation Report on ESG Rating and Data Products Providers, as it reported a lack of transparency about methodologies underpinning the sustainability ratings or data products which only cover limited industries and geographic areas leading to information gaps for investors seeking to follow specific investment strategies.
- Overcoming information challenges by improving sustainability reporting and disclosure
The lack of complete and uniform sustainability reporting among businesses and jurisdictions hinders investors’ access to crucial sustainability-related information, which could cause financial asset mispricing and extra difficulties for SMEs. As a result, the market’s integrity is at stake, as well as its ability to allocate money properly toward sustainability objectives.
Several regional or international frameworks exist or are under development to help organisations assess and disclose sustainability-related information. For example, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) to create a worldwide baseline of high-quality sustainability disclosure standards to satisfy the information needs of investors. In this regard, IOSCO welcomed the enthusiastic participation from numerous stakeholders on the ISSB exposure drafts and agreed on the standards for IOSCO’s eventual endorsement of the ISSB’s recommendations. The endorsement process will begin after the ISSB has issued its final standards.
3. Enhancing the Role of International Financial Institutions in supporting the goals of the Paris Agreement and 2030 Agenda
-While MDBs have made good progress, there remains a gap between the scope of their climate work programs and the scale and speed required to achieve the objectives of the Paris Agreement and 2030 Agenda. In this regard, the Multilateral Development Banks (MDBs) reported working to scale up and accelerate their work in this area to enhance climate-related financing commitments and engagement with governments in emerging markets and developing countries.
Efforts are underway to innovate new products and adapt existing ones to attract private investments in more pristine areas. The MDB Climate Working Group, launched at COP24, is working under a joint approach with six core areas for aligning with the Paris Agreement and covers all finance flows. For its operationalisation, road testing methodologies are being deployed to finalise in time to meet MDB commitments, aiming to have this work completed and operational by 2023–24.
-At COP26, the MDBs released a “Collective Climate Ambition Joint Statement” which welcomes the growing ambition reflected in the new Nationally Determined Contributions (NDCs) and commits to support the delivery of these plans and to contribute to align their financing flows with the Paris Agreement. MDBs also committed to scaling up climate finance, operationalising new approaches to support NDCs and accelerating the realisation of the United Nations Framework Convention on Climate Change (UNFCCC) objective.
–The Finance in Common Summit (FICS) produced the first “Progress Report to the G20” which contributes to and aligns with the Roadmap’s objectives. The summit operates as a platform for MDBs to work with regional associations of Public Development Banks (PDBs), as well as with the International Development Financing Club (IDFC) and individual institutions. PDBs manage USD 23 trillion of total assets and provide up to USD 2.7 trillion of annual investments, out of which more than 83% are from PDBs from G20 countries. FICS reinforces the coherence in PDBs’ strategies and operations by accelerating their convergence towards shared standards and best practices to deliver a more effective collective action for sustainable development.
REPORTING PROGRESS ON THE SFWG G20 ROADMAP
Following the G20 Sustainable Finance Roadmap, here is an overview of the progress made in each of the five Focus areas proposed.
- Market development and approaches to align investments to Sustainability Goals
Eighteen networks, initiatives, and International Organizations (IOs) have attempted to overcome financial system barriers and make it easier to fulfil the SDGs and the Paris Agreement. Others have been striving to make the similarities and distinctions between taxonomies-based and other alignment approaches more transparent and more apparent.
-Overcoming barriers. A set of guidelines for a responsible banking and a legal framework are being proposed by the United Nations Environment Programme Finance Initiative (UNEPFI), with a formal launch anticipated by the fourth quarter of 2022. Additionally, UNEP and UNCTAD have developed a methodology to measure the number of companies publishing sustainability reports; and IPSF and DESA (Department of Economic and Social Affairs) continue exploring sustainable finance alignment approaches.
-Improving coordination. Institutions such as the Sustainable Banking and Finance Network (SBFN), the United Nations Conference on Trade and Development (UNCTAD), UNDP, UNEP FI and World Bank have been working actively on the development, at a national level, of alignment tools and approaches (initially focused on Sustainable Finance Taxonomies), and other activities and strategies that can be implemented to promote sustainable finance in countries.
The International Monetary Fund (IMF), the World Bank Group (WBG), the Organization for Economic Co-operation and Development (OECD), and the Bank for International Settlements (BIS) are also working jointly to operationalise and design a common minimum guidance for the G20 high-level voluntary principles for sustainable finance alignment approaches, including taxonomies.
-Benchmarking and measuring. Multiple IOs, such as the OECD or UNCTAD, continue to provide recommendations and guidelines to help countries assess the alignment of financial centres to the SDGs. For example, UNCTAD reported monitoring the evolution of the sustainable finance market to accurately measure its size, geographical exposure, and contribution to sustainable development outcomes.
2: Consistent, comparable, and decision-useful information on sustainability risks, opportunities, and impacts
19 IOs, networks, and initiatives have reported supporting efforts for consistent information standards to maximise positive impacts for the financial sector, improving corporate disclosure on sustainable development-related matters, and addressing some information gaps on sustainability data.
-Consistency of information standards. The IFRS Foundation established the new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. In addition, UNEP FI works actively across sectors to provide consistent standards for the financial industry to maximise positive impacts.
GI-HUB (Global Infrastructure Hub) and DESA have been working, each separately, on developing a framework to leverage private sector participation and improve corporate disclosure on sustainable development-related matters.
UNCTAD’s Sustainable Stock Exchanges (SSE) programme is working actively with stock exchanges around the world to provide consistent guidance to listed companies on the reporting of sustainability information, such as the Model Guidance on Climate Disclosure to guide issuers on TCFD (The Task Force on Climate-Related Financial Disclosures) implementation.
-Bridging information gaps on sustainable data. For instance, UNEP FI has developed an Impact Methodology, which provides a framework to assess the impacts of a bank’s portfolios on sustainability factors. In addition, the UNCTAD SSE programme has begun benchmarking stock exchanges in G20 countries based on the sustainability performance of issuers on each exchange, examining factors such as climate emissions and gender equality.
In April 2022, IMF submitted to the Indonesian G20 Presidency a work plan for a possible new Data Gaps Initiative (DGI) focused on four topics:
(1) Climate Change; (2) Household Distributional Information; (3) Fintech and Financial Inclusion; and (4) Access to Private and Administrative data and Data Sharing.
-Improving data quality and usefulness. To participate in the improvement of data quality, the Network for Greening the Financial System (NGFS) published a report on data gaps providing specific policy recommendations for improving the availability, quality, and comparability of climate-related data in July 2022 and is currently working on finalising a directory of climate-related decision-useful metrics and data sources
-Nature and biodiversity-related information. The UNEP-FI reported plans to present a tool to align portfolios with the post-2020 Global Biodiversity Framework during 2022. The Sustainable Banking and Finance Network (SBFN) reported working on knowledge exchange efforts to gather their members’ demands on nature and biodiversity-related support. UNCTAD is revising the core SDG indicators (GCI) to include new land use and biodiversity indicators.
3: Assessment and management of climate and other sustainability risks
In addition to an annual progress report presented to the G20 Finance Ministers and Central Bank Governor (FMCBG) in July 2022, the Financial Stability Board (FSB) will submit three other reports, on achieving consistent climate-related disclosures, on scenario analysis and on regulatory and supervisory approaches to addressing climate-related risks.
In addition, 18 different IOs, networks, and initiatives have reported working towards the actions proposed in Focus Area 3. They have been actively working aiming to perform assessment and management of climate and other sustainability risks using a set of diverse strategies.
-Considering sustainability risks in financial risk assessment. For example, the International Monetary Fund (IMF) has started implementing a work plan to incorporate climate change considerations in Financial Sector Assessment Program risk analysis and plans to add climate scenarios for physical and transition risks that drive different paths for macro-financial variables as a next step. In addition, the NGFS (The Network for Greening the Financial System) has published the third iteration of its climate scenarios.
-Understanding the macroeconomic implications of climate risks and climate policies. The G20 Framework Working Group (FWG) has had an initial discussion on the macroeconomic consequences of climate change and associated climate change mitigation policy options. Moreover, to provide a concrete follow-up on the Ministerial mandate of the 2021 October and 2022 February Communiqués, the FWG has been working to conduct a more systematic analysis of macroeconomic risks stemming from climate change and of the costs and benefits of different transitions, including by drawing on well-established methodologies.
-Understanding sustainability risks implications. In this line, the International Labor Organization (ILO) is contributing an input paper to the transition finance framework by highlighting the socio-economic impacts of the climate transition, while the IMF is assessing the broader macroeconomic impacts of various climate policies.
4. Role of IFIs, public finance & incentives
17 IOs, networks, and initiatives have committed to several plans or Joint Actions on the sustainable finance front. Some of them have been developing a framework on how to best leverage private sector participation to scale up sustainable infrastructure investment while providing technical assistance in the region to develop financial products and services for climate mitigation and adaptation.
-The forum on international policy levers for sustainable investment, hosted by the G20 Indonesia Presidency, discussed a range of policy levers that can incentivise or create an enabling environment for sustainable finance and increase investment that supports an orderly, just and affordable transition towards low-greenhouse gas emissions and a climate-resilient development. Building on this technical initiative, the G20 FMCBGs had a fruitful exchange of national experiences on policies to address climate change and preserve financial stability and economic growth in the long term.
-Aligning institutions to sustainability goals. For example, UNEP-FI and IsDB have implemented action plans to provide better sustainable finance and climate change guidelines. In addition, the Asian Infrastructure Investment Bank (AIIB) has committed to aligning its operations to the Paris objectives by July 2023, while the SBFN assists members from across emerging markets to advance national sustainable finance roadmaps and unlock investment opportunities.
-Mobilising private finance. Specifically, AIIB has created a Special Fund Window (SFW) to make its financing more affordable to its less developed members. The IMF published a note discussing potential ways to mobilise domestic and foreign private sector capital in climate finance to complement climate-related policies. The IMF is set to publish an analytical chapter of the Global Financial Stability Report that takes a more in-depth look at financial markets and instruments in scaling up private climate finance in emerging markets and developing economies.
-Capacity building. In this context, the IMF is supporting countries integrating climate policies in their macro-frameworks through capacity development; the IsDB (Islamic Development Bank) plans to promote sustainable, resilient, inclusive economic growth that is compatible with environmental and climate goals for inclusive human development that is built upon a foundation of sustainable, resilient, and sustainable infrastructure. In addition, the Coalition launched a report that analyses various countries’ sustainable finance roadmaps to understand commonalities and differences better and identify best practices to facilitate country experience sharing.
5. Cross-cutting issues
Working groups have been formed to investigate how transition issues may be incorporated into sustainable finance alignment techniques, and frameworks for maximising private sector involvement in the expansion of sustainable infrastructure have been developed.
-Stock-take of emerging digital solutions. In this regard, the Green Digital Finance Alliance’s Green Fintech Classification Report maps databases of green fintech innovations. It identifies ways to improve the enabling environment that fosters the accessibility of sustainability data. In addition, UNEP FI is working to address barriers to achieving a coherent system of norms and resources for impact management.
-Financing a just climate transition. The International Pharmaceutical Students’ Federation (IPSF) has established a working group to explore how sustainable finance alignment approaches may integrate transition considerations. The UNEP FI has worked on the practical applications of the EU Taxonomy for bank lending, assessing the possibilities EU Regulation provides for transition finance and synergies between impact analysis and target-setting. In addition, the UNCTAD has been promoting the uptake of sustainability by capital markets, and the Organization for Economic Co-operation and Development (OECD) has been drafting guidelines for eligibility and integrity during transition financing.
-Aligning capacity building efforts. SBFN and UNCTAD have provided technical assistance and capacity building to work with governments. OECD is developing a framework to assist a comprehensive approach to capacity building for sustainable infrastructure, both from policy area and sector perspectives. The Coalition has also developed mappings of various capacity buildings required to further mainstream climate actions in the finance ministry.
Despite the solid financial and economic headwinds arising from multiple crises, G20 members, IOs, MDBs, market participants, and other networks and initiatives remain committed to advancing global sustainable finance markets. Accordingly, the 2022 G20 Sustainable Finance Report focused on reporting and assessing the progress in addressing priorities in the G20 Sustainable Finance Roadmap. Since then, G20 members, IOs, MDBs, networks, other initiatives and G20 working groups have reported to the SFWG on progress made towards the 5 Focus Areas and the 19 recommended Actions of the Roadmap.
For more details about the progress made so far, read the full report summarising the Sustainable Finance Working Group (SFWG) work in 2022 and visit the online dashboard on “Progress Tracking” on the G20 SFWG Website to check the latest voluntary reported progress on the actions of the Roadmap.
Disclaimer: This was published first by the UNDP Sustainable Finance Hub on this link.