The third era of sustainable finance

The sustainable finance movement that began over 30 years ago has now moved towards regulation and standardisation, but in this rapidly developing landscape education is vital, writes Dr. Anthony Miller, Chief Coordinator, UN SSE and Dr. Tiffany Grabski, Head, SSE Academy


To understand where we are, it’s useful to remind ourselves of the journey taken to get here. The sustainable finance movement can be roughly separated into three eras with unique characteristics, each building on the other. The first such era started roughly around 1990, when the Domini 400 Social Index was launched in the US, one of the first such indices and still going today. This was the ‘pioneering era’ characterised by boutique firms exploring a new concept of investment that better incorporated environmental and social data into investment decisions. This is when the term ‘socially responsible investing’ or SRI was popular and the term ESG had not even been coined yet.

The work of these early pioneers in the 1990s began to diffuse into mainstream finance in the early 2000s. This is when the shift to the second era, the ‘mainstreaming era’ began to take place. This was characterised by the entrance of major financial services and asset management companies into the sustainable finance space. In this phase, we see a shift from SRI to ESG (environmental, social and governance), accompanied with an expansion of what issues are being addressed. This phase sees a growing acquisition of the small boutique SRI players by the big mainstream financial services companies, and it is when we see companies like S&P, Bloomberg, FTSE-Russell, MSCI, Vanguard and Blackrock – to name a few – all enter the sustainable finance space with offerings for mainstream investors. It was also the period that saw the creation of the UN-supported Principles for Responsible Investment, in 2005, and the UN Sustainable Stock Exchanges (SSE) initiative, in 2009. It was a decade that began with the niche and ended with the mass market. This mainstreaming era continued into the 2010s, and continues to this day. Sustainable finance has momentum and continues to grow in size and sophistication.

The age of sustainable finance
By the mid to late 2010s, however, the world was noticeably shifting to the third era of sustainable finance, the era of ‘regulation and standardisation.’ This era is characterised by the codification of sustainable finance practices. The UN Sustainable Development Goals, launched in 2015, created the global policy framework for sustainable development that further fuelled the mainstreaming of sustainable finance. As sustainable finance grew, so did the need for regulation and standardisation. Public markets are like trains and regulation and standardisation are the twin rails they run on.

As sustainable finance grows in size, it was inevitable that more work would need to be done to ensure transparency, stability and investor protection. The start of this era can be traced to events like the creation in 2015 of the now famous TCFD, or Task-force on Climate-related Financial Disclosures, by the Financial Stability Board and in 2018, the creation of the first formal sustainability working groups at IOSCO, the International Organisation of Securities Commissions. National regulators were also getting involved as well as supranational authorities like the EU. It is a period in which the world went from zero markets with mandatory ESG disclosure to more than 30.

This is the era of sustainable finance that we live in today. In the last five years, sustainable finance has benefited from the development of official taxonomies such as the EU Taxonomy on Sustainable Finance, the creation of the IFRS Foundation’s International Sustainability Standards Board (ISSB) consolidating sustainability reporting standards, and the work of the IOSCO Task Force on Sustainable Finance. As Ashley Alder, IOSCO Chair and head of the Hong Kong securities regulator says, “it is of utmost importance that the regulatory community steps up its efforts in ensuring markets contribute positively to sustainability challenges, in a way that secures the integrity of financial markets and the protection of investors.”

Education is key
In this era of standardisation and regulation, education takes on new levels of importance. Market participants need help in keeping up with the now fast pace of developments in sustainable finance. We’ve seen training and capacity building related to climate change and disclosure of climate-related information in particular become a growing focus for stock exchanges. As the linchpin of capital market systems, stock exchanges have their finger on the pulse of market needs. Exchanges’ growing focus on sustainability-related training and capacity building speaks volumes about the demand for knowledge and expertise on this topic.

This rising demand is likely due to the rapid progression of standards, frameworks and guidance being developed, coupled with an expansive demand from both investors and regulators. Stock exchanges have recognised the knowledge gap and are taking action. A key example of this action is related to the launch of the TCFD recommended disclosures. These 11 recommended climate-related financial disclosures and accompanying guidelines set a new global framework for identifying what information investors require to assess and price climate-related risks and opportunities.

Stock exchanges play an important role in supporting listed companies and investors as they overcome challenges related to the identification, management and disclosure of climate-related risks and opportunities. When the FSB launched the TCFD recommendations in 2017, stock exchanges were among the first organisations to support the recommendations publicly. Since then, the number of exchanges supporting the TCFD has continued to grow and training has become the top activity conducted by stock exchanges in support of the TCFD recommendations (see Fig 1).

Since 2021, more than 50 stock exchanges have hosted training for their market specifically on climate-related financial disclosures and the TCFD. Much of this training has been supported by the SSE Academy, the SSE initiative’s education arm focused on the provision of globally consistent and pragmatic training for market participants on the adoption and implementation of sustainable finance practices. Building on the UN SSE initiative’s Model Guidance on Climate Disclosures and the TCFD’s recommendations, the SSE Academy has collaborated with stock exchanges providing interactive training that allows companies to ask experts key questions to overcome hurdles and accelerate their climate-disclosure journeys. Through this training programme, the UN SSE, partnering with the World Bank Group’s International Finance Corporation (IFC) and CDP, has enabled stock exchanges to train over 20,000 market participants from 142 countries through more than 200 hours of training. At least a quarter of the 20,000 participants self-identified as being in a leadership position in their organisation and 35 percent of participants indicated that their organisations were in the process of integrating the TCFD recommendations into reporting practices for the upcoming reporting cycle.

The motivation for participating in training varied slightly by region (see Fig 2), however the main impetus globally for upskilling on this topic was to enhance skill sets pertaining to identifying climate-related risks and opportunities that face organisations. Nearly half of all participants indicated risk and opportunity identification as a motivating factor for joining training. During the training, the second most frequently asked question pertained to conducting scenario analysis as a means of identifying the financial impact that climate-related risks and opportunities organisations will face over the coming years.

At the completion of the training, participants indicated in feedback forms that they wish to receive additional training on a number of topics – the most referenced topics being on conducting climate scenario analysis, ESG standards more broadly, nature-related disclosures, and ongoing developments in climate-related disclosures including developments from the IFRS Foundation’s International Sustainability Standards Board (ISSB).

To address these ongoing capacity building needs, the SSE Academy has partnered with the IFRS Foundation to develop new training on the ISSB’s upcoming standards. The ISSB is set to be the new global standard consolidating existing frameworks for reporting financially-material sustainability factors, with international support from the G7, G20, the International Organisation of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions. Based on the structure developed by the TCFD, the ISSB’s initial standards set out both general sustainability-related financial disclosures as well as specific requirements on climate-related financial disclosures. Together with the IFRS Foundation, the SSE Academy will continue to support stock exchanges in their capacity-building activities by providing training on the ISSB’s standards when they are released in the coming months.