What is sustainable finance and why does it matter? Economic growth has created unprecedented prosperity for many, but it has come at a high price – climate change, inequality and severely depleted natural resources. According to WWF, the world’s leading independent conservation organization, if we are to tackle these issues successfully, huge amounts of capital need to be shifted to more sustainable low-carbon sectors.
Commitment demonstrated through both public and private investment, and a new financial system, are urgently needed to meet these challenges, and to achieve the United Nations Sustainable Development Goals, which are designed to shift the world on to a path of sustainable prosperity in just over a decade. Time is running out. At the World Economic Forum Sustainable Development Impact Summit in New York in 2019, business leaders and public figures voiced concerns about the lack of progress, pointing to a deficiency in innovative financial solutions focused on sustainability.
So how can sustainability considerations, including environmental, social and governance practices, be integrated into the financing of economic activities? Peter J. Young, Chair of the recently formed technical committee ISO/TC 322, Sustainable finance, has some answers.
ISOfocus: With the world facing many challenges, from climate change to inequality, why is sustainable finance so important?
Peter J. Young: Sustainable finance is at the heart of solving the biggest global challenges that confront us today. Financial activities are vital for the transition to a sustainable global society – addressing key needs such as economic stability, poverty, inequality, climate change, environmental degradation, prosperity, societal stability in peace, and justice.
Financial services are estimated to be between 12 % and 19 % of the global economy. This is a huge sector characterized by many segments, often operating and regulated with limited overlap. The shift towards sustainable finance requires both an increase in coherence and a facilitation by common approaches, two elements that International Standards can help provide.
Achieving the United Nations Sustainable Development Goals (SDGs) by 2030 will require doubling current investment flows to the range of USD 5 trillion to USD 7 trillion each year, requiring a significant scaling up of both capital flows and the capacity to practise sustainable finance. This is essential to deliver strong, sustainable, balanced and inclusive growth, addressing the SDGs’ 2030 targets and international climate change commitments. All countries are falling short, but the greatest gap is in developing countries where a large increase in foreign direct investment is required. This can only be facilitated by increasing consistency, transparency and security in the sustainable finance market.
Why did ISO create a technical committee to address the subject?
Currently, there is no globally agreed definition of sustainable finance as applied to the practices, activities and products of the financial sector. There are also varying interpretations of what constitutes good sustainable finance practice and these issues are a drag on progress. Tackling these uncertainties is part of what ISO/TC 322 was created to help address.
A large number of voluntary and regulatory activities are being developed by countries, regions and sectors. Many of these are explicit in recognizing the benefit that International Standards could offer, although none is involved in developing such standards across the whole market. This partly reflects the fact that these stakeholders have had limited exposure to International Standards and developing them requires ISO/TC 322 to access a whole new audience, get them to engage in the ISO processes and direct them through their national standards bodies to participate. This is a challenge in itself.
The role of ISO/TC 322 is to establish a framework under which new standards may be developed to define and guide certain sustainable finance activities. This is a very broad remit which cannot be achieved without considerable contributions from other ISO/TCs (several of which already have directly applicable standards; for example, supporting management and reporting) and from external stakeholders and organizations.
ISO/TC 322 will reach its goals, partly by providing a harmonizing and collaborative platform for all relevant sustainable finance work and partly by developing new standards, often in cooperation with other ISO/TCs as appropriate.
What are your goals and hopes for the TC work programme?
I believe the planned work has global implications and is of interest to a great number of countries and organizations from across the global financial services sector. This structured ISO standards programme for sustainable finance will help align global financial systems with sustainability. Specific outcomes I would like to see arising from ISO/TC 322’s work include:
- Development of globally recognized common terminologies, principles and standards for sustainable finance, helping to reduce market confusion and lowering transaction, verification and communication costs for players engaged in the sustainable finance market
- Clearly defined standards to help prevent “sustainability washing”, underpin the credibility, integrity and scalability of sustainable finance activities, and guide financial institutions (including banks, investors and insurers) to better integrate environment, social and governance (ESG) considerations into investment and finance practices
- Improved understanding of sustainable finance activities to facilitate the innovation and development of sustainable financial products, as well as related services such as third-party verifications and ESG data provision
- Standardized metrics to allow the measurement and improved transparency of sustainable finance flows and the ESG performance of sustainable finance activities, financial institutions and markets
What are the TC work items, if any, that are currently underway?
ISO/TC 322 aims to support the alignment of the global financial system with the SDGs by developing standards (including a terminology guide, high-level principles, a framework, and specific technical standards to populate the framework) for financial institutions and financial products. This broad remit means we need a deep understanding of existing relevant activities, whether by other ISO technical committees or external organizations.
Existing work is, therefore, focused on enabling activities involving a “stock-taking” study group to map existing initiatives and needs, and a terminology group to develop a technical glossary. This glossary – potentially in the form of a technical report – will organize and explain commonly used terms and languages on sustainable finance, including sustainable finance concepts, financial products, analytical tools, organizations and initiatives. It is already under development with a view to publishing in 2020.
The first ISO standard envisaged sets out good-practice principles for sustainable finance applicable globally. It will provide a context for the development and role of future specific standards by providing consistent understanding of sustainable finance concepts, a framework for informed decision making and risk mitigation, techniques for measuring benefits and guidance on disclosure.
Do you have any future aspirations for the standards to be developed?
ISO/TC 322’s aim is to consolidate the rapid learning and innovations in sustainable finance at an international scale and enable all countries to finance delivery of the SDGs at a faster pace, lower cost and reduced risk. It wants to expose financial organizations to the value of the international standardization process. I also want us to anticipate and facilitate the trend towards a more balanced sustainable approach, competent in meeting ESG goals in even measure.
Building on the early work above (and bearing in mind that we have only existed for about nine months), my aspiration is to see a suite of technical standards developed over coming years. These could cover impact assessment requirements, disclosure requirements, verification and stewardship. Each can be applied to the major financial products which can deliver sustainable outcomes, including sustainable loans, sustainable bonds, funds, insurance, private equity and listed stocks.
Some standards will be delivered by supporting other technical committees and subcommittees (e.g. ISO/TC 207/SC 4 on its work related to sustainable lending/bonds) and some by joint working groups (e.g. with ISO/TC 207/WG 11 on green finance) to ensure the necessary expertise is convened during the standards development process. Close working relationships will have also been established with other organizations active in segments of the financial community.
Our outputs will help guide the sustainable operations of financial institutions and investees, define and classify sustainable finance activities, measure the sustainability impact, enhance transparency and ensure integrity of sustainable finance activities. They would help accelerate the growth of sustainable finance and provide reliable mechanisms for mobilizing finance globally to address our most pressing environmental, climate and social challenges.