Regulator Coordination Insufficient to Scale Up Sustainable Finance

Most financial institutions say coordination among regulators is not sufficient to effectively promote sustainable finance globally, according to a GFMA survey.

The GFMA (Global Financial Markets Association) has published its Sustainable Finance Survey Report, aggregating feedback from 22 of the largest globally active financial and capital market participants to gauge global progress to develop the sustainable finance market.

The reports demonstrates how global financial institutions are addressing ESG considerations, including the management of physical and transitional climate risks, for themselves and their clients.

It shows that global financial institutions are increasingly building climate change and sustainable considerations into their core businesses, as well as into their products and services across their business lines.

The financial sector has accounted for over USD 300 billion in green, sustainable and social bond issuance since 2007, in addition to supporting issuances for their clients, the report said, citing Dealogic data.

Firms are also developing new metrics and methodologies to account for climate-related risks, including methods to gather and leverage data, both for internal risk management and for public disclosures aimed at promoting transparency of their sustainability strategies.

According to the report, most firms are using data or new technologies to assess and price climate-related risk. Examples include the use of artificial intelligence in risk departments, the application of climate scenario analysis to corporate lending portfolios, and improvements in data quality in TCFD (Task Force on Climate-Related Financial Disclosures) disclosures.

The majority of financial institutions responding to the GFMA survey already follow the recommendations of the TCFD , while all remaining firms indicate that they plan to do so.

Recognises the role policymakers and regulators need to play to scale up the sustainable finance market, industry participants have expressed concerns that the current policymaking approach may be too focused on risk, rather than on incentives.

Ultimately, most financial institutions do not feel there has been sufficient coordination among regulators to effectively promote sustainable finance globally.

While there have been promising initiatives such as the TCFD and the NGFS (Network for Greening the Financial System), not all key regulators have actively participated in such fora, the report said. At a regional level, policymakers in the EU are generally seen to be much better coordinated than their counterparts in North America or Asia.

The financial institutions surveyed said policymakers should work to make regional approaches more consistent without being overly narrow or constraining.

“A better-aligned set of regulatory requirements would help institutions to focus their business models to support the scale and pace of change required to meet sustainability goals,” the report says. “Dialogue between authorities across borders is critically important to avoid market fragmentation.”

Further, the report says, there are existing policies in place that disincentivise the scaling up of sustainable finance activities. For example, some sustainable finance asset classes, such as long-term infrastructure projects with extended maturities, attract relatively punitive capital treatment.

Capital requirements that refer to a time horizon longer than one year or the lack of recognition of physical collateral also make it challenging for institutions to support some sustainable finance transactions.

“Such treatment marks a misalignment between policymakers’ sustainability and supervisory objectives,” the report says, suggesting that internal credit models which define capital absorption for different products could be updated to account for the perceived lower risk profile of sustainable lending.

“For sustainable finance to be accessible and streamlined across all markets, a coordinated approach and commitment of all major jurisdictions are needed to catalyze innovation to incentivise greater participation from private sector.”

Possible incentives could include tax relief for sustainable activities and investors, subsidies or grant schemes for sustainability-oriented projects and issuances, and green securitisation to draw in institutional players that require larger investment, among others.

The report also outlines potential areas for further policy exploration.

The full report is available here.

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