Earlier this week I wrote about the progress being made by the signatories to the UN Principles for Responsible Banking as they work to put sustainability front and centre of their businesses. I described the shift in the industry from taking a uniquely risk-based approach to sustainability integration, to one that is more focused on aligning with the needs of society, including particularly the climate emergency. In this second blog, I will focus on some of the pushback that these banks and other financial institutions are seeing as they scale up their sustainability engagements.

With COP26 just over a week away, the pressure for action is rising along with the temperature. And some of the pressure is focused inwards, a civil war of sorts whereby some in the climate community are highly critical of the actions being taking by a number of financial institutions – from the green products that they are bringing to market to the sustainability commitments they are making. The critics are asking whether their actions will help deliver real outcomes at the pace and scale required? Or rather if they are just sheep’s clothing with the aim of greenwashing business-as-usual approaches.

Three recent examples are the SEC and BAFIN investigations into ESG greenwashing at DWS, the accusatory blog from Tariq Fancy of his former employer Blackrock, and civil society criticism of Mark Carney and the Glasgow Financial Alliance for Net Zero (GFANZ).

I would like to focus on one aspect which underpins all of them – the relationship between the financial sector and government. The criticism centers on the tenet that voluntary action on the part of the private finance sector, for instance in ESG labelling or committing to net-zero emissions, is an alternative to government resolving these issues through regulation. Put on a show of action to put off government forcing your hand.

At UNEP FI we see this as a false dichotomy, and I will try to explain why voluntary action from the financial sector is so important and actually crucial to spur changes in government policy. UNEP FI as a global partnership between the UN and 430 leading financial institutions has been working for many years to help integrate sustainability considerations into financial practice. In 2004 then UNEP FI Head Paul Clements-Hunt, James Gifford and a few others first coined the term ESG (Environmental, Social and Governance) and worked with early leaders in the responsible investment industry and the UN Global Compact to establish with Kofi Annan the Principles for Responsible Investment. Euromoney provides a nice look back at that heady period. Six years later a group of insurance underwriters convened by UNEP FI launched the Principles for Sustainable Insurance. And most recently, in 2019, we saw the launch with 132 founding banks and Antonio Guterres of the UN Principles for Responsible Banking.

These sustainable finance frameworks have helped spawn, and today host, many of the more targeted initiatives, including three Net-Zero Alliances that are part of GFANZ. UNEP FI convenes the banking and insurance alliances, co-convenes the asset owner alliance with PRI, and PRI themselves are also co-convenors of the asset managers initiative. These frameworks and alliances are all voluntary in nature and therefore are open to the same sort of criticism as mentioned above.

In earlier days of the environmental movement, the relationship between public and private actors was simpler, somewhat idealistic, with environmental externalities expected to be simply priced in by government. Of course, we’ve learned through the failures of the Kyoto Protocol and the early days of the European Union Emissions Trading System that getting pricing right and even getting the political ambition to do so is not easy. Clearly the model that the private sector should wait to be regulated into action is somewhat flawed. And, of course, expecting that voluntary action on its own is enough is also often wishful thinking. The plethora of ESG approaches which lack comparability are a case in point and this could become the case for net-zero commitments as well.

What we firmly believe at UNEP FI is that voluntary action from the finance industry, the so-called leaning in or change-making ambition of leading banks, insurers and investors, is not a replacement for regulatory action but rather an expected pre-cursor or core ingredient in it. The relationship between private and public sectors is less a step-function – financiers waiting for a price on carbon to start engaging – and more of a dance whereby each party makes a move that then signals the other to respond, building trust and the ratcheting of ambition that the Paris Agreement was designed to foster. Christiana Figueres gave a great Ted talk shortly after COP21’s signing that described how the many stakeholders involved managed to create this kind of positive ambition-building dynamic. Six years on, this approach is still working and at UNEP FI we believe it’s the only way forward.

A simple example is climate risk disclosure which has probably been the most important development for the private sector since the Paris Agreement was signed. The Taskforce on Climate-related Financial Disclosures (TCFD) was established by Mark Carney in his role as Chair of the G20 Financial Stability Board, who asked Michael Bloomberg to pull together the best minds from industry to recommend how a corporate or financial institution should transparently disclose the climate risks in their business or on their balance sheet. Here the public sector, rather than directly regulating climate disclosures, was mandating the private sector to develop the framework and to start reporting voluntarily. The approach was well received by industry and today most major corporates and financiers’ issue TCFD reports annually. UNEP FI has worked extensively with our membership to get started with their reporting and to develop common approaches that others may follow. Essentially there is a lot of work going on within the financial community to build the skills and approaches for disclosing effectively. However, although the breadth of disclosures has really grown, there is the increasing realization that the depth, and particularly the comparability of disclosures is somewhat lacking. And that regulators must start to weigh in, which they are now doing in many jurisdictions, starting in New Zealand, the UK, EU and beyond. The Central Banks and Supervisors’ Network for Greening the Financial System made up of the majority of financial regulators globally is providing important inputs to this process.

Building on the learning from TCFD, we at UNEP FI have been pleased to be working with UNDP, WWF and Global Canopy to launch the Taskforce on Nature-related Financial Disclosures (TNFD) which we expect may follow a similar trajectory – it will challenge industry leaders to get started but keep regulators aware of developments and ready to step in, if and when needed.

Alongside the public-private developments on TCFD and TNFD, there’s another important dance happening in defining which business activities are truly sustainable –  through taxonomies. The EU and China were the first here but have been followed by many other regions and efforts to start linking them up. The International Platform on Sustainable Finance is particularly focused on ratcheting this sort of public-private dance and the recently launched five-year roadmap of the G20 Sustainable Finance Working Group, convened by our sister agency UNDP, is as well.

The public-private progress being made on climate risk disclosure and sustainability taxonomies will, we hope, help ratchet ESG ambitions to a new level of activity, comparability and credibility. With this, the private finance community can credibly lean in to the challenges – becoming the proverbial change makers – and know that their voluntary leadership will not only position them for sustainability transitions but also help catalyze governments to join the dance and create the conditions where the laggards have no choice but to also join the fray. Public and private action, both credible and ambitious – this is what the world needs today, both in Glasgow and beyond.

In part three of my pre-COP blog, I will come back to the net-zero ambition and what is needed to make the dance moves most credible there.

Read my blog assessing how banks are translating talk into action.