Sustainable Finance Study Group (SFSG)

Information presented in this profile is for reference only. The Climate Action in Financial Institutions Initiative does not guarantee as to the exhaustiveness of this information and invites you to contact the Secretariat (contact@mainstreamingclimate.org) if you wish to propose any modifications.

By including this profile, the Initiative, its Supporting Institutions and the Secretariat do not endorse the activities described below nor the guidance and information provided in this profile.

Last updated: July 2018

Website: unepinquiry.org/g20greenfinancerepositoryeng/

Contact: InquirySecretariat@unep.org

Summary: In 2016, the G20 launched a Green Finance Study Group (GFSG) to investigate possibilities to encourage private investors to increase green investments. Its yearly synthesis reports give insight on how policy action could encourage knowledge sharing, capacity building and commitment around green financial topics. In 2018, the GFSG was replaced by the Sustainable Finance Study Group (SFSG), which is continuing the work of its predecessor with a wider mandate.

What are the objectives of the initiative?

The Green Finance Study Group’s mandate was to: “identify institutional and market barriers to green finance, and based on country experiences, develop options on how to enhance the ability of the financial system to mobilize private capital for green investment”[1]. The Sustainable Finance Study Group will continue to focus on green finance-related topics but will also take into account other sustainability co-benefits such as job creation and income equality.

Who launched it? Who is participating?

The GFSG was launched under China’s Presidency of the G20 and was co-chaired by China and the United Kingdom. The SFSG worked closely together with other international initiatives and G20 work streams, notably the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) and the G20 Climate Finance Study Group (CFSG).

Why has this been put into place?

The GFSG was established to explore options for addressing the challenge of scaling up green finance. This initiative is thus part of a broader interest the G20 has taken over the past years into sustainability-related financial issues in line with its goal of strong, sustainable, and balanced growth. In 2018, it was renamed the G20 Sustainable Finance Study Group and will produce the 2018 Sustainable Finance Synthesis Report to be submitted to the G20 Finance Ministers and Central Bank Governors Meeting in July and G20 Leaders’ Summit in November.

What are the main work streams/areas of work?

The GFSG concentrated its efforts on five principal research topics: Greening the banking system; Greening the bond markets; Greening institutional investment; Risk analysis; and Measuring progress.

What are concrete outcomes (both political and in terms of recommendations)?

During the G20 Finance Ministers and Central Bank Governors’ Meeting in Washington in 2016, the GFSG was requested to develop “more specific options for developing green banking, scaling-up the green bond market, supporting the integration of environmental factors by institutional investors, and developing ways for measuring progress of green financial activities”[2].

These options were presented for consideration for voluntary adoption by national and international authorities in the G20 Green Finance Synthesis Report 2016:

  • Provide strategic policy signals and frameworks: Country authorities could provide clearer environmental and economic policy signals for investors regarding the strategic framework for green investment e.g., to pursue the Sustainable Development Goals (SDGs) and the Paris Agreement.
  • Promote voluntary principles for green finance: Country authorities, international organizations and the private sector could work together to develop, improve, and implement voluntary principles for and evaluate progress on sustainable banking, responsible investment and other key areas of green finance.
  • Expand learning networks for capacity building: The G20 and country authorities could mobilize support for the expansion of knowledge-based capacity building platforms such as the Sustainable Banking Network (SBN), the UN-backed Principles for Responsible Investment (PRI), as well as other international and domestic green finance initiatives. These capacity building platforms could be expanded to cover more countries and financial institutions.
  • Support the development of local green bond markets: On request of countries that are interested in developing local currency green bond markets, international organizations, development banks and specialized market bodies could provide support via data collection, knowledge sharing and capacity building.
  • Promote international collaboration to facilitate cross-border investment in green bonds: Country authorities or market bodies could promote cross-border investment in green bonds, including through bilateral collaboration between different green bond markets, where market participants could explore options for a mutually-accepted green bond term-sheet.
  • Encourage and facilitate knowledge sharing on environmental and financial risk: To facilitate knowledge exchange, the G20/GFSG could encourage a dialogue, involving the private sector and research institutions, to explore environmental risk, including new methodologies related to environmental risk analysis and management in the finance sector.
  • Improve the measurement of green finance activities and their impacts: Building on G20 and broader experiences, the G20 and country authorities could promote an initiative to work on green finance indicators and associated definitions, and to consider options for the analysis of the economic and broader impacts of green finance.

This report was “welcomed” by the G20, which indicated in the Hangzhou Summit Communique “We believe efforts could be made to provide clear strategic policy signals and frameworks, promote voluntary principles for green finance, expand learning networks for capacity building, support the development of local green bond markets, promote international collaboration to facilitate cross-border investment in green bonds, encourage and facilitate knowledge sharing on environmental and financial risks, and improve the measurement of green finance activities and their impacts.”

Have intermediate or final reports / guidance been issued?

A large number of input papers prepared by institutions or initiatives as contributions to the GFSG are housed in the G20 Sustainable Finance Study Group Document Repository, including:

Calendar and milestones

* www.pbc.gov.cn/english/130721/3487189/index.html

[1] unepinquiry.org/wp-content/uploads/2017/07/2017_GFSG_Synthesis_Report_EN.pdf

[2] www.imf.org/en/News/Articles/2015/09/28/04/51/cm041616

Links with the 5 Voluntary Principles for Mainstreaming Climate Action

This section aims to support discussions on the implementation of the 5 voluntary Principles for Mainstreaming Climate Action. Information provided in this section is for reference only; the Climate Action in Financial Institutions Initiative, its Supporting Institutions and the Secretariat do not endorse the activities nor the guidance and information provided in this section.

The G20 Green Finance Synthesis Report 2016 highlighted some of the challenges in developing and applying risk analysis tools to assess environmental risks and the different options to address them. “Some of these challenges, such as uncertainty about public policies, are outside the control of financial institutions. However, within the financial system, key challenges include the lack of capacity, complexity and the absence of adequate data. Developing credible analyses on how complex environmental threats can create financial risks requires expertise that is often not found in any one institution. Collaboration among financial, environmental and policy specialists as well as international knowledge sharing may be required for developing and improving environmental risk methodologies. Further, the lack of accurate, meaningful, comprehensive and consistent data is a major obstacle in the development and application of risk analysis tools. To help address some of these challenges, the G20/GFSG, jointly with the private sector and research institutions, could encourage further dialogue on environmental and financial risk, to facilitate knowledge exchange on methodologies for environmental risk analysis and management within the financial sector. Such a dialogue would engage efforts by different types of financial intermediaries (e.g., banks, re-/insurances, and institutional investors) to address some of the common challenges by improving data availability, developing and improving commonly accepted methodologies for more forward looking analyses of risks, and raising awareness of environmental risks in the mainstream of the financial sector”.

Four different options are suggested in the report to green finance in the banking industry and drive the development of environmental risk management tools.

  1. Promote voluntary sustainable banking principles: Country authorities could work with international organizations and the private sector to develop, improve and implement voluntary principles for and evaluate progress on sustainable banking, with a view to enhancing the ability of the banking system to extend green credit and reduce risks from resource and pollution intensive sectors. This could help level the playing field within countries and provide the foundations for scaling up green banking. The Equator Principles currently offer the most recognized benchmark for risk management, but only cover project finance. More banks and other financial institutions could adopt similar commitments and oversee them at board level, such as assessing climate change risks they face and only financing projects that went through proper environmental due diligence. Building on the experience in the investment community, a comprehensive set of principles could help drive the development of risk management tools with an expanded green lending focus. Implementation could be encouraged through a periodical review of risks and opportunities at the board level along with annual reporting.
  2. Deploy innovative instruments to support the provision of financing for long-term investment and overcome maturity mismatch. Banks could explore the issuance of green bonds as a way to mitigate the constraint of maturity mismatch on their ability to extend long-term green loans in some markets (see more details in Chapter 4). Other options for banks in this regard include issuing securitized products (with reasonably long maturities) on the back of green loans, and extending collateralized loans backed up by future revenue streams such as those from energy management contracts or the sale of GHG permits.
  3. Promote ways to coordinate policy responses at the country level: Country authorities could consider initiatives to promote coordinated domestic responses to the challenge of green finance in the banking sector, in consultation with key stakeholders such as banking associations, banking regulators, relevant ministries, securities exchanges, and credit bureaus. Based on country circumstances, such initiatives could help to define key concepts for green finance, identify policy options to incentivize market action, build up stakeholder awareness and capabilities as well as enhance market discipline through improved disclosure of environmental information. Such collaborations could also result in more efficient centralized data collection (e.g., hosted by a national level data center) that serves as a basis for banks’ risk analysis and management.
  4. Expand learning networks for capacity building: The G20 could promote international and domestic knowledge sharing through the expansion and deepening of knowledge-based capacity building platforms such as the SBN. These platforms could cover more countries and extend beyond banking regulators and banking associations to work with bank training centers and institutes to train bank CEOs and risk managers. These initiatives could also share technical guidance to support assessment of environmental costs/benefits at the project level by banks, as well as risk analysis and performance reporting.”

The first part of the G20 Green Finance Synthesis Report 2017 focuses on the application of environmental risk analysis (ERA) in the financial industry and provides the following recommendations:

“Financial institutions could combine two elements to assess environmental risks: 1) understanding and identifying the environmental sources of financial risks; and 2) translating these factors into quantitative and qualitative information to understand the potential magnitude of financial risk to investments and to aid investment decisions. The appropriateness of risk analysis tools and associated metrics may depend upon, among others: first, risk types (e.g., market, credit, business); second, the risk factors financial institutions are exposed to (e.g. physical or transition risks); third, the size of direct and indirect exposure to the specific environmental risks; and fourth, key country/sector-specific factors. Based on a review of current practice, it is clear there is considerable scope for more dialogue, awareness and knowledge sharing on ERA.”

The G20 Green Finance Synthesis Report 2016 notes that “internationally comparable indicators are also useful in facilitating cross-border and cross-market green investment, for evaluating green performance of financial firms, and for analyzing the macro implications of green finance activities”.

The report also highlights a number of steps that can be taken in “improving the definitions, taxonomies, and indicators for measuring and reporting on green finance activities and their impacts:

  1. Establish a basis for the measurement of green finance activities and associated definitions. Building on G20 and broader experience, including the on-going work of the FSB-initiated task force, the G20 and country authorities could promote an initiative to work with the private sector on green finance indicators and associated definitions and improved data availability, possibly with the assistance of selected international organizations.
  2. Assess impacts of green finance. The G20 could consider options for the analysis of the economic and broader impacts of green finance.”

The G20 Green Finance Synthesis Report 2016 mentions that reporting on the implementation of responsible investment principles is one option to address some of the challenges to green investing:

“Promote voluntary adoption of responsible investment principles: Country authorities and international organizations could encourage market participants to promote the adoption and implementation of voluntary responsible investment principles, including reporting on implementation of such principles. Existing international knowledge hubs, such as the PRI, could be expanded to cover a larger number of institutional investors and to provide capacity building services for investors in more countries.”

Adopt the 5 voluntary Principles