Greenwashing involves false or misleading claims to portray a company, product, or service as environmentally responsible. This practice deceives consumers and investors into believing the firm is committed to sustainability, while the reality may differ. As the importance of sustainability grows among the public and investors, greenwashing has become a significant concern, particularly in the finance sector. The rise of ESG investing has increased pressure on financial institutions to support sustainable practices. Yet, it has also enabled some to falsely present themselves as environmentally conscious to attract investors.
As appreciation of the urgency of climate change grows, several innovative financial instruments have been developed and deployed to raise capital for action, including green bonds, transition bonds, and sustainability-linked bonds (SLBs). However, confusion remains about the basic concepts of these instruments and the differences between them. This piece focuses on demystifying two such instruments: sustainability-linked bonds (SLBs) and transition bonds.
ESG funds blend financial analysis with environmental, social, and governance considerations, seeking sustainable and ethical investments. Environmental metrics include greenhouse gas emissions, energy use, waste, pollution, resource conservation, and animal welfare. Social factors gauge relationships with employees, suppliers, customers, and communities. Governance aspects encompass leadership, compensation, transparency, controls, and shareholder rights. Investors favor ESG funds for potential long-term gains and reduced risk. Originating from early 20th-century social investment movements, ESG investing surged in the 2000s, catalyzed by initiatives like the UN PRI and the Paris Agreement. By 2023, ESG funds managed over $30 trillion globally. In India, with only nine ESG funds totaling $1.3 billion, growth is hindered by limited awareness, performance concerns, and reporting standards gaps.
Climate scenario analysis, a strategic planning tool, is gaining traction for its utility in examining potential future scenarios and assessing the resilience of an organization’s business strategies against various climate-related risks. Businesses, financial institutions, and regulators need to adopt a progressive approach to integrate scenario analysis into strategic planning practices.
Climate stress tests are rapidly gaining traction to assess whether financial institutions and systems can withstand severe climate-related risks. Many regulators globally are employing such tests. The Bank of England was the first to initiate climate stress tests, for insurance companies in 2019 and for banks in 2021. Regulatory authorities in Australia, Canada, the EU, France, Hong Kong, and Singapore have since followed suit.
Climate indices are specialized stock market indices designed for passive investors seeking to invest in companies that incorporate climate change considerations into their business strategies. These indices serve as benchmarks for integrating climate change into securities selection, portfolio construction, and risk management.
Climate-related financial risks refer to those arising from climate change impacts or efforts to mitigate climate change. Understanding and managing these risks could help prevent or reduce a fall in financial asset values, support in pricing risk premia and preserve the resilience of the financial system.
Climate change has far-reaching social and economic impacts, necessitating urgent and immediate action from various stakeholders including governments, corporates, financial regulator, and proactive action from financial institutions (FIs).
In the last few years, the momentum in the sector has built up to acknowledge that capital needs to shift to low-carbon activities. With regulatory and policy support, this has led to an increasing focus on channelling financial flows to climate action.
At the same time, there is an acknowledgement that risks posed by climate change to the economy could threaten the stability of the financial sector. Thus, FIs need to measure and manage these risks.
This brief explains some of the main ways in which FIs are responding to and participating in climate action.
Climate finance that aims to reduce greenhouse gas emissions is called ‘mitigation finance,’ and comprises 95% of all climate finance. As global temperatures rise, finance is also required to address the impacts of climate change, called ‘adaptation finance’. Currently, 98% of all adaptation finance comes from public sources.
This brief introduces the sources and uses of public adaptation finance, particularly in the context of India.
Climate change Climate change is a global problem and requires all countries to take effective, concerted, and collective action. In the early 1990s, countries joined the first international treaty, the […]