Sustainable finance has grown unevenly without fully delivering the productive investment economies need, a speech published on Oct. 27 by the Bank for International Settlements said, calling for a change in approach.
The speech, titled “Shaping the future of sustainable finance - from market growth to economic transformation”, called for attention to shift from financial labels and commitments towards financing credible business transformation.
Published in the institution’s central bankers’ speeches series, it considered how sustainable finance should develop amid competing demands for investment. It provided no figures to quantify its assessment, specified no period over which that assessment applied and described no research dataset on which it was based.
Sustainable financial products had expanded considerably, although that growth had been uneven. In some markets, the pace of expansion had slowed. The expansion of those products had not yet translated fully into productive investment on the scale that economies required.
A more mature approach would direct finance towards changes in businesses, strengthen their ability to withstand disruption and support prosperity over the long term. This would mean moving beyond a focus on financial labels and commitments to concentrate on credible changes in the businesses receiving financing.
The use to which financing was put would therefore be at the centre of the next stage in the development of sustainable finance. The shift in approach would focus attention on how financing supported business transformation and the productive investment that economies needed.
The economic setting complicated the task of making that shift. Geopolitical divisions had increased, while security and the ability to withstand disruption had become central concerns for economies.
Governments had limited room in their budgets. Alongside those budget constraints, energy costs and the ability of industries to compete had also become more prominent economic concerns.
At the same time, economies needed to fund reductions in carbon emissions, defence, digitalisation, adaptation to demographic change and infrastructure. Each formed part of the demands for investment that economies faced. Those demands competed for funds alongside the investment needed for sustainable finance to achieve its aims.
Investment needs were considerable, as were the obstacles to meeting them and the competing demands for the money available. The approach therefore required realism about the constraints within which sustainable finance operated, together with changes in how it supported economic transformation.
That meant recognising both the scale of the investment required and the obstacles to financing it, while directing greater attention towards the transformation of businesses and their ability to support long-term prosperity.
