UN report charts pathway to a sustainable investment chain

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The report, entitled 'Financial Reform, Institutional Investors and Sustainable Development: A review of current policy initiatives and proposals for further progress', was produced by the United Nations Environment Programme Inquiry into the Design of a Sustainable Financial System (UNEP Inquiry) and the California Public Employees' Retirement System (CalPERS).

"At CalPERS we have no doubt that our focus on sustainability is entirely consistent with our fiduciary duty - indeed it is an essential part of it," Henry Jones, chairperson of the Investment Committee, CalPERS, said.

"Where doubts on this score remain, they must be dispelled. And we need institutions that have the knowledge, the skills and the ways of working that are required to embed sustainability in their investments - to manage the risks it brings, and to capitalise upon the opportunities if offers. We hope every country will reflect on how it can best address these challenges," he added.

Financing gap

With an estimated annual financing gap of up to $7 trillion a year in infrastructure investments alone, the global financial system, worth more than $300 trillion, has a potential to transform the international economic landscape to better serve the needs of humanity.

"A package of measures is needed to deliver the full sustainability potential of institutional investors. Disclosure is important, but without effective governance frameworks and incentives, this will not drive sufficient change," Nick Robins, co-director, UNEP Inquiry, said.

The report advocates for systemic and dynamic policy reform that better aligns institutional investors with policy goals for sustainable development. It shows the evolution in policy intervention, from focusing on disclosure obligations and statements on investors' core legal duties to a 'second generation' approach, addressing the strong synergy between sustainability and other policy objectives.

These new policy instruments include improving prudential regulation to protect retirement incomes and ensure financial stability, regenerating the real economy, and strengthening public trust in the financial system. Making the connections among policy objectives explicit presents an opportunity to maximise benefits in multiple areas.

Policy objectives

Seven critical policy objectives that hold the strongest potential for positive change are explored in the report together with fourteen policy tools to get us there.

Policy tools include:

• Governments giving public sector pension funds, sovereign wealth funds and other state investment institutions formal sustainability obligations. Such is the case of the Government Pension Fund Global in Norway.
  
• Governments incorporating sustainability into the mandate of prudential regulators, such as the Dutch regulator DNB mission statement including 'safeguard(ing) financial stability and thus contribut(ing) to sustainable prosperity in the Netherlands'.
  
• Requirements to disclose and report on policies on sustainability issues. For example, France requires investment institutions to disclose their carbon footprint.

The report charts a pathway to a sustainable investment chain, articulating that these areas will deliver four main outcomes: resilient and efficient portfolios, capital mobilisation towards the low-carbon transition, increased economic welfare with more long-term investment and restored public trust in investors and the financial system.