• FABIO NATALUCCI, FELIX SUNTHEIM, and JÉRÔME VAN DEN BUSSCHETHE TRANSITION TO net-zero greenhouse gas emissions requires unprecedented change by companies and governments, as well as additional investment of as much as US$20 trillion over the next two decades.
Strong fiscal policies, complemented by a broad range of regulatory and financial policies, will be necessary to facilitate the green transition.
The world’s US$50 trillion investment fund industry, especially funds with a sustainability focus, can play an important role in financing the transition to a greener economy and helping to avoid some of the most perilous effects of climate change.
Sustainable funds differ from conventional funds, because they have a sustainability objective while also seeking financial returns. Within this broad class of funds, some are more narrowly focused on the environment, and a further subcategory is concerned with climate-change mitigation specifically.
The positive role of funds comes directly from their ability to influence the corporate sector. Through stewardship, which includes direct engagement with firms and proxy voting, funds can effect changes in firms’ sustainability practices.
Moreover, the growing popularity of investing in sustainable funds means more capital available to firms with a high sustainability rating, boosting firms’ bonds and shares issuance.
However, even though sustainability is becoming mainstream in investment strategies, sustainable investment funds still represent only a small fraction of the investment fund universe.
An emerging trend sees sustainable investment funds growing faster than conventional peers. Net flows into sustainable funds increased notably in 2020, and climate-themed funds grew especially fast, surging by a staggering 48% of assets under management.
So what can policymakers do to help the sustainable investment fund sector be more impactful?
Firstly, strengthen the global climate-information architecture, which includes data, disclosures, and sustainable finance classifications, both for firms and investment funds.
Secondly, proper regulatory oversight needs to be in place to prevent ‘greenwashing’, that is, ensure that labels fairly represent funds’ investment objectives.
This in turn increases market confidence and further boosts flows into sustainable funds.
Thirdly, once those elements are in place, tools to channel savings toward funds that enhance the transition become important.
* Adopted from the International Monetary Fund’s blog.
