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Sustainable Finance Synthesis ReportG20 Sustainable Finance Study GroupJuly 2018

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Sustainable Finance Synthesis ReportAcronyms and Abbreviations

ABS Asset-backed securitiesAI ArtificialintelligenceCDP CassaDepositiePrestiti(Italy)CLO CollateralizedloanobligationDCMs DebtcapitalmarketsESG Environmental,socialandgovernanceEU EuropeanUnionGDP GrossdomesticproductGFSG GreenFinanceStudyGroupoftheG20IADB Inter-AmericanDevelopmentBankIFC InternationalFinanceCorporationIoT InternetofthingsMLAI MachinelearningandartificialintelligenceOECD OrganisationforEconomicCo-operationandDevelopmentP2P Peer-to-peerPAED PubliclyavailableenvironmentdataPE PrivateequitySBG SustainabilityBondGuidelinesSBP SocialBondPrinciplesSDGs SustainableDevelopmentGoalsSFSG SustainableFinanceStudyGroupoftheG20SIBs SocialImpactBondsSMEs Smallandmedium-sizedenterprisesSPV SpecialpurposevehicleTCFD TaskForceonClimate-relatedFinancialDisclosuresUK UnitedKingdomUS UnitedStatesVC VenturecapitalWEF WorldEconomicForum

Acronyms and Abbreviations

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G20 Sustainable Finance Study GroupJuly 2018

Sustainable Finance Synthesis ReportTable of contents

Executive SummaryIntroduction

1. Creating Sustainable Assets For The Capital Markets1.1Background1.2CreatingSustainableAssetsAndExpandingDebtCapacity1.3ChallengesToCreatingSustainableAssetsForCapitalMarkets1.4VoluntaryOptionsForCreatingSustainableAssetsForTheCapitalMarkets

2. Developing Sustainable Private Equity And Venture Capital2.1Background2.2DevelopingSustainablePrivateEquityAndVentureCapitalMarkets2.3ChallengesToDevelopingSustainablePrivateEquityAndVentureCapital2.4VoluntaryOptionsForDevelopingSustainablePrivateEquityAndVentureCapital

3. Applications Of Digital Technologies To Sustainable Finance3.1Background3.2MappingOfPotentialApplications3.3VoluntaryOptionsForAdvancingSustainableDigitalFinance

ConclusionEndnotes

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Table of contents

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G20 members have adapted, under Argentina’s Presidency, the work of the Green Finance Study Group (GFSG) to the broader concept of sustainable finance, leading to the change of its name to the Sustainable Finance Study Group (SFSG). Sustainablefinancecanbebroadlyunderstoodasfinancingaswellasrelatedinstitutionalandmarketarrangementsthatcontributetotheachievementofstrong,sustainable,balancedandin-clusivegrowth,throughsupportingdirectlyandindirectlytheframeworkoftheSustain-ableDevelopmentGoals (SDGs).Aproper framework for sustainablefinancedevelop-mentmayalsoimprovethestabilityandefficiencyofthefinancialmarketsbyadequatelyaddressingrisksaswellasmarketfailuressuchasexternalities.

In 2018, the SFSG seeks to identify voluntary options to expand private investment in sustainable activities that achieve positive environmental impacts and social and economic co-benefits (e.g. job creation, growth enhancement, technological develop-ment,povertyreduction,andsocialinclusion).

Private capital is often an important source of sustainable finance. Public financealonemaynotbesufficienttomeetthedemandsforsustainablefinanceastheglobalecon-omycontinuestogrowandposesincreasingburdensonourresourcesandecosystems.Forthesereasons,G20membershavesoughttointroduceandincentivizeprivateinvestmentinprojectsthatarealignedwithsustainabilityobjectives.

Over the past years, many countries have introduced new initiatives and financial products to expand sustainable finance. Despite this encouraging momentum, the deployment of private capital for sustainable finance is still constrained due to a va-riety of institutional and market barriers. Theseincludethelimiteduseofappropriateinvestmentvehicles,andthelackofinformationorinformationasymmetryregardingtheoutcomeofsustainableinvestments.UnleashingthiscapitalmoreeffectivelypresentsanimportantopportunitythattheG20cancontributetorealizing,enablingbenefitstoitsmembersandothers.

Under Argentina’s Presidency, Finance Ministers and Central Bank Governors have mandated the SFSG to develop and assess options for voluntary adoption by members to help deploy financing, including by:creatingsustainableassetsforcapitalmarkets;developingsustainablePrivateEquityandVentureCapital(PE/VC);exploringpotential

Executive summary

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Sustainable Finance Synthesis ReportExecutive Summary

applicationsofdigitaltechnologiestosustainablefinance,takingintoaccountcountries’circumstances,prioritiesandneeds.

The SFSG stocktaking, analysis and layout of voluntary options intend to address specific sustainability-related challenges in these three areas.Keyfindings from theresearchare:

Currently,privatesectorfinancingofsustainableprojectshasbeenlargelyoriginatedbybanksandresidesontheirbalancesheetsintheformofloans.Whileacknowledgingthatbanksmayhavelegitimatereasonsforretainingtheseassetsonbalancesheets,arangeofdebtcapitalmarketproductscanprovidepathwaysforinstitutionalinvestorstofinanceorrefinancethesesustainableloans.Examplesoftheseproductsincludesustainability-target-ingbonds, coveredbonds, asset-backed securities (ABS),mortgage-based securities, andcollateralizedloanobligations(CLOs).Otherpathwaystodevelopsustainabledebtcapac-ityinvolveinstitutionalinvestorsunderwritingsustainabledebtontheirownorinvestinginfundsthatunderwritesustainableassets,andinvestingthroughdigitalplatformsfordealorigination.Allpathwaysandproductsshouldbeincompliancewithinternationalagreedregulatorystandards.

Severalchallengeswereidentifiedindevelopingsustainableassetsforthedebtcapitalmar-kets.Amongthesewere: insufficientmarketawarenessof thebenefitsof sustainable in-vestments;thelackofunderwritingcapacity;thelackofclarityforidentifyingsustainableinvestmentsaccuratelyandefficiently;andlackofeffectiveimpactreporting.

Voluntaryoptionsemergingfromtheresearchtomitigatesomeofthesechallengesinclude:

1.Raiseawarenessofthebenefitsofsustainabledebtproductsthroughcommunica-tionandeducationalinitiatives.

2.Encouragedialoguetoimprovethequalityandtransparencyofsustainabilitytaxon-omies,takingintoaccountnationalandregionalcircumstances,prioritiesandneeds.

a) Creating sustainable assets for capital markets.

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3.Facilitatetechnicaltrainingsfortheanalysisofsustainableinvestments,thedevel-opmentoftheinternalcapacityofinstitutionalinvestorstounderwritesustainabledebtproducts,andcapacity-buildingforassetmanagersinmanagingportfoliosofsustainableassets.

4.Encouragethedevelopmentofdigitalplatformsthatbringtogethersustainableassetsandinvestors.

5.Seektoidentifytheunintendedconsequencesofsustainableassetsincludingef-fectsonfinancialstabilityandrisk-adjustedreturns.

b) Developing sustainable Private Equity and Venture Capital.

Whileearly-stagecompaniesandsmallandmedium-sizedenterprises(SMEs)withposi-tiveenvironmental,socialandeconomicimpactsarecriticaltodrivingsustainablegrowth,manyofthesecompaniesfacedifficulties inobtainingadequate investmentcapital.ThegrowthofsustainableinvestmentstrategiesamongPE/VCfundsprovidesanopportunitytoaddressthelackofadequatefundingforenvironmentallysustainablebusinessmodelsandtechnologies,yettheirdeploymentisstillhindered.

ChallengesidentifiedfordevelopingsustainablePEandVCinclude:actualorperceivedlow risk-adjusted returns of some investments in sustainable technologies andbusinessmodels;theearlystageofsomesustainabletechnologiesandbusinessmodelsandtheirendmarket;misalignedreturnhorizons;establishingcleardefinitions;standardizationandver-ification;limitedmarketscaleandsophistication;complexitiesinquantifyingthepricingofexternalitiesandattimesmixedincentivestopricingthem;andanunevenlydevelopedPE/VCmarketplaceamongcountries.

Toovercomethesechallenges,thefollowingvoluntaryoptionswereidentified:

1. Promote the establishment of incubators/accelerators for sustainable start-ups

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andtheintegrationofsustainabilityconsiderationsinexistingorgeneralincubators.

2.Facilitatemulti-stakeholderdialogues toworkonthe interpretationof sustain-abilityininvestmentobligations.

3. Support the launching of demonstration projects and dissemination of goodpracticesandlessonslearned.

4.Encouragetheclarificationintheuseofstandardsformanagingsustainablein-vestmentsbyPE/VC,takingintoaccountnationalandregionalcircumstances.

5.Promotethedevelopmentofarangeofsustainableproductsandfundstructuressuitableforabroadrangeofprivateequityinvestors.

AmappingexerciseacrossG20membershighlightsemergingpracticeinapplyingdig-italtechnologiestosustainablef inance.Potentialbenefitsfromtheseapplicationsforsustainablef inanceinclude:makemoreextensive,accurateandrelevantdataavailablemorecheaplyandquickly;improvepricingofenvironmentalrisksandopportunitiesandatalowercost;reducesearchcosts;improvemeasuring,trackingandvalidationoftheapplicationofsustainabilitycriteria;unlockinnovationandinclusioninaccessingsustainablef inanceoptions,includingtheincreasedinvolvementofcitizens;encour-age new sources of f inance with an interest in sustainable development outcomes;andfacilitatenewinvestmentconfigurationsandbusinessmodels.Realizingsuchpo-tentialrequiresovercominganumberofchallenges,including:risksandunintendedconsequencesassociatedwiththedigitalizationoff inance;thelimitedunderstandingofdigitaltechnologiesandtheirinterplaywithsustainablef inance;limitedavailabili-ty,qualityanduseofsustainability-relateddataforf inancialdecision-making;nascentbusinessmodels.

Voluntaryoptionsinthisdomainare:

c) Exploring potential applications of digital technologies to sustainable finance.

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1.Raiseawarenessaboutthepotentialopportunitiesandrisksoftheapplicationofdigitaltechnologiestosustainablefinance.

2.Exploretherelevanceofsupervisoryarrangementsforapplyingdigitaltechnol-ogiestosustainablefinance.

3.Encourageinvestmentindigitaltechnologiesthatadvancesustainablefinance,suchas technologies that improve the assessmentandavailabilityof sustainablefinance-relateddata.

The above-mentioned findings can help countries in their voluntary efforts in de-ploying sustainable finance. Specifically, it can be useful tomake available the con-siderable source of long-term capital from institutional investors for the refinance ofthegrowingpoolofsustainableloansonbanks’balancesheets;inovercomingthelackoffundingforthedevelopmentofsustainabletechnologiesandofsustainablebusinessmodelsbyearly-stagecompaniesandSMEs.

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TheG20members have adapted thework of theGreen Finance StudyGroup(GFSG)underArgentina’sPresidencytothebroaderconceptofsustainablef i-nance. Sustainable f inance can be broadly understood as f inancing as well asrelated institutional and market arrangements that contribute to the achieve-ment of strong, sustainable, balanced and inclusive growth, through support-ingdirectlyandindirectlytheframeworkoftheSustainableDevelopmentGoals(SDGs).Moreover,sustainablef inancelooksafterf inancialmarketstabilityanditsoveralleff iciency.Inadoptingthemoreencompassingtermofsustainablef i-nance,G20membershaverenamedtheworkstreamasthe“SustainableFinanceStudyGroup”(SFSGortheStudyGroup).

In 2018, the SFSG is focusing on pursuing positive environmental impacts ofinvestments that could generate social and economic co-benef its (e.g. job cre-ation,growthenhancement,technologicaldevelopment,povertyreductionandsocialinclusion).

Privatecapitalisoftenanimportantsourceofsustainablef inance.Publicf inancealonemay not be suff icient tomeet the demands for sustainable f inance as theglobaleconomycontinuestogrowandposesincreasingburdensonourresourcesandecosystems.Mobilizingprivate investment inareassuchassustainable infra-structure, sustainable technologies andbusinessmodel innovations, amongoth-ers,candeliversubstantiveenvironmental,social,andeconomicbenef its.

An increasing number of initiatives across G20 members have resulted in ex-panded sources ofprivate capital for the f inancingof sustainableprojects andinabroaderalignmentoff inancialmarketswithsustainabilitytargets.Thebi-ennial 2016Report by theGlobal Sustainable InvestmentAlliance (GSIA) es-timatedthatUS$23trillionofassetsareprofessionallymanagedgloballyundersustainable investment strategies and reported a 25% increase from 2014 esti-mates.The208respondentsoftheGlobalImpactInvestmentNetwork(GIIN)2017AnnualImpactInvestorSurveycollectivelymanagenearlyUS$114billionin impact assets, a f igure that serves as themost detailed and available “floor”forthesizeoftheimpactinvestingmarket.Inaggregate,205respondentsinvest-edUS$22billion intonearly8,000 impact investments in2016andplannedto

Introduction

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Sustainable Finance Synthesis ReportIntroduction

increase capital investedby 17% toUS$26billion in 2017.1 Basedon the 2017GIIN’sannualsurvey,theGlobalSteeringGroup(GSG)expectsthatthesizeoftheimpactinvestmentmarketgloballyhasreachedUS$150billioninMay2018andwill reachUS$307billionby2020–atacompoundannualgrowthrateof18%from2015to2020.2

Basedontheseorganizations’assessmentsandotherquotedreports,thereisanincreasing pool of private investors allocating, re-allocating or wanting to al-locate capital towards a diverse array of sustainable investments across all as-setclasses,usingavarietyofinstrumentsandsustainableinvestmentstrategies.Notwithstanding,in2017,basedontheGSIAtracking,sustainableinvestmentstoodat26%ofallprofessionallymanagedassetsglobally.So,despitetheencour-agingmomentum,thedeploymentofprivatecapitalforsustainablef inancingisstillconstrainedduetoavarietyofinstitutionalandmarketbarriers.UnleashingthiscapitalmoreeffectivelypresentsanimportantopportunitythattheG20cancontributetoandbenef itfrom.

UnderArgentina’sPresidency,FinanceMinisters andCentralBankGovernorshavemandated theSFSGtodevelopandassessoptions forvoluntaryadoptionbymemberstohelpdeploysustainablef inancing,takingintoaccountnationalcircumstancesprioritiesandneeds,includingby:

a)creatingsustainableassetsforthecapitalmarkets;

b)developingsustainablePrivateEquityandVentureCapital;and

c)exploringpotentialapplicationsofdigitaltechnologiestosustainablef inance.

TheSFSGstocktaking, analysis and settingoutofvoluntaryoptions intend toaddressspecif icsustainability-relatedchallengesinthesethreeareas.

Thereporthighlights,basedonexperts’inputs,thatthedeploymentofsustain-ableprivatecapitalacrossdifferentassetclassesfacesatleastthefollowinggener-icandspecif icconstraints:

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Generic Constraints: Theseconstraintsarecharacterizedbymarketandpolicyfeaturesthatimpedeorslowdowntheflowoff inance(withorwithoutsustain-abilitybenef its)ingeneral.Examplesofsuchgeneralconstraintsinclude,amongothers,thelackoflegalarrangementssuchasthoseforspecialpurposevehicles(SPV) that can host securitized assets, the absence of exitmechanisms such asa developed initial public offering (IPO)market for PE/VC investments, andtheuneven layoutordistributionof technology infrastructure(e.g.high-speedbroadband)andmobiledevicesacrosscountries.Addressinggenericconstraintswould signif icantlycontribute topromoting thedeploymentof sustainable f i-nance;however,theyfalloutofthescopeoftheStudyGroupandassucharenotthemainfocusofthisreport.

Specif ic Constraints: These constraints refer to specif ic market and institu-tional issuesthatimpedethedeliveryoff inancialservicesalignedwithsustain-abilityobjectives.Examplesofthesechallengesare:

- Lack of internalization of environmental and social factors:when investorsconsider positive and negative sustainability-related outcomes as externali-ties,theydonotfactorthemintotherisk/returnprof ileofsuchinvestments,thusleadingtoadistortedrisk/returnassessmentfromasocietalperspective.Thelackofinternalizationofsuchexternalitiescouldresultinprivateunder-investmentinmoresustainableactivities.3

- Misaligned return horizons: somesustainableprojectsdelivertheirf inancialand sustainable benef its over longer periods of time than the ones general-ly consideredbybusiness-as-usual industrybenchmarks.Additionally, somesustainableinvestmentshaveahighercapitalexpenditure(capex)andopera-tionalexpenditure(opex)upfrontcost.4Suchamaturitymisalignmenttendstoreducetheavailabilityoff inancingtolong-datedsustainableprojects5andalso leads toa suboptimalallocationofcapitalamongthef inancingentitiesthatarebestpositionedtoparticipateatdifferenttenorsandmaturities.

- Lack of information and information asymmetry:somesustainabledevelop-mentoutcomesarenotfullytransparentorarehardtoassessduetothelack

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ofdef initions, informationdisclosureandthespecif icanalyticalcapacity inthe f inancial industry. Such information gaps increase the search costs forsustainableprojectsandreducef inancialflowstothem.6

- Lack of general clarity for identifying sustainable investments: the lack ofconsistent and reliable labeling of sustainable assets also constitutes a chal-lengetosustainableinvestment.7

- Insufficient sustainability-related analytical capabilities: f inancial institu-tions(e.g.banks,institutionalinvestors,assetmanagers,privateequityfunds)areintheearlystagesofdevelopingmethodologiesandtoolstoidentifyandassessf inancialrisksassociatedwithsustainableinvestmentsandmanyotherinstitutionsareyettobeengagedinthisprocess.

Some or all of these factors can result in missed f inancing opportunities forsustainable projects, suboptimal asset allocations, or in unintended negativeimpacts on sustainable development outcomes. Overcoming these constraintsrequires a combination ofmarket-based initiatives and policy interventions atdifferentlevels.Somecommoncomponentsidentif iedbySFSGforeffectiveac-tionsbymarketplayersinclude:

- Principles and standards:encouragingdialoguestoimprovethequalityandtransparencyofsustainabilityprinciplesfor,anddef initionsandmeasuresin,f inancialdecision-making,toenablebetterrisk-rewardassessmentandpossi-blepolicyinterventions.

- Data and analytic capabilities: improvement of the availability of qualityandlow-costdataandanalyticaltoolsforunderstandingthesustainablefea-tures of f inancial decisions, and the incentives and capabilities tomakeuseofsuchdata.

- Long-term vision:encouragingcriticalmarkettechnicalunderpinnings,suchas indices, ratings, listing requirements, performance assessment methodsandstandards,sothatf inancialdecisionmakerscantakedueaccountofthe


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longer-termimplicationsoftheirinvestmentsforsustainability.

- Innovation: supportingf inancialmarketdevelopmentsthatenablef inancialdecisionmakers tobetter advanceandassess the risksand returnsof emerg-ing, innovative investment opportunities that deliver sustainable develop-mentoutcomes, suchasamorecirculareconomyorexpandingthe lifecycleofproductsandtheaccesstoawidercustomerbasethroughplatform-basedcollaborativeconsumptionmodes8enabledbydigitalization.

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G20memberscouldsubstantiallybenefitfromsupportingthecreationofsustainableas-setsforthecapitalmarketsastheypursuethegoalofachievingastrong,sustainable,bal-ancedandinclusivegrowth.

Thisreportfocusesonthecreationofsustainablefinancialassetsforthedebtcapitalmar-kets.Forthepurposeofthissection,sustainableassets,sustainableloans,sustainabledebtandsustainablebonds refer to specificfinancialproductsordebt linked toassetsor in-vestmentsthattargetenvironmentalandsocialsustainability;however,themoregeneralconsiderationoffinancialsustainabilityisalsocontemplated.

Currently,privatesectordebtfinancingofsustainableprojectshasbeenlargelyoriginatedbybanksandresidesontheirbalancesheetsintheformofloans.9Fortheforeseeablefu-ture,banklendingwillremainakeyproviderofinvestmentfinancing,butitwillmostlike-lyfallshorttocopeonitsownwiththemassivefinancinggapforsustainableinvestmentssuch as sustainable infrastructure,battery technology, resource-efficient agriculture andsustainableshipping.10Ifsustainableinvestmentsaretorampuponthescalethatisneeded–atleastdoubling,evenquadruplinglevelsincertainsectors–,theremaybedebt-fundingcapacityproblemsshouldbanksremaintheprimaryproviderofsustainabledebtlinkedtosustainableassets.

Atthesametime,thedebtcapitalmarkets(DCMs)aretheworld’slargestanddeepestpoolofcapitalvaluedatoverUS$100trillioninoutstandingsecurities.Thetimelyandefficientshifttothesecapitalmarketsfrombankswillfreeuplimitedbanks’balancesheetscapacityforrecyclingcapitalback intoearly-stagesustainableprojectsfinancingwherebanksarebest suitedtohandletheriskofgreenfieldprojects.11Thatsaid, it isacknowledgedthatsomebanksmayhave legitimatereasonsforretainingsustainable loansontheirbalancesheet.However,forthemanybanksthatwillwantorneedtomovesustainableloansintotheDCM,itbecomesimportant12tobuildpathwaystoinstitutionalinvestors.Thesein-vestorspossess structurally13 long-termbalance sheets thatcannaturallyhold long-termdebtrelatedorlinkedtosustainableassets.14Thisimpactwillbemaximizediftheappropri-atesustainableassetsthatmeetinstitutionalinvestors’preferencesareavailable.

Arangeofdebtcapitalmarketproductscanactaspathwaystofinanceorrefinancesus-tainableloansforinstitutionalinvestors.Bankscouldanalyzethebenefitsofre-purposing15

Creating sustainable assets for the capital markets

1.

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Sustainable Finance Synthesis ReportCreating Sustainable Assets For The Capital Markets

capitalmarketproductsthataggregateandtransformsustainableloansintoanasset-backedbondformatpreferredbyinstitutional investorsandinamannerconsistentwithfinan-cialstabilityandexistingregulations.ByaggregatingandsellingsustainableloansintotheDCMs,banksandcorporateswillbeabletorefreshtheirbalancesheetsandapplythepro-ceedstounderwritenewsustainableinvestments.16Thisprocesswillservetoenhanceboththevolumeandvelocityof sustainablecapital formation.Asecondpathway todevelopsustainabledebtcapacitywouldseeinstitutionalinvestorsunderwritesustainabledebtontheirownorinvestinassetmanagementfundsthatunderwritesustainableassets.Whatismore,therehasbeenanincreasinginterest,demandandallocationbyinstitution-alinvestorsofsustainablefinancialproducts,providingasuitableopportunitytoexplorethesepathways.

In2016,theGFSG’sworkcoveredtheroleofinstitutionalinvestorsingreeninvestments17 andtheneedtomakethebankingsystemmoresustainable.Studyinghowtoexpandsustainabledebtcapacitythroughmigratingsustainableloanexposureandcashflowsonbanks’balance sheets to theDCMsorby institutional investor’sorigination is ahighlycomplementaryandtimelyresearchtopic.

This chapter reviews how pathways driven by investment products could be used forcrowdinginlong-termprivatesectorinvestorsandenablecapitalapportionmentconsis-tentwithsustainabilityobjectives.Casestudiesaredrawnupontoillustratebestpracticesinawidearrayofcountries.Italsoidentifieschallengestoincreasingsustainabledebtca-pacityandpresentsvoluntaryoptionsforovercomingthesechallenges.InputsaredrawnfromsectorspecialistsandbestpracticesfacilitatedbySFSGknowledgepartners.

Thesizeofsustainableinvestmentsneededgloballybetweennowand2030tomeettheSDGsisestimatedbytheWorldEconomicForum(WEF)tobeoverUS$100tril-lionbetweennowand2030,orUS$8trillionannually.18Forsustainableinvestments(i.e. green mortgages, electric vehicle loans, green technology corporate lending,

1.1 Background

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sustainablemasstransport,electricstoragetechnology,sustainableagricultureandcleanenergy,amongotherinvestments)in21emergingmarketsalone,theInterna-tionalFinanceCorporation(IFC)estimatesUS$23trillion19off inancingisneededuntil 2030. In advancedmarket economies, f iscal constraints have led to a reduc-tionintheshareofpublicfundsallocatedtolong-termsustainableinvestmentstoaround40%comparedwith60-65%inemergingeconomies.20Itiscleartheamountofsustainableinvestmentcapitaltheworldneedsissizablealreadyintheshort-termandneedstobecatalyzedquickly.

Bankloansare,andwillremain,acriticalsourceoff inancefornewsustainablein-vestments.Intermsofoverallvolumes,bank lendingremainsthe largestsourceofsustainable investments f inance in global markets. Whether through short-termcorporatelendingornon-recoursespecializedlending,banksprovide,forexample,roughly 80% of sustainable infrastructure f inance.21 In lowermiddle-income andlow-incomecountries,state-ownedbanksanddevelopmentbanksplayabiggerrole,especially in supporting thede-riskingof investments.Anupdate to anOrganisa-tion for Economic Co-operation andDevelopment (OECD) database on projectinterventions indicates institutional investors are increasingly interested in infra-structure investmentand showhowtheoff icial sector (e.g.DevelopmentFinanceInstitutions-DFIs-andotherpublicinstitutionsandactors)isinvolvedinattractingthisinterestbyusingrisk-mitigatingandtransaction-enablinginterventions.Loansareflexibleinthattheycanbepairedwithmanydifferenttypesofsustainableinvest-mentf inancestructures,includingpublicandprivatesponsorshipmodels.

Thebanking sector remains thekeyproviderof sustainable investment f inancing,butit is likelythatitwillnotbeable,onitsown,tof illthef inancinggapforsus-tainable investments.22For instance, thePeople’sBankofChina(PBoC)estimatesthatChinawillneed to invest at leastRMB2trillion (US$320billion)peryear ingreensectors23inordertomeettheenvironmentaltargetsunderthe13thFive-YearPlan(2016-20).Publicresources,however,willonlycoveraminorityoftheseinvest-ments.24TheEUCommissionestimatesayearlyinvestmentgapofatleastEUR180billion(US$209billion)toachieveitsclimateandenergytargetsby2030.25 Accord-ingtorecentestimatesfromtheEuropeanInvestmentBank(EIB),theoverallinvest-mentgapinsustainabletransport,energyandresourcemanagementinfrastructure

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intheEUhasalreadyreachedayearlyf igureofEUR270billion(US$313billion).26

The demand for environmentally sustainable investments already exceeds supply“with investors representingUS$24 trillion calling for the creationofmore greeninvestments(comparedwithagreenloanmarketin2014ofUS$165billion,repre-sentingonly15%of thevalueofall syndicated loans)”.27Therearevariousdriversbehindthisincreasingdemandbyinstitutionalinvestorsforsustainableinvestmentproducts,forexample,thegrowingbeliefthatconsiderationofenvironmental,so-cialandgovernance(ESG)factorsisimportanttolong-termvalueforpensionfundrecipients;theroleofreputationriskandportfolio-levelriskrelatedtosustainableissues isprogressivelyarecognizedconcernof investors;clientdemand;theclarityarisingfrompolicysignalssuchastheSDGs.28

Thespectrumofinstitutionalinvestorsiswide,involvingpensionfunds,endowmentfunds,insurancecompanies,commercialbanks,mutualfundsandhedgefunds.Thepresenceofinstitutionalinvestorsincountriesvaries;somedonothavelargedomes-ticinstitutionalinvestors;manydonothavesuff icientcapacityorremittopurchasesustainablebondsorloans.Itisneverthelesspossibleandevenroutineinsomeareasforregionalorinternationalinstitutionalinvestorstoentersuchmarketsiftherearesustainablebond issuances thatmeet their investment criteria. For example, someemergingmarkets already have a strong representation of international insurancecompaniesactiveinthecountry;andaccordingtostudies,emergingeconomiesareexpected to see a growth in their insurance market.29With such a large businessin localcurrency, reserve fundsaswell as retainedearningscouldbe invested longtermfortheirpolicyholders–anditislikelythatlocalsustainablebondswouldbeanattractivepropositionfortheirinvestmentportfolio.Sustainablebondissuancecouldbeafactorintheexpansionofinstitutionalinvestorsandcouldcrowdinnewinstitutionalcapitalandactasaco-benef ittiedtothesustainablebonds.

Hence,creatingthef inancingcapacitybyexpandingsustainablef inancialproductsandpathwayscouldsignif icantlycontributetomeetingsustainable investmentre-quirementsofthenearfuture.

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Toprovideinstitutionalinvestorswithwideraccesstosustainabledebtandtobuildsuf-ficientcapacitytomeetsustainabledevelopmentneeds,therearetwoprimarypathways.OneistheDCM,wherebanksissuesustainability-targetingcorporatebondsoraggregatesustainableloansthatcanbesoldinvariousbondformatsinlinewithinstitutionalinves-tors’preferences.Asecondpossiblepathwayistheoriginationofsustainabledebtdirectlybyinstitutionalinvestorsorthroughassetmanagementfunds.

The debt capital markets in the large global f inancial centers offer the ability toaddressthef inancingneedsofsustainableprojectsintothehandsofinstitutionalin-vestorsatbothscaleandpacewithlargedevelopedelectronicsalesandtradingplat-forms.Althoughthedebtcapitalmarketsaremostoftenassociatedwiththeselargef inancialcentersinadvancedeconomies,localcurrencybondmarkets(LCBMs)aregrowinginmanyemergingmarketsandcancontributetoamoreresilientf inancialsystem.ThereisanincreasinglyimportantroleofLCBMsasasourceoflong-termfundingforlong-terminvestmentssuchassustainableinfrastructureandhousing.

These markets imply liquidity, transparency and ratings, allowing institutionalinvestors to access thematic bonds (e.g. green bonds, social bonds, sustainabilitybonds).30Thesebondsare“anytypeofbondinstrumentwheretheproceedswillbeexclusivelyappliedtoeligibleenvironmentaland/orsocialprojects”andareregulat-edinstruments“subjecttothesamecapitalmarketandf inancialregulationasotherlistedf ixedincomesecurities.”31

Bonds provide the advantage of already being awell-established asset class in theinvestmentportfoliosofmainstreaminstitutionalinvestorsandhavesignif icantpo-tentialtotransformtheeconomyintoonethatismoreenvironmentallyandsocially

1.2 Creating Sustainable Assets and Expanding Debt Capacity

1.2.1 Debt Capital Markets

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sustainable.For instance,greenbondsissuedbyItaliancompaniesreachedatotalvolumeofnearlyUS$6billionbymid-January2018.Ofthistotal,78%wasissuedfromtheprivate sector,12%fromthepublic sectorand the remaining10%fromf inancial organizations.The Spanish global energy provider Iberdrola has issuedgreenbondstof inanceitsemissions-freedevelopmentsandtorespondtogrowingliquidityneedsas institutional investorsare increasinglydemandinggreen invest-ments.From2014todate,thevolumeoftheirgreentransactionswithinthecap-italmarketsamounts toalmostEUR8.15billion (US$9.48billion).32TheFrenchgovernmenthas fueled the greenbondmarket inFrance (see theEUR9.7billion-US$11.3billion-)SovereignGreenOAT).Frenchutilitiesareamongtheworld’slargest green bond issuers: SNCF réseau, the railways company, EDF and Engie,theenergycompanies,haveissuedseveralbillionsEurosingreenbonds.Mid-sizedcompaniessuchasNeoen,AkuoEnergyandFoncièreINEAarealsostartingtois-suegreenbonds.Furthermore,severalFrenchassetmanagershavelaunchedfundsdedicated to green bonds, such as those byMirova/Natixis, Amundi, Axa, BNPParibas,CréditMutuel.

Bondshavelongbeentheassetclassfavoredbypensionfundsandinsurancecom-panies.OECDinstitutional investors(investmentfundsandassetmanagers)con-troluptoUS$84trillion33inassets–andOECD-basedassetowners(excludingin-vestmentfunds)managearoundUS$54trillion.34Bondswithlongermaturitiesarepotentially a good f it with institutional investors’ long-term liabilities, allowingfor asset-liabilitymatching. For example, Ferrovie dello Stato Italiane issued thef irstEuropeangreenbondbyanincumbentrailwayoperatortof inancebothnewregionalandhighspeedtrainsinNovember2017.TheEUR600million(US$700million) issuancehadmore than60%demand fromforeign investors andaround50%off inalordersfrominstitutionalinvestorswithasustainabilitycommitment.TheexecutionallowedFerroviedelloStatoItalianetosetitscouponatthelowestpriceeverobtainedinapublicbondissuance.35

There are many types of bonds and all variations that can be structured to tar-getprojectslookingtogenerateenvironmentalandsocialsustainabilityoutcomes.Chart 1 shows thepotential growthofdifferent typesofbonds in the f inancingforsustainableprojectsduringtheperiodof2015-35,asprojectedbytheOECD.36

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Sustainability-targeting bonds:Thethreebondsdescribedbelowhavesimilarstruc-turesbuttheuseofproceedstargetseitherenvironmentalorsocialgoalsofsustain-ability, or both.These bonds are issued by entities that are tied to a sustainabili-ty-themed‘useofproceeds’butsecuredagainsttheentirebalancesheetoftheissuer.Basedontheavailableprinciplesandguidelines37createdandusedbythemarket(i.e.theGreenBondPrinciples(GBP),SocialBondPrinciples(SBP)andSustainabilityBondGuidelines(SBG)):

CHART 1 :

Low-carbon Asset -backed and F inanc ia l Sector Bonds Have the Largest Potent ia l to Sca le up , 2015-2035

Note: SSA: supranational, sub-sovereign and agency; ABS = asset-backed security; CLO = collateralized loan obligation. The figure depicts the base case “low-securitization scenario”. Bonds in the People’s Republic of China, Japan, the EU and the United States.

Source: OECD (2016), A quantitative framework for analysing potential bond contribution in a low-carbon transition (a contribu-tion to the 2016 G20 Green Finance Study Group); OECD (2017), Mobilising Bond Markets for a Low-Carbon Transition, Green Finance and Investment, OECD Publishing, Paris

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•Greenbondsenablecapital-raisingandinvestmentfornewandexistingproj-ectswithenvironmentalbenef its.

•Socialbondsarebondsthatraisefundsanddirectthe ‘useofproceeds’to-wardsnewandexistingprojectswithpositivesocialoutcomes.

•Sustainabilitybonds lookfortheapplicationofthe ‘useofproceeds’bondconcepttobondsf inancingbothgreenandsocialprojects.

Therearecurrentlyfourtypesofbondsthatf itunderthesethreethematiccategories:

•StandardUseofProceedsBond:Astandardrecourse-to-the-issuerdebtobli-gationalignedwiththeGBP/SBP/SBG.

•Revenue Bond:A non-recourse-to-the-issuer debt obligation alignedwiththeGBP/SBP/SBGinwhichthecreditexposureinthebondistothepledgedcashflowsoftherevenuestreams,fees,taxes,etc.andwhoseuseofproceedsgoestorelatedorunrelatedproject(s).

•ProjectBond:Aprojectbond for a singleormultipleproject(s) forwhichthe investorhasdirectexposure to theriskof theproject(s)withorwithoutpotentialrecoursetotheissuerandthatisalignedwiththeGBP/SBP/SBG.

•SecuritizedBond:Abondcollateralizedbyoneormore specif icproject(s)includingbutnot limitedtocoveredbonds,ABS,MBSandotherstructuresandalignedwiththeGBP/SBP/SBG.Thef irstsourceofrepaymentisgener-allythecashflowsoftheassets.

Whenbanks issuethef irstof these typesofbonds, theyareusingtheproceeds tofundlendingtodef inedprojects.Thisappliestoprivatecommercialbanksaswellasnationaldevelopmentbanksandotherformsofsovereign,supranationalandagen-cy issuers.KfWisanexampleofa frequent issuerofgreenbonds thatareused tof inancegreenlendingactivities(Box1).

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Mostofthegreenbondsissuedtodatearebondswheretheuseofproceedswillfundenvironmentallysustainableprojectsoractivitieswithinanentityandwillbesecuredbytheentirebalancesheetoftheissuer.Suchbondsareimportantprovidersofsustain-ablef inance,astheygivemainstreamf ixedincomeportfoliomanagersanopportunityforeasilyfundingtheentitiesthataredirectlyf inancingthesustainableprojects.

In addition to these corporate issuer-backed bonds that target sustainable projects,thebondmarketcanplayasignif icantlylargerrolewhenaggregatingbankloansandissuingasset-level(backed,supportedorlinked)bondstargetingsustainableprojects.Thefollowingarevariationsoftheseaggregatedbondscoveredbythepaper:

Sustainability-targetingABS, includinggreenresidentialmortgage-backedsecurities(RMBS):Thesesecuritizedbondsconsistsofbanksorf inancialcorporates identify-ing,taggingandpoolingloansorreceivablestargetingenvironmentalorsocialsustain-abilityoutcomes,andsellingthemasabondinsideaspecialpurposevehicle(SPV).Thesebondstendtobe“truesales”andmoveriskoffofbanks’balancesheets.Exam-plesof this are the IADBcase study inMexico,where small energyeff iciency loanswerepooledandsoldasABS,andthecaseofFannieMaethatpoolsandsellsgreenresidentialmortgages(Box1).

Thereispotentialforasignif icantexpansionintheoriginationandsubsequentissu-anceofABSasperceivedrisksfall.38Thestandardizationofprojectsandpolicysup-portcanenablethepoolingofindividualloans,whicheffectivelytiesbondstoagroupofassets, rather thanto individualassetsorcorporates.Comparedtoprojectbondsthatgenerallybackindividualprojects(orcollectionsoflargerscaleassetsconcentrat-edinwindandsolarfarms),ABSaremoreeff icientvehiclesforaggregatingpoolsofindividualloans.AparticularlyinnovativeexampleofsustainableABScanbefoundintheMexicanissuanceofabondsupportedbysmallenergyeff iciencyloans.AccordingtoquantitativeanalysisbytheOECD,annualABSandCLO(seebelow)issuanceisseenashavingthepotentialtoreachUS$280-380billioninthe2031-35periodinthebaselineandenhancedsecuritizationscenarios,respectively(orbetween44%and52%ofannualissuance).

Sustainability-targetingCLObonds:ThesebondsareissuedbyaCLOvehicleandact

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asitsliability.Assetmanagersissuesustainability-targetingbondstopurchasesustain-ableloans,managetheloansandpaythebondcouponwithproceedsfromthepoolofloans.Traditionally,CLOswerepopulatedwithleveragedloansandhigh-yieldbonds.ACLOwouldpurchase sustainabledebtdirectly fromabank, involvinga true saleanda reductionof risk exposure fromthebanks’balance sheets.This is apowerfulstructurethatcouldbere-purposedforlong-termsustainableloans,providingmanybenefits.First, loanamountsandtenorstendtobesmallerthanbondissuancesandareincreasinglyaccessiblebyagreaterrangeofentitiesincludingSMEsandindividu-als.Thisimpliesbetteropportunitiestoaddresssmaller-scaleprojectf inance.Second,the scalingupof these smaller loansmakes the returnon the income streamsmorecommerciallyattractive.Third, akeycharacteristicof this structure is its flexibility.Unlikesustainability-targetingbonds,bankloansaregovernedpredominantlybyasetof (bilateral)contracts, sothe loandocumentationcanbetailoredto individualcir-cumstances.Thisenablespenaltymechanisms(ashigherinterestratesontheloans)incaseitfailstousetheproceedsforsustainabilitypurposesortoaccomplishestablishedsustainability targets, disincentivizing the potential for risk of “greenwashing”.39 A simulatedSustainableEnergyCLOcaseisbeingdevelopedbySEB,WhiteandCase,Standard&Poor’sandOckZiffcontemplatingtheinstitutionalinvestorsmarketintheEuropeanUnion.Thepurposeofsuchexerciseistounderstandtheriskandper-formanceofsuchanentity.40

Sustainable project bonds:Thesearebondsissuedspecificallyforandsecuredbyasus-tainableinfrastructureproject.ThecaseofMeerwind,anoffshorewindfarmprojectinGermany,isagoodexampleofaprojectbond:aprivateplacementbondfallingunderRule144A(41)wasissuedtoinstitutionalinvestorstocanceltheloanfromthebankthathadfinancedthewindfarm’sconstruction.

Sustainability-targeting covered bonds: Thesearesustainableasset-supportedbondsthatpossesstheguaranteeoftheissuer.Coveredbondscarrytheguaranteeofanissuingbankandusepledgedloansasadditionalcollateral.Inthiscase,thebanksstillowntheloansbutgetsuperiorpricingduetothecreditenhancementofthegreencollateral.Althoughcoveredbondsdonottransferriskoffofbanks’balancesheets, it is stillan importanttooltoreducecostoffundsandreachadeeperliquiditypoolbyexpandingtheirinves-torbase.TheBankofChinaissuedalandmarkcoveredgreenbondinLondonin2016,whichobtainedsuperiorpricingandwideneditsinvestorbase(Box1).

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Ahealthymarketforsecuritizationcandeliversignificantfinancialandsocialbenefits.Forexample,theFannieMae’sGreenMortgageprogram(Box1)provideslow-pricedmortgag-estohomesthatareenergy-andwater-efficient.Fromahigh-levelperspective,asameansofefficientlychannelingfinancialandeconomicresources,securitizationsupportseconomicgrowthandfinancialstabilitybyenablingissuersandinvestorstodiversifyrisk.Byopeningupnewavenuesforraisingcapital,securitizationcanaidindiversifyingthefundingbaseoftheeconomy.Itcanalsohelpfreeupbankcapital,whichcouldpotentiallyallowbankstoextendnewcredittotheeconomy.42

Effortsarealreadybeingputinplacebypolicymakersgearedatmitigatingrisksandensur-ingthatsecuritizationmarketscontributetoeconomicgrowthandfinancialstability,suchastheEU’sCapitalMarketsUnionActionPlan,theSolarAccesstoPublicCapitalInitia-tiveintheUnitedStatesandinitiativeselsewhere,includinginChina.43 Thisrevitalizationcanbeachievedinalargemeasurebystandardizingtheassetsandbymakingsafer,simplerandmoretransparentthesecuritizationprocessandthemarketactivityitspurs.Theuseofsecuritizationasaninstrumenttoachievesustainableoutcomesmust,andwouldinprin-ciple,beundertakeninaprudent,judiciousandtransparentmannersothatABSmarketsemergewithintegrityandwithdueconsiderationforanyfinancialstabilityissues.

Beyondaggregatedbonds,thebondmarketprovidesgreaterflexibilityandmoreoptionsforfreeingupcapitalafterithasbeendeployedfortheearlyphaseofsustainableprojects(i.e.uponthe“exit” fromthedevelopment stageof sustainable infrastructureprojects).Bondscanhelpinincreasingthespeedatwhichcapitalcanbe“recycled”backintodevel-opment,constructionandearly-stagerisks,andalsohelpstoattractadditionalearly-stagefinance.Investorsaremorelikelytoinvesttheircapitalinconstructionphasesifthereisacredibleandpredictablelow-costexitonceassetsbecomeoperational.44

Althoughtheamountofsustainablefinanceneededinthemediumtermtofinancethepath toa sustainableeconomy is staggering, the fundsavailable fromlong-term institu-tionalinvestorsaresizableandmostlikelyenoughtomeetthechallengeofachievingtheSDGs.45 Hence,itisimportantforthepathwaysdescribedabovetobeeffective.Financialproductsoralternativedebtoriginatorscouldbedesignedtodeliversustainabledebtfol-lowingestablishedmarketpracticessuchastheGreen,SocialorSustainableBondPrinci-ples.Thiswouldfacilitatethecrowdinginofsustainablelong-terminstitutionalinvestors.

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Box 1:

Examples of Sustainable Assets for the DCMs

1. Green Covered Bond: Bank of China expanded its international investor base and liquidity by having “green loans” on its balance sheet “tagged” and used as additional security in a green covered bond issued in London. Further, the green over-collateralization of loans allowed the bank to obtain superior pricing.

2. Instituto Costarricense de Electridad (ICE) B Bond: Costa Rica hydropower plant f inancing included an innovative structure by IADB invest that allowed the B bond to be sold to international institutional investors.

3. Invenergy B Bond: Uruguay wind farm that placed B Bond by IADB with US institutional investors under a 4(a)(2) structure.

4. Bank Negara Malaysia: The Central Bank of Malaysia launched the f irst green sukuk in the world on 27 June 2017. The sukuk green Islamic bond targeted pro-ceeds to be used to fund specif ic environmentally sustainable infrastructure proj-ects, such as the construction of renewable energy generation facility.

5. Caja Rural Navarra Covered Bonds: The Spanish cooperative bank has issued sustainable covered bonds for a total amount of EUR1 billion (US$1.16 billion) according to its Sustainability Bond Framework.

6. Energy eff iciency green ABS: IADB purchased receivables of small energy eff iciency projects and issued a green ABS in Mexico. This was the f irst energy eff iciency backed bond issued globally and was sold in the regions’ local capital markets.

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7. Fannie Mae Multifamily Green residential mortgage program: United States issuer of residential mortgages aggregated and issued into the US capital markets US$21 billion of green mortgages in 2017.

8. KfW 2018 Swedish Krona (SEK) Green Bond Issuance: German KfW issued a SEK green bond (EUR612 million equivalent, or US$710 million) and was able to broaden its green investor base with issuances in a non-Euro currency.

9. Garanti Bank Green Mortgage Covered Bond: Turkish Garanti Bank issued a US$150 million equivalent green covered bond.

10. Blackstone Group Meerwind Financing: German offshore wind develop-ment that had construction financing taken out by a 144A bond sold to institu-tional investors in the UK market.

11. Enel Finance International N.V.: Placed two green bonds in January 2017 and 2018, backed by a guarantee issued by Enel S.p.A., of EUR1.25 billion (US$1.45 billion) each. The eligibility of funded projects was set in accordance to the Green Bond Principles. The issuances followed the Group’s 2017-2019 Strategic Plan, which contemplated the refinancing of EUR12.4 billion (US$14.4 billion) for projects related to the low-carbon economy transition.

12. Cassa Depositi e Prestiti (CDP): The Italian National Promotional Institu-tion controlled by the Ministry of Economy and Finance issued a EUR500 million (US$580 million) 5-year social bond on November 2017, with Vigeo Eiris as sec-ond party opinion. It was the f irst ever social bond issued in Italy and Europe that targeted areas affected by natural disasters. The proceeds fund Italian SMEs eli-gible under the CDP Social Bond Framework criteria, consistent with the ICMA Social Bond Principles.

13. Instituto de Crédito Oficial (ICO) issuances of social bonds: The Span-ish f inancial agency under the Ministry of Economy has issued a total volume of

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EUR2 billion (US$3.2 billion) of social bonds since 2015. The funds raised via the social bonds are used to f inance Spanish SME projects in those regions where income per capita is below the national average. ICO has been certif ied as a “re-sponsible issuer” in order to launch its social bonds by Sustainalytics.

14. KfW: In 2017, EUR14 billion (US$16.2 billion) have been provided by Ger-man promotional bank KfW to increase energy efficiency in the residential build-ing sector. KfW provides loans to commercial banks, who on-lend the funds to their customers. On the other hand, KfW refinances its activities primarily by issuing bonds in the international capital markets and receives high sustainability ratings scores. Thus, by investing in KfW bonds, investors support the availability of bank loans for sustainable projects.

15. Berlin Hyp: In April 2015, the German bank became the f irst issuer of a Green Mortgage Pfandbrief, i.e. a German law-based covered bond that is used to refinance loans for green buildings. Berlin Hyp offers its borrowers a discount of 10 basis points on loans for green buildings. As of May 2018, the volume of Berlin Hyp’s green finance portfolio reached EUR3.3 billion (US$3.8 billion), represent-ing an increase of 500% since the issuance of its f irst green bond.

16. Amundi Planet Emerging Green One (EGO): In March 2018, the World Bank Group’s IFC and the French asset manager Amundi launched a fund target-ed at investing in green bonds focused on emerging markets, expecting to deploy US$2 billion over its lifetime.

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Underwriting of sustainable debt directly by institutional investors: Insurance com-panies andpension funds could provide a highly scalable pathway to increase sus-tainabledebt capacity. In this case, institutional investorswouldbypassbanks anddirectlyunderwritelong-termsustainableloansontheirbalancesheets.Suchunder-writingactivitiesbyinsurancecompaniesaretakingholdinsomecountries(Germa-ny,UKandUS, amongothers). It is important tonote these f irmsoperatewithincountry-specif icregulations.Notalljurisdictionshaveasuff icientlydevelopedinsti-tutional investorbase;however, asnotedabove, international insurancecompaniesare actively entering emergingmarkets and can be a new source of local currencysustainabledebt.

Development of sustainable asset funds and management companies: Independentfundswouldpurchaseororiginatesustainabledebtandmanagetheportfolio.Insti-tutionalinvestorswouldinvestinfundsandreceivereturnsbasedonthecashflowofthesustainableloans.HermesAssetManagementSustainableCREandIonaCapital(Box2)aretwogoodexamplesofnon-banksustainableassetmanagementcompaniesthatdirectlyissueandretainsustainablecreditandequity.Alternatively,theBBOXXcasestudyshowsaf inancialstructurethatsupportsasolarenergykitmanufacturerthatbundlesupreceivablesandsellstheaggregateddebtobligationsasasecuritiza-tiontoOikocredit,aDutchcooperativeandsocialinvestoroperatinginternationally(Box2).Fromapolicyperspective,theFrenchlegalframeworkhasbeenmodernizedwithamendments introduced in2013and2016 toallow insurancecompanies andfundstounderwriteloansundercertainconditions.Francehasalsoworkedonitsse-curitizationlegalframework,enlargingthelegalcapacityofcertainfundstoacquireoutstandingdebtsfromthenon-bankf inancialsector.

Generally, available data suggests intermediated investment through funds is a pre-ferredwayforinstitutionalinvestorstoenterthemarket:adatasetoninstitutionalin-vestmentswithinvolvementofactorsfromtheoff icialsectorshowsthatcloseto90%oftheseinvestmentactivitieswereintermediatedinvestments,bothequityanddebt.46

1.2.2 Origination of Sustainable Debt by Institutional Investors or Through Sustainable Funds

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Private digital platforms for the origination and distribution of sustainable loans: Currentandemergingcrowdfundingorotherdigitalplatformstargetingsustainableinvestments could aggregate sustainable loans and sell them to institutional inves-tors.Digital technologies, such as digital contracts andblockchain technology, areprogressivelyappliedtofunctionsthatcouldmakepossiblethesellingofsustainabledebtquicker,more transparentlyandcheaper.Topic3of theSynthesisReportex-ploresthispossibleapplicationofdigitaltechnologiesfurther.

Box 2:

Examples of Investors’ Origination of

Sustainable Debt

1. Iona Capital: UK-based asset manager that directly underwrites subordinate debt in environmental infrastructure projects. Iona’s investments allow UK in-stitutional investors to access sustainable projects cash flows.

2. Hermes Investment Management: UK-based Hermes underwrites its own sustainable debt and equity for energy-eff icient and sustainable commercial real estate. The asset manager has determined its focus on ESG factors delivers supe-rior returns and a reduced risk of default.

3. BBOXX: Kenya and UK securitization where future receivables from Kenyan purchasers of solar energy were bundled and a US$500 million bond was issued and sold to Oikocredit.


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4. Prudential Insurance: UK insurance and pension provider that has developed internal capacity to underwrite sustainable infrastructure via its internal fund.

5. Crédit Agricole CIB: A socially responsible US$3 billion private synthetic risk transfer was completed by the French bank to Mariner Investment Group LLC through a Green Capital Note. Crédit Agricole CIB aims to redeploy the freed up regulatory capital in new lending for green sectors contributing to achieving the SDGs.

1.3 Challenges to Creating Sustainable Assets for Capital Markets

Generalchallengestocreatingassetsforcapitalmayinclude,amongothers,theneedto have appropriate risk ratingmodels, the creation of adequate riskmanagementproducts (e.g. derivatives, insurance contracts) and the encompassing robust andeffective market regulation. In addition to these generic challenges, a number ofchallengesarespecif ictothecreationofsustainableassetsfordebtcapitalmarkets.Amongthese,thefollowingwereidentif ied:

1. Lack or insufficient awareness of the potential benefits and invest-ments opportunities:Thispreventsgeneratingthe institutionalcontextsandem-powerment thatcould triggeranaccelerationofpossibleactions ingeneral, and incapacity-buildinginparticular.Investorsarerecognizingagreaterinterestinenviron-mentalandsocialsustainabilityamongtheirstakeholders(e.g.clientsandfundmem-bers),buttheirfocusisstilllargelydrivenbyf inancialconsiderations(i.e.risk-adjust-


36


edrateofreturns).47 Increasingprivatesectorresearch48onthecorrelationbetweenESG-mitigatedrisksandbetterreturnswithinsomeassetclassesishelpingraiseun-derstandingamongmarketstakeholders.Likewise,theexistenceandinvolvementofpubliclycapitalizedgreeninvestmentbanksinsustainableinvestmentshasbeencon-ducivetoinvestmentactivity.Dataoninstitutionalinvestmentswithinvolvementofactorsfromtheoff icialsectorshowsasignif icantnumberoftransactionsinvolvinggreen investment banks.49Nevertheless, for the timebeing, the generally prevalentlackofawarenessofthematerialityofenvironmentalandsocialfactorsretardstoalargeextenttheirinternalization,thusleavingthemasexternalitiesandnotfactoringthemintotherisk/returnequation.

2. Lack of capacity for underwriting sustainable assets: Banks, institu-tionalinvestorsandotherkeystakeholdersinthef inancialmarketslackknowledge,skills and empowerment to identify and evaluate eligibleprojects and risks to ade-quately structure, sell andmanage these sustainable f inancial products.That said,someinvestors,aswellasdiversenetworksandorganizations,arenowbeginningtodevelop the tools and trainingneeded togo fromraisingawareness toaction, suchassustainabilitydef initions,evaluationmetrics,forward-lookingenvironmentalriskassessments,andrelatedreporting.

3. Competing sustainability classifications and taxonomies: Asreferencedby the work of the Task Force on Climate-related Financial Disclosures (TCFD),therearemanydisclosureframeworks(e.g.GreenBondPrinciples,ClimateDisclo-sure Standard Board Framework, AssetOwnersDisclosure Project).50While theseinitiativesprovidefurtherguidancetomarketplayersthatwishtoemploythem,theexistenceofvarioustoolsthatarenotalwayscoordinatedorclearenoughmaymisstooffertheconsistencyortransparencylookedforbyinvestors.Therecommendeddis-closuresoftheTCFD,althoughdirectedatcompanies’climate-relatedf inancialrisksratherthansustainabilityclassif ications,mayprovideastandardizedcommonframe-workfordisclosuresinthisarea,helpingpromotealignmentacrossexistingregimes.Frameworks developed could benef it from following a proportionality approach.Severalmarketparticipantsarenow inpursuitofamorecommonterminology foridentifyingsector-specif icsustainabilityfactorsandmeasuringthecapitaldifferen-tialofmoresustainableenterprises.51IntheEU,theEuropeanCommissiontableda

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legislativeproposaltodevelopanEUclassif icationsystemforsustainableeconomicactivitiestofacilitatesustainablef inance.Theabsenceofcommonlyagreedclassif i-cationsandtaxonomies insustainablef inancemayalsogivespaceforsomelevelof‘greenwashing’,possiblemisunderstandings,andfurthertransactioncoststounder-standtheoriginators’viewonsustainability.

4. Inconsistencies among available sustainability standards and labels: ResearchbytheIFCthatbuiltontheworkoftheG20GFSGoninstitutionalandmarketbarrierstoscalingupgreenf inancerevealeda lackofconsistencyinmarketterms and standards of green f inance.52 This extends to the broader space of sus-tainablef inance.Acertif iedlabelsignalscompliancewithstandardsandproceduresthatalignwithstatedsustainabilitycriteriaandtaxonomies.The lackof,orunder-developedcertif ied labelshindersthe identif icationofsustainable loanstobemar-ket-ref inancedorsecuritized.This,inturn,challengestheeasewithwhichinvestorscancomparedifferentinvestmentproductsandmakeinformedchoices.Inthebondspace,forexample,countriesarebeginningto,orhavealready,setstandardsandco-ordinationbodies.Forexample,ChinahasestablishedaGreenBondsStandardCom-mittee, a regulatory supervisionbody that oversees thepractices of bond verif iers.ASEANhas issued itsgreenbondguidelines. InSouthAmerica,Argentina,Brazil,Chile and Peru have issued or are in the process of issuing their own green bondguidelinestoprovideamarketstandardforpotentialissuers.TheEUisexploringthepossibilityofdevelopingEUgreenbondstandardsandextendingtheEUEcolabeltocertainf inancialproducts.Whilethesestepshelpformalizethegreenbondmarket,variabilityinstandardsacrossregionscarriesitsownrisksasitmayconfuseinvestorsand increasetransactioncostsforcross-bordercapital flows lookingforsustainableinvestmentopportunities.

5. Complexity of project f inancing in public services sectors with high sustainability impact: Public services (e.g. sewagetreatment,energy,mass trans-portation)candeliver importantpositive environmental, social andeconomic im-pacts.Thefullbenef itsofinvestmentprojectsintheseindustriesareoftenhardtomeasureduetomultiplestakeholdersinvolvedintheinvestments.Inthesecases,theinvestmentprocessmaybelengthierandrestraininvestorsfromdeployingavailablesustainablef inancingcapital.

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6. Superficial or unsophisticated sustainability-related impact report-ing:Theunevendevelopmentanduseofsustainabilitymetricsforimpactreporting,bothquantitativeandqualitative,hindertheavailabilityoftransparentandrelevantinformation generating ambiguity for issuers and investors. This would also chal-lenge the integrity of themarket. Further, lending to impact funds and impactfulcompanieshasnotrampedupasmuchasothersetsofsustainabledebtproductssuchasgreenbonds.These investmentsareoftenperceivedas lower-yielding thanothersustainableinvestments.

To ensure that the whole array of environmental, social and economic benefits brought by sustainable finance are realized, the work towards addressing the aforementioned challenges must be diligent in assessing possible unintend-ed consequences.Thedevelopmentof sustainabledebt to long-term institutionalinvestors using the pathways, products and structures outlined above needs to bevigilanttoavoidnegativeunintendedconsequencessuchasmarketinstabilitycausedbyoverleveragedstructuredproducts.Inthatregard,thedevelopmentofstructuredf inance shouldbedone in anorderlyway,payingdue regard to the f inancial risksinvolvedandincompliancewithallinternationalagreedregulatorystandardssuchastheBaselCommitteeonBankingSupervision(BCBS)standardspertainingtoSimpleTransparentandComparablesecuritization,orSimpleTransparentandStandardizedsecuritizationintheEU.53

G20members could benef it from the development and use of existing productsand f inancing techniques to increase sustainable capitalmarket products and al-ternatives thereof.Amongthesepathwaysare:debtcapitalmarkets,direct saleofsustainableassets,ordigitalplatforms.Basedonthecasesanalyzed,bestpractices,andconsultationwithplayersfromtheprivatesector,thefollowingvoluntaryop-

1.4 Voluntary Options for Creating Sustainable Assets for the Capital Markets

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tionscouldbeconsideredbycountriestoaddressthechallengesidentif iedabove:

1. Raise awareness of the benefits of sustainable debt products through communication and educational initiatives. Policymakers, f inancial trade or-ganizationsandleaderswithinf inancialandinvestmentcompaniescouldactivelydevelopdifferenttypesofinitiativestoraiseawarenessontheneedforsustainablef inanceandtheproductsandpathwaysadvancedherein.Toensuresuff icientex-pertiseandcompetency, initiatives spreading sustainable f inance literacy forpro-fessionals such as pension advisors could be put forward. Understanding of thewhole array of benef its (e.g. reduction of negative impacts on the environment,creationofjobs,betterriskmanagementoff inancialinstitutions)couldbeincor-porated in such initiatives, togetherwith insights on themateriality of differentenvironmentalandsocial factors.Organizationsandforumssuchas theG20, theFinancialStabilityBoard(FSB),theBankforInternationalSettlements(BIS),theOECD and other key international organizations can continue to communicatetheir researchandprojectionsand the implications to thewell-being.Task forcesthatbringtogetherkeyprivateandpublicstakeholderscanbeusefulplatformstocatalyzeideasandactionsatdifferentlevels(e.g.national,sub-national,regional).Examples in this space include themulti-stakeholder green f inance task forces intheUK54andintheNetherlands.55

2. Encourage dialogue to improve the quality and transparency of sus-tainability taxonomies, taking into account national and regional circum-stances, priorities and needs. Relevantplayerscouldindividuallyorcollectivelyconvene to improve the quality and transparency of sustainable taxonomies andstandards.The support of organizationswith conveningpower such as theG20,andwithtechnicalcapacitysuchasUNEnvironmentandtheOECD,amongoth-erscouldfacilitatetheneededspaceandresourcesforeffectiveexchanges.

3. Facilitate technical training and capacity-building among key stake-holders in the sustainable debt market:

i. Facilitate technical training for the analysis of sustainable investments. De-velopment of the necessary skills to identify and evaluate the risks and op-

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portunitiesofsustainablef inance.Thiscanbedonebyuniversitiesaswellaseducationaldivisionsoftradeorganizations.Curriculashouldbedevelopedto teachunderwritersand investorsalikeonhowtocollect sustainabledataandconductsustainableriskanalysis.Trainingsshouldalsocoversubjectsofevaluationmetricsandtools.

ii. Promote the development of the internal capacity of institutional investors to underwrite sustainable loans on their own.Inthiscase,asdemonstratedbycertaininstitutional investors, in-housecapacitycouldbebuilttooriginate,monitorandserviceaportfolioofsustainabledebtproducts.

iii. Promote capacity-building for asset managers in managing portfolios of sus-tainable loan assets for long-term investors.Likeinstitutionalinvestors,assetmanagerscanmoveintothesustainableloanmarketforsmallerinstitutionalinvestorsthatmaynothavethesuff icientinternalcapacitytomanageororig-inate sustainable loanson theirown. Institutional investors eager toobtainexposuretosustainableinvestmentscandrivethisopportunity.

iv.Promote the development of asset managers who oversee sustainable CLOs. CLOshavebeenapowerfulmeanstomoveloansfrombanks’balancesheetsinto theDCM via the issuance of liabilities to gain the funds to purchasethe sustainable loans. The asset managers could oversee the loan portfoliolike bankswould.By taking the loans into their SPV, thebanks are able togainbalancesheetcapacityviaatruesale.Bondtradeorganizations,informedbanks and f inancial service law f irms could drive the development of thisopportunity.Thedevelopmentof sustainableCLOs shouldpaydue regardtof inancialrisksandensurethatsuff icienttransparencyandsimplicityareapartofthestructures.

v.Promote the development of knowledge on sustainability-related risks and risk-adjusted returns in the debt capital market. Thiscouldsubstantially fa-cilitatetheissuanceofbonds,coveredbondsandsustainableasset-supportedbondstargetingsustainabilityoutcomes.

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4. Encourage the development of digital platforms that bring togeth-er sustainable assets and investors. Thistypeofleapfroggingtechnologycouldallowbankstorenewandrefreshtheirbalancesheetstosustainableinvestorstap-ping into reductions of operational andmarket risk and transaction costs for allcounterparties, generating an opportunity to facilitate access to long-term inves-tors. It therefore allows the emergence of additional capacity to underwrite newsustainable loans.Manyofthesetechnologies,andtheirpossibleapplications,arecurrently nascent, Chapter 3 provides amapping and preliminary assessment oftheirpotentialusefulnessforcreatingandtransactingsustainableassets.

5. Seek to identify the unintended consequences of sustainable assets including effects on f inancial stability and risk-adjusted returns.Developorapplyf inancialmodelingandotherriskidentif icationtechniques,asstudiedbytheGFSGin2017duringtheGermanPresidency,tohelpdevisepotentialunintendedconsequences related to sustainablebonds supportedby sustainableassets.Theseunintendedconsequencescouldbenegative intheformofexcessive leveragethatmay lead to f inancial stability issues or inferior performance resulting in poorerthanexpectedrisk-adjustedreturns.Thesepotentialconsequencesshouldbecon-sideredalongsidethedesiredpositive impactsaswellaspotentiallyunanticipatedpositiveconsequences.

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Sustainability-driven innovation offers an opportunity to boost economic growth, im-provelivingstandards,andgenerateavarietyofemploymentoptions,whilekeepingourecosystemshealthy. Such innovation is constantly createdbybusinesses, at all stages ofdevelopment.Thesebusinessesdevelop,applyandadaptbreakthroughtechnologiesandinnovativebusinessmodels.While youngand small sustainable companieswith aposi-tiveenvironmental,socialandeconomicimpactsarecriticaltodrivingsustainablegrowth,manyofthesecompaniesfacedifficultiesobtainingadequateinvestmentcapital–therightquality,therightquantity,andattherighttime.Privateequityandventurecapital,charac-terizedbyofferingyoungandsmallcompaniesacombinationofriskcapitalandexpertise,isoftenthemostsuitableformofinvestmentforthem.

Thischapter reviews the international experienceof sustainablePEandVCfunds,dis-cussesthekeychallengestofurtherdevelopthesustainablePE/VCmarket,andprovidesoptionstoovercomethesechallengesthatcouldbeconsideredbycountriesonavoluntarybasis.Theworkdrawsfrominputsbyknowledgepartners.

Sustainabletechnologies(suchasthoseforwaterandwastetreatment,energysaving,en-ergystorage,andcarboncapture)andsustainability-drivenbusinessmodels(thoseincen-tivizingthereturnof‘used’products,extendingthelifecycleoftheirproductsandassets,sharingplatforms,orproduct-as-a-service)offeranumberofimportantbenefits.First,thedevelopment and applicationof sustainable technologies andbusinessmodels providesnewandmoreefficientwaystostrengthenenvironmentalconservation.Second,theycancreatenewbusinessopportunitiesforsectorsandfirms,thusenhancingeconomicgrowth.Third,suchtechnologiesandbusinessmodelsaretoalargeextentembeddedwithinSMEs,helpingthemtoremaincompetitiveorexpandintonewmarkets.Insum,thedevelopmentof sustainable technologies and sustainablebusinessmodels can contribute tomultipleaspectsofsustainabilitysuchasgeneratingefficiencyinresourcesusage,creatingjobop-portunitiesandenhancinggrowthpotential.

However,start-upsorgrowthcompaniesdevelopingorapplyingsustainabletechnologies

Developing sustainable private equity and venture capital

2.1 Background

2.

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andbusinessmodelsdonotalwayshavesteadycashflowsorsufficienthardassetsascol-laterals.Traditionalfinancingchannels,suchasbankloansandbonds,oftenfallshortofmatchingtheirneeds.Moreover,mostfast-growingcompanieswithnewsustainabletech-nologiesandbusinessmodelsaretoosmalltobelistedonstockexchangesorcapturetheinterestoflargertradebuyers.PE/VCfundsarebetterpositionedtobacksuchinnovationsinsustainability,becausethey:provideequitycapital,whichcantoleraterisksandadjustquickly to challenges; contributemanagerial and technical expertise andkeycustomer/supplierrelationships;helpmaintainalignmentofthelong-terminterestofthecompanies;identifyandfinancepromisingSMEsandunderservedsegmentsoftheeconomy;provideoptimaltransitiontothenextgrowthstagethroughallowinginvestorstovisualizecredibleexitoptionssuchasIPOsorbuyoutbytradebuyers.

ExperiencesfromanumberofcountriessuggesttheavailabilityofPE/VCfundscansub-stantiallyboostthespeedofdevelopmentandthedeploymentofsustainabletechnologiesandbusinessmodels.However,thePE/VCmarket(andmoresothesustainablePE/VCspace)isnotevenlydevelopedacrosscountries.Thismakesitlargelyunavailableforsus-tainabletechnologiesandforgrowinginnovativeandsustainablebusinessmodelsinsomeregions.

PE/VC,asubsetofthefamilyofequitycapital(i.e.ownershipinterestorriskcapital),en-compassesasetoffinancinginstrumentsthatenableinvestorstotakeastakeinhigh-poten-tialcompaniesthatareprivatelyheld(i.e.eachownedbyasmallnumberofshareholdersandnotlistedonastockexchange).CapitalfrommultipleinvestorsisgroupedintoaPE/VCfundthatinvestsinmultiplehigh-potentialprivatecompanies.PE/VCfundsinvestriskcapitalinthesehigh-potentialcompaniesandhelpthemgrowbyprovidingtechnicalandmanagerial expertise to improveperformance,operations, governance and strategicdirection.

Likeotherformsofequitycapital,PE/VCsitsattheownershiplevelofacompany’scap-ital structure,meaning that it has themost subordinated claimon the company’s cash

Sustainable Finance Synthesis ReportDeveloping Sustainable Private Equity And Venture Capital

2.1.1 Private Equity and Venture Capital

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flows.ThismakesPE/VCariskier,butpotentiallyhigher-returning, investment instru-ment,whichcanalsoenablelessriskyformsofcapital(suchasbondsandloans)higherupthecapitalstructure.Equitycanincreaseinvaluebymanymultiplesoftheinvestment(e.g.AppleandMicrosoftstartedingaragesandarenowcorporategiants),whereasdebtinvestmentreturnsarelimitedtorepayingthedebtcapitalplusinterest.Thatsaid,debtisfirstinlineforclaimsonanyvalueshouldacompanydefault;equityislastandoftenwipedoutinadefaultsituation.

PE/VCfundstypicallyholdinvestmentsfor3-7years(inthecontextofa7-12-yearfundlife),withacommitmenttobuildinglastingandsustainablevalue.PE/VCfundsrealizereturnsfortheirinvestorsbyexitinginvesteecompaniesatavaluehigherthanatentry,reflectingthevaluethefundmanagerhasadded.PE/VCfundmanagersareremuneratedmainlyuponexit,byreceivingashareoftheincreaseinvaluetheyhavehelpedtocreate,andarethusin-centivizedtohelptheirinvesteesgrowandincreaseprofits.Typically,privateequityfundswillexittheirstakeinacompanybylistingonthepublicmarkets,orsellingtoafinancialorstrategicbuyer(atradesale)orinsomecasesbacktothecompanyoritsmanagement.

PE/VCfundsareusuallyspecializedinasegmentorstageofdevelopmentofcompanies.VCisprivateequitythattargetsearlier-stagecompanies.Forinstance,theearlieststageofVC(theAroundoffunding)isoftenshortandservestogetthecompanytoalevelsufficienttoobtainsecondandthirdstages(theBorCround)offinancing.Laterroundsoffunding(C,Dandonwards)maydevelopoverlongerperiodsoftime,backedbyfundsthatspecializeintheselaterstages.RegularPE(referredtoplainly)isgenerallyfocusedonlater-stagecompanies.PEandVCeachhavetheirowntechniquesandinvestmenthorizons.

ThissectionpresentskeytakeawaysdrawnfromtheconsultationwithknowledgepartnersandexpertsoncurrentpracticesfordevelopinganddeployingPE/VCtosustainableinvest-ments.Thefollowingaretheinitialfindings:

2.2 Developing Sustainable Private Equity and Venture Capital Markets

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a. Integration of sustainability factors into PE/VC decision-making can contrib-ute to financial outperformance, besides better environmental and social outcomes. AninternalstudyofIFCrealsectors’portfoliofrom2010to2015foundthatclientswithbettersustainabilityperformancetendtooutperformclientswithweakersustainabilityperformanceonallfinancialindicators(forROE,theoutperformancewas210bps;forROA,110bps;andforIRR,770bps).Changesinsustainabilityperformanceandfinancialreturnstendtomoveinthesamedirection.Yet,whilethereiscorrelation,causationisdifficulttodemonstrate.

b. Incubators can help create an innovation ecosystem and pipeline for venture investors looking for innovative sustainable start-ups. Thearticulationofsustainabilityconsiderationsatthis level(i.e. incubators’themes,selectionprocesses,etc.)couldbeinstru-mentalinacceleratingthetranslationofemergingsustainablestart-upideasintosustainablein-vestmentopportunities,andthus,resultingingrowthofSMEs.TheUSDepartmentofEnergyandseveralstategovernmentssetupfundstofosterearly-stageresearchandstart-upfundingforearlycommercializationofsustainableprojectssuchasnewenergies(e.g.DepartmentofEnergy’sAdvancedResearchProjectAgency-Energy,theTataCenter,MIT’sEnergyInitiativeandTheEngine,PrimeCoalition,NYSERDAandChicago’sCleanEnergyTrust).Theselabsprovidesharedcentralizedfacilities,equipmenthelpingtoshortentheramp-updevelopmentperiodsandreducingcapitalcosts.InChina,viacooperationwithgovernmentfundsorgreenindustrialfunds,somesustainablePE/VCfundsgetaccesstoprojectandtechnologyresources,subsidizedrentandotherconcessionsandinvestmentopportunities.

c. Patient capital funds’ structures that allow sufficient investment time for growth can be beneficial for sustainability-oriented projects. Comparedwithtraditionalandmatureprojects,sustainableprojectsinnascentsectorsrequirelongertimetodemonstratetheircommercialviability.Patientcapital–whichhasalongertimehorizon–isthereforeim-portanttomeetthecapitaldemandfromsuchprojects.Patientcapitalvalueslearningfrompreviousmistakes,allowsforadditionaltimeandresourcesforportfoliocompaniestoscale,andunderstandstheneedtobuildoutsupportinginfrastructureandframeworksinnascentsectorsorfornewbusinessmodels.Forearly-stageinvestments,acceleratorsandfollow-onfundmod-els(e.g.US-basedY-Combinator,500Startups,TechStars,andArgentina-basedNXTPLabs)providefundswithalowerriskoffailure,becausetheywouldbecomingintoacompanywithaconcept,modelandrevenuealreadyproven.Thisisespeciallytruewhenthefollow-onfundbackspromisingcompaniesfromthe‘in-house’accelerator,astheteamwillhaveknownthe

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companiessinceinception.Thebenefitworks‘upstream’aswell,asthemanagercanusesomeofitsfeestocontinuetheaccelerator’swork.InItaly,VentureCapitalFundofFunds,ledbytheItalianNationalDevelopmentBankCDP,providesanactivecontributiontothelaunchanddevelopmentofinnovativestart-ups,notablysupportingandfosteringsustainableinnovationamongSMEs.

d. Diversified options for exiting sustainable start-ups are critical. Corporate stra-tegic investors, large incumbentcompaniesandforward-lookingutilitieshavecommittedtosustainabilityandtobringingforwardtheirknowledge,commercialrelationships,andaccesstocustomersatalowercost.Somehaveevendevelopedtheirspecificcorporateventurecapitalstreamsorfunds.Thishelpsstart-upssucceedandcreateconfidenceinthePE/VCinvestmentandexitenvironment.IntheUS,nearlyhalfofFortune500companieshaverenewableenergyorcarbonreductiontargets,alongwithsomecitiessuchasLosAngeles,AtlantaandSaltLakeCity.Thisconsumer-driveninterestreinforcesthebeliefthatmanyofthesePE/VC-backedsus-tainabletechnologiesandbusinessmodelswillfindrobustendmarkets.

Box 3:

Examples in the Sustainable PE/VC Industry

a. IFC PE/VC investment funds (global): IFC Venture Capital Group invests in early-stage healthcare, edutech, internet and cleantech companies that offer innovative technologies or business models geared to emerging markets through direct investments and funds. IFC’s Private Equity Funds Group focuses on sustainable growth equity funds in emerging markets, which have a generalist

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strategy, that provide expansion capital to SMEs and established mid-market companies across many sectors. In 2009, IFC set up the IFC Asset Management Company (AMC) to be a sustainable PE/VC fund manager, raising capital from global investors. AMC’s fund of funds team co-invests its LPs’ capital, total-ing more than US$1.2 billion through two commercial funds of funds: the cli-mate-focused Catalyst Fund and the diversif ied Global Emerging Markets Fund.

b. The Yozma Fund of Funds approach (Israel): The government-created fund introduced a limited amount of concessional f inance through the fund of fund’s “waterfall” structure. It targets high-growth companies in the communications, information technologies and life sciences sectors. The original Yozma funds had US$2 billion under management by 2001, up from US$200 million in 1993 (public and private investments).

c. NXTP Labs accelerator (Argentina): This accelerator focuses on seed stage projects, investing through its structured program in return for a minority eq-uity stake, and it then makes subsequent investments in the best performing companies. NXTP Labs supports tech start-ups, and has evolved to increasingly embed sustainability criteria to select and help grow the incubated companies.

d. VC Fund of Funds by Cassa Depositi e Prestiti (Italy): It contributes to the launch and development of innovative start-ups, notably supporting and fostering sustainable innovation among SMEs. CDP supports the industry throughout its life cycle, up to the turnaround phase, through liquidity, equity and risk-sharing instruments.

e. Ecotechnologies Fund (France): The EUR150 million (US$174 million) fund was launched by France’s Environment & Energy Management Agency within the framework of the actions of the Program of investments for the fu-ture (PIA) and is managed by Bpifrance Investissement. It provides late-stage VC investments to environment-related startups based in France, with tickets falling between EUR1-10 million (US$1.6-16 million), and looking for private

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co-investors to join on a pari passu base.

f. Moringa Fund (France/Emerging Markets): The EUR84 million (US$98 million) private equity investment fund targets early-stage and develop-ment-stage companies operating or developing agroforestry farming with high environmental and social impacts across sub-Saharan Africa and Latin America. The fund, managed by Moringa Partnership, makes equity and quasi-equity in-vestments of EUR4-10 million (US$4.6-16 million).

The general challenges that lead tounderdeveloped sustainablePE/VCmarkets in-clude, among others, the lack of exitmechanism (such as a well-functioning stockmarket), the lack of innovation capacity, weak protection for intellectual propertyrights, inadequatemarketsizeforcommercializingtechnologiesanddisruptivebusi-nessmodels,especiallyforsmallereconomies,andtheunevendevelopmentofanen-trepreneurshipcultureacrosscountries.

InadditiontothesegenericchallengeshinderingthedevelopmentoftheentirePE/VCindustry,anumberofchallengesareratherspecif ictosustainablePE/VCfunds.Amongthese,thefollowinghavebeenidentif ied:

1. Actual or perceived low risk-adjusted return for sustainable PE/VC in-vesting. Mostcommercialinvestorslooktoinvestwithfundmanagersthathavelongtrackrecords,includingmultiplefundgenerations.However,fundswithasustainable

2.3 Challenges to Developing Sustainable Private Equity and Venture Capital

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theme tend tohave a relativelybrief track record.Early examples ofundersized,understaffedandpoorlymanagedsustainablefundshavetaintedsomecommercialinvestors’ perceptionof sustainable investing. In addition, commercial investorsperceive sustainablePE/VCfunds asnecessarilyhaving longholdingperiods, il-liquidity, additional investment restrictions and limited exit prospects, thinkingof these sustainable investments as a less commercially attractive proposition.Furthermore, investors may believe specialized capabilities, with the associatedadditional costs, areneeded to screen for,monitor andmeasure an investment’ssustainability, again reducing the prospect for commercial returns.Whilemuchof this has been improved as themarket grew and experiences weremultiplied,misperceptionsstillremain.

2. Early stage of many sustainable technologies and business models and their end markets.Veryoften,disruptivesustainable investmentsmaybe innascent industrieswith technologies andbusinessmodels still in thedevelopmentphase, in whichmost start-ups needmore time for f ield testing and for provingtheircommercialviability.For instance, incorporatingnewtechnologies intoelec-tricgrids,buildingenergymanagementsystemsormunicipalwatersystemsmustbeextensivelytestedandprovenreliable–allofwhichtakestime.Theadoptionrateofexistingenergy,waterandwasteincumbentscanbeslowerthanexpected.Manynew sustainable technologies lack a supportive value chain and are very expensivetoscale.Withoutcertaintyaroundend-marketdemand,equipmentmanufacturersmaybeunwillingtoscaleupcapacityandenablelowercosts.Similarly,investmentsreliantonpreferentialindustrialpoliciescansufferfromanyhintofvariationintheduration, stability, and consistencyof thesepolicies, adding to theuncertaintyofexitandmakingsustainablePE/VCfundslesswillingtoparticipate.

3. Misaligned return horizons between relatively short-term PE/VC funds structure and longer-term sustainable projects in certain sectors. Some sustainable sectors,particularly those that arehighly capital-intensive andhave utilities and other heavily regulated incumbents as customers, have longbusiness/salescycles,andthedevelopmentpathwaysarecharacterizedbyslowbutsteady growth. Sectors such as these (e.g. forestry) are generallynot suitable fortraditional10-yearPE/VCfunds.

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4. Lack of clarity in definitions, standards and verification of sustainable technologies/business models. Alackofstandardizedverif icationforwhatconsti-tutesasustainablewayofinvestingandconsistentenvironmentalandsocialriskman-agement standards andpractices are challenges for investors in the space, includingPE/VCfunds.This cancontribute toan informationasymmetrybetween investorsand specialized fundmanagers focused on the less explored sustainable investmentspace.ThisisparticularlyrelevantinthecaseofPE/VCfundswhosesustainablein-vestmentstrategyisforexampleESGintegration(inthecaseofathematicinvestmentstrategy,thefundmaycreateitsownframeworksanddefinitions,andhaveatheoryofchangethatguidestheselectionofinvestments).

5. Limited market scale and sophistication. Fewmarketshavethescaleandsophistication for the sustainablePE/VCmarkets to grow. In relation to exits, sus-tainableprojects andSMEs are often sold to large corporates via activemerger andacquisitions (M&A)markets,whichareoften locatedonly in large economies.Sus-tainablePE/VCcanbenefitfromancillaryservices(oftenintheformof incubatorsoraccelerators),includingaccounting,marketingandlegalservices,buttheyarenotwelldevelopedordevelopedenoughinmostdevelopingcountries.Manysustainabletechnologiesfacetheinitialhurdleofsmallandimmaturemarkets.Inaddition,thesetechnologiesneedtobedevelopedbyhigh-caliberuniversitiesandresearchinstitutes,whicharenotalwaysavailableinsmallereconomiesor,whentheyare,maybediscon-nectedfrommarketplayers(e.g.industryassociations,enterprisesandcorporates).

6. Complexity in quantifying the pricing of externalities and at times mixed incentives to pricing them.Inmostjurisdictions,thereisalackofregulationsandlawsthat price in the externalities associated with conventional (as opposed to sustainable)investing.Thisincludes,forinstance,regulationsandlawsregardingpollutionandenvi-ronmentalandsocial(E&S)footprints.Environmentalbenefitsgeneratedbysustainableinvestmentsaredifficulttoquantify,letalonemonetize,duetothelackofuniformandauthoritativequantificationmethodologies.Objective,well-recognizedstandardshelpim-provethepricingofexternalitiesandleveltheplayingfieldaroundtheriskmanagementas-pectofinvesting.InthecaseofPE/VC,positiveexternalitiesareofparticularimportance,sincetheypayattentiontotheupsidesandhenceincreasethevalueoftheinvestment–asopposedtoonlylookingatmanagingorreducingtherisks.

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2.4 Voluntary Options for Developing Sustainable Private Equity and Venture Capital


ThissectionfocusesonoptionsthatarelargelyspecifictodevelopingsustainablePE/VCs,asthegenericissueshavebeendiscussedextensivelyintheliterature.

1. Promote the establishment of incubators/accelerators for sustainable start-ups and the integration of sustainability considerations into existing or general incubators. Governmentsandcorporatescouldestablishincubators/acceleratorsforsus-tainabletechcompaniesandcompaniesemployingsustainablebusinessmodelsasawaytoreduceoperatingcostsofthestart-upsandsubstantiallyenhancethesurvivalrateofthesecompanies.These incubators/acceleratorsmayprovidesupport infinancing,marketing,legal,accountingandlogisticsissuesandthenecessarycoachingforrunningacompany.Effortscouldalsobemadetoencourageexistingincubators/acceleratorstodevotemoreresourcestosupportsustainablecompanies.

2. Facilitate multi-stakeholder dialogues to work on the interpretation of sustainability in investment obligations.Relevantstakeholderscouldengageinwork-inggroupsthatbringtrusteeswithdifferentinterpretationstogethertodiscusstheirdif-ferences,highlightingwhytheyshouldtakedueaccountofbroadersocietalsustainabilityconcernsoveralonginvestmenthorizon,andeventuallyanalyzepossiblepoliciestoaddenvironmental,socialandothersustainabilityissuesintoinvestmentprocessesanddeci-sion-making.

3. Support the launching of demonstration projects and dissemination of good practices. Animportantwaytoreduceriskaversionandthusencourageprivatecap-italparticipationinsustainablePE/VCinvestingissendingthemarketsignalviaprofitabledemonstrationprojects.Variousapproachesmaybeemployedtoaccelerate theachieve-mentof such signaling, e.g. the IFCCatalystFund,which explicitly sought to create acommercially structured fundwith thehelpofgovernments tomobilizeprivatecapital

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andeventuallydemonstratethatinvestinginthegreenandclimatespaceinemergingmar-ketscanbeprofitable.Withadifferentapproach,socialimpactbonds(SIBs)56couldofferacomplementaryoptionoffinancingthroughprivatecapitalthepilotingordemonstrationofsolutionstosocialorenvironmentalissuescurrentlyaddressedbythepublicsector.Var-ioussolutionsunderlyingtheSIBsareputforwardbysocialenterprises,whichareenter-prisesorSMEsthatlooktoachieveasocialbenefitthroughthesaleofgoodsorservicesonthemarket,generatinganincome.

4. Encourage the clarification in the use of standards for managing sustainable investments by PE/VC, taking into account national and regional circumstances. Improvingthetransparency,viaforexamplebetterdisclosure,intheuseofsustainabilityorenvironmentalandsocialstandardsforPE/VCriskmanagement,andprovidingrelatedcapacity-building,arecritical.Thishelpsmeasurerisks,resultsandimpact,therebysup-portingfundmanagers indeliveringthesustainabilitygoalsandbenefitsoftheir invest-ments;andallows,inturn,investorstotrackandcompareinvestmentopportunities.

5. Promote the development of a range of sustainable financial products and fund structures suitable for a broad range of private equity investors. VehicleslikethefundofPE/VCfundsandmanagedaccountscanbeusedtoadddiversificationandtoenableaccesstosmaller,specializedPE/VCfunds,particularlyforthoseinstitutionalinvestorsthathaveaverylargeminimumticketsize.Fundstructuresthatblendpublicandprivatecapitalinamannerthatprioritizesreturnstoprivateinvestorsmaybeimplementedinordertomo-bilizecapitalfromcommercialinvestorswhoareskepticalthatsustainablePE/VCcande-liverthereturnstheyexpect.AccordingtoConvergenceFinance’sdealoriginationplatformdatabase,57themostfrequentlysoughtformsofconcessionalcapitalaresubordinatedloans,subordinatedequity,first-losscapital,equityandguarantees.Onemarket-acceptedsolutiontothelackofscaleandsophisticationinsomemarketsistodevelopinvestmentstructures(suchasfundsofPE/VCfunds)thataggregateexposuresto individualPE/VCmanagersandtotheirunderlyinginvestments.CollectiveinvestmentvehicleslikethispermitinvestorstoinvestatscaleandrelyonspecialistinvestmentprofessionalstoselectthemostpromisingPE/VCmanagers inmarketswithminimaltrackrecordandrelatively littlesophisticationto‘seed’anddevelopthePE/VCmarketincountries(orsectors)wherePE/VCactivityisnascent.Governmentscanusethesemarket-acceptedstructurestostimulatedevelopmentinstrategicareasbytheuseoflimitedconcessionalityorfirst-lossprovisions.

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ThissectionsummarizesfindingsbytheSFSGontheopportunitiestobetterleveragedig-italtechnologiesforfinancingsustainabledevelopment,aswellasthechallengesthatlimittheeffectiveuseofdigitaltechnologiesforthispurpose,andhowtheymightbeovercome.Thefindings arebasedon amapping acrossG20members,whichhighlights emergingpracticeinapplyingdigitaltechnologiestosustainablefinance.ThesefindingsdrawfromcontributionsbyG20members,technicalconvenings,outreachtoexpertsandliteraturereviewundertakenbytheSustainableDigitalFinanceAlliance.

Thischapterfocusesonhowdigitaltechnologieshelpovercomekeychallengesandtakeadvantageofopportunitiesrelatedtothetwootherworkstreamfocusareas:(i)creatingsustainableassetsforcapitalmarkets,notablymeasuringandvalidatingsustainableinvest-ments,andbringingtogethersustainableassetsandinvestors;and(ii)deployingsustain-ablePE/VC,notablyfacilitatingadditionalsourcesofsustainablecapitalandhelpingvisu-alizetheinvestmentopportunities.

Oneofthekeychallengesfacedbytheglobalfinancialsystemtodayistomobilizeprivatecapitaltosupportsustainablegrowthwhileatthesametimefosteringaresilientfinancialsystem.However,anumberofconstraintslimitmobilizingsuchfinanceatscale,includinginformationasymmetries,highsearchcostsofsustainableinvestmentopportunities,andthedifficultiesinvestorsfaceinfullyidentifying,assessingandpricingrisksassociatedwithunsustainableinvestmentsaswellasupsideopportunities.58

Digitaltechnologiescanhelpovercomesuchchallengesbyimprovingthequalityandtime-linessofrelevantinformation,andbyreducingthecostofacquiringthisinformation.Itcanalsohelpincreasetheinvolvementofcitizensinbringingtheirbroaderinterestsandconcernsintoshapingfinancialdecision-making.

Applications of digital technologies to sustainable finance

3.1 Background

3.1.1 Why Digital Finance?

3.

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Sustainable Finance Synthesis ReportApplications Of Digital Technologies To Sustainable Finance

Digitaltechnologieshaveaswellabroaderroleinsupportinginnovationsthatacceleratethetransitiontowardsasustainabledevelopmentpathway.Suchinnovationsaremainlyunderpinnedbytechnologicaldevelopments,butalsobythegrowingincidenceofamoredecentralizedinfrastructure,businessmodelsinvolvinggreatersharedandrentalizedcapi-tal,andclosed-loopvaluechainsthatmitigateorderivegreatereconomicvaluefromwhatwerepreviouslyoftennegativeexternalities.

Furthermore,digitaltechnologiesaredemonstratingtheirabilitytoaddressthesechalleng-esanddrivesustainable,inclusiveeconomicgrowth.AccordingtoaMcKinseyGlobalIn-stituteReport,digitalfinancecouldboostGDPgrowthinIndia,Brazil,MexicoandChinabyalmost12%,5.5%,5%and4.2%respectively.59Withanannualdatagenerationthatisexpectedtoreach44zettabytes(thatis,trillionsofgigabytes)by2020,datahasbecomeaneconomicassetthatdeliversfinancialbenefits,withinherentcross-borderpropertiesandimplications.60ItisestimatedthatArtificialIntelligence(AI)alonecouldliftglobalGDPbyanestimatedUS$15-20trillionby2030,61andglobalmobileconnectionscouldreach8.9billionwithinthreeyears.ThenumberofInternetusershasalreadymorethantripledinadecade,reaching3.2billionin2015.62

Abroadrangeoftechnologicaldevelopmentsinthedigitalspaceofferopportunitiestoboostsustainablef inance.Thesedigitaltechnologiesarecapturedintheconceptofdigitalf inance.Digitalf inance,whichunderpinsthenexusbetweendigitalizationandf inance,includesabroadrangeoftechnologiesanddigitalelementssuchasbigdata,AI,onlineandmobileplatforms,blockchain,andtheInternetofThings(IoT).

While there is no single agreed definition, the term digital f inance encompasses abroadrangeofnewf inancialproducts,f inancialbusinesses,f inance-relatedsoftware,andnewformsofdigitallyenabledcustomercommunicationsandinteractions.63

Anumberofinternationalorganizationshaveprovideddefinitionsofdigitalf inance,including:

3.1.2 What is Digital Finance?

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• International TelecommunicationsUnion (2016): TheDigital Financial Servicesecosystemconsistsofuserswhohaveneedsfordigitalandinteroperablefinancialprod-uctsandservices;theproviderswhosupplythoseproductsandservicesthroughdigitalmeans;thefinancial,technical,andotherinfrastructuresthatmakethempossible;andthegovernmentalpolicies,lawsandregulationswhichenablethemtobedeliveredinanaccessible,affordable,andsafemanner.64

•WorldBank(2016):DigitalfinancereferstotheimpactthattheInternetandrelateddigitaltechnologieshaveonthefinancialsector.65

•OECD(2017):Digitalfinancialservicescanincorporateanyfinancialoperationus-ingdigital technology, includingelectronicmoney,mobilefinancial services,onlinefinancialservices,i-tellersolutions,andbranchlessbanking.66

ThisReport inclinestothedef initionusedbytheFinancialStabilityBoard(FSB)that points also to the broader use implications of digital f inance.67 The Secre-tary-General of the International Association of Insurance Supervisors usefullyoffersanalignedworkingdef initionoff intech(f inancialtechnology)asatechno-logically enabled f inancial innovation that “gives rise to new businessmodel, ap-plications,processesandproducts.Thesecouldhaveamaterialeffectonf inancialmarketsandinstitutionsandtheprovisionoff inancialservices.”68

Sustainabledigitalfinancecanbeusefullythoughtofastheapplicationofdigitaltechnolo-giesinfinancingsustainabledevelopment.Inthecurrentcontext,thiswouldbeanelementinseekingtosupportdirectlyorindirectlytheobjectivesundertheframeworkofthe2030AgendaandtheassociatedSDGs.

Whilenewtechnologiesandcombinationsofthesetechnologiescontinuetounfold,thefol-lowingarecomponentpiecesunderpinningdigitalfinancetodate:69

•Big dataaggregateslargeamountsofincreasinglycomplexdatafrommanydifferentinternalandexternalsources,unlockingopportunitiesforreal-timebusinessinsights70

•Machine learning and artificial intelligence (MLAI) useadvancedcomputersci-

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enceandalgorithmstoanalyzevastdatasets,derivepatternstopredictbehaviorandprices,andautomatedecisionsorproviderecommendations,increasingdecision-mak-ingcapabilities.

•Mobile technologyhasevolvedrapidlyfrombeingasimpletwo-waypagertobeingamobilephone,GPS(GlobalPositioningSystem)navigationdeviceandwebbrows-er.Advancementsinmobiletechnologyhaveunlocked‘mobilemoney’allowingcon-sumerstostorenationalcurrencyandmakepaymentswithouthavinga traditionalbankaccount.Italsoenabledcomputerprogramstorunonmobilethroughmobileapplicationsthatcreateaccesstoavastrangeofgoodsandservices.

•Distributed ledger technology (DLT)orblockchainisashareddatabaseoftrustedtransactionsdistributedacrosslargepeer-to-peer(P2P)networks.Theencrypted,dis-tributednatureofdataontheblockchainandsystemofconsensusmakesitinherentlysecure,immutable,verifiableandtransparenttostoretransactionsandrecords.

•Internet of Things (IoT)throughlow-costconnectedsensorsandAIisresultinginmachinelearningthatautomatesdiscoveriesandenables‘intelligent’computerscapa-bleofnon-routinetasks.By2025,itisestimatedthattheIoT’seconomicimpactwillbearoundUS$1.1trillion.71

Advancesindigitaltechnologieshaveunlockednewf inancialapplicationsandbusi-nessmodels.Forexample,P2Pplatformsallowforelectronicmoneytransfersdirect-ly between two parties via a P2P service, offering an easy alternative to traditionalpayments.Similarly,investmentcrowdfundingplatformsallowforsmallamountsofmoneytoberaisedfromalargenumberofpeopletofundaventureorproject,andinclude both equity and debt stakes. This opens up new investment opportunitiesforlendersandinvestorsandsourcesofcapitalforborrowers.Thelatterisparticular-ly interestinginthecontextofpiloting,forexampleofsustainabletechnologiesandemergingbusinessmodels targetingsomeunexploredmarket (i.e. itcouldworkasacomplementary typeofVC,especially interestingwhereVCand incubatorsarenotverycommon).

Digitalf inanceinitsbroadestcontextisalsoconsideredtoincludemonetaryinnova-

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tions,suchasso-calledvirtualordigitalassets(alsoknownascryptoassets).However,thisaspectisexcludedfromtheworkoftheSFSGin2018.

ThemappingacrossG20membersandtheprivatesectorshowedrapidlyemergingpracticesanddiversedigitalf inanceapplicationstosustainablef inance.Theseprac-ticesdemonstratethecapabilitiesofdigitalf inancetoaddressthechallengesrelatedtothemobilizationofsustainablecapitalthroughtheuseofdifferenttechnologicalecosystems.Themappingalsorevealedthattheapplicationofdigital technologiestosustainablef inanceimpactsthef inancialandrealeconomyatdifferentlevelsandbringsaboutdifferentbenef itstoadvancesustainabledevelopment(Chart2).

3.2 Mapping of Potential Applications

CHART 2 :

Harness ing D ig i ta l F inance to Enhance the Mobi l i zat ion o f Susta inab le F inance

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•AtthebottomofthepyramidinChart2,digitalf inance’spowertomakelargeamountsofdataavailableathighspeedandlowcostincreasesopportunitiesforinvestmentsinsustainableassets,notablyforinstitutionalinvestorsbyimprov-ingpricingofenvironmentalrisksandopportunitiesata lowercost; reducingsearchcosts;andimproving,measuring,trackingandvalidationoftheapplica-tionofsustainabilitycriteria.

•Movingupthepyramid,digitalf inanceunlocksgreaterinclusionandinnova-tion inaccess to sustainable f inanceoptions, includingthe facilitationofciti-zens’activeinvolvementinsustainablef inanceandmobilizationofnewsourcesoff inanceforsustainabledevelopment,attheinstitutionalandretaillevels.

•Atthetopofthepyramid,the interactionbetweeninnovations indigitalf i-nance and innovations in the real economy facilitate new investment config-urationsandbusinessmodels, reducingsustainablebusinessmodels risks,andcreatingopportunitiestoscalesustainableinvestments,particularlybyPE/VC.At the same time, interactionsbetween sustainabledevelopmentand theeff i-cientuseofcapitalatthetopofthepyramidmaybemorecomplexandcreateunintendedtrade-offs.

Sustainabledigitalf inancepracticeislargelymarket-driven,withgrowingpolicy-basedencouragement.Themappingrevealedthatdigitalf inance’s‘datapower’isunderlev-eraged,whileits‘innovationpower’issmallscale.Table1providesasummaryofcasesfromthemappingexercise.

a. Digital Finance and Investment Decision-making

Digitalfinancecanenablemoresustainableinvestmentdecision-makingbybothincreas-ingefficienciesandbymakingmoredataavailablecheaperandfaster.Hence,accuracybecomesmorerobustandeasesthemobilizationofsustainablefinancing.

3.2.1 Applications of Digital Technologies to Sustainable Finance

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Digitization and automationofback-endprocesses canoffer large-scale reductions incosts and increases inflexibility andaccuracyofbackoffice tasks,making themmoreefficient.72Withincapitalmarkets,digitalfinancehasenabledgreaterautomationonthebuy-side, reducing cost frictions.Processes automation inbond issuances allowsbor-rowerstoconnectdirectlytomorediversifiedsourcesoffunding.Whilenotyetwidelyadopted, suchautomationhas thepotential to reduce thecostsofdesignandfinanc-ingofgreenbondsandloansatgreaterscales,andpullenvironmentalbenefitssuchaswidespreadpaperlessoperations.73Similarly,ithasbeenestimatedthatroboticprocessautomationofrepetitivetasks,particularlyinoperationsandfinance,couldreducecostsby50to70%forhigh-frequencytasks.74Ithasanestablishedtrackrecordofproducingtangible,measurableresultsinthecapitalmarketandbankingindustry.75Itisimportantto put in place robust governance standards to ensure that automation processes aremanagedandmaintainedandthatsystemsarealignedwithbusinessandpeoplestrate-gies.Blockchaincouldalsofurtherreducethecostsofbackofficefunctionsandsecurityclearing,withestimatedsavingsinbankinfrastructurecostsofaroundUS$15toUS$20billionayear.76Giventhefastgrowingpaceoftheseapplications,humanoversightofthesemachine learning underlying algorithms should be reinforced and coding stan-dardsandbestpracticesshouldbefollowed.

Dataisthebackboneofinvestmentdecision-makingasithelpsinvestorsbetterunder-standandquantifyriskaswellasrisk-adjustedreturns.Thelackofspecificdatathatiseasilyavailablemakes itexpensive tomeasureandgenerateprivatedata for taggingorlabelingloansassustainable.Hence,fewbanksareabletodoso(asnotedinChapter1).Thiscreatesdifficultiesforinstitutional investorstounderstandtherisksofunlabeledorvaguelylabeledsustainableloansandtoassessthetruerisksandnatureoftheinvest-ments.Similarly,PE/VCinvestorsfacedifficultiesinquantifyingenvironmentalbene-fitsaswellasinassessingandclassifyinginvestments’effectsonsociety77(aspinpointedamongthebarriersidentifiedinChapter2).Whilepubliclyavailableenvironmentaldata(PAED)canhelpimproveaccesstoenvironmentalinformation,therearestillchallengestoeffectivelyusingPAEDinfinancialanalysis.78

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Digitalfinance’s‘datapower’helpsaddressthesechallengesinthefollowingways:

•Bigdata,machinelearningandAImakeitpossibletogatherandprocesslargequan-titiesofenvironmentalandsocialperformancedata,athighspeedandlowcost,en-ablingpricingtobeappropriatelyadjusted.Itisimportantforsuchdatatobecleanedorscrubbedinordertodetectandremoveerrorsandinconsistenciestoimprovethedataquality.Suchtechnologiesarebeingusedbybanks79toofferlowercostsofcapitalforrealestateloansusedforenergy-efficientmodifications.Suchloanscouldbebun-dledforinstitutionalinvestors.MLAIsupportsthedevelopmentofsustainabilityrat-ingmethodologies,benchmarking,andscorecardsbyleveragingvastamountsofdata.Thisalsoenablesmoreefficientandtransparentintegrationofenvironmental,socialandeconomicconsiderationsintoinvestmentdecision-making.

•Digitalfinancetechnologiescanreducedatacostsassociatedwithmeasuring,trackingandvalidationofsustainableassets.80Blockchaintechnologyallowsthe“applicationofsustain-abilitycriteria”tobeverifiedandauditedinasecure,transparentandimmutablemanner,increasingconfidenceandloweringlabelingcosts.Whilethisreflectsanareaofhighpoten-tial,manyofthesetechnologysolutionsarenascent,mostlyinpilotstages.Thereareanum-berofongoingpilots.Forexample,theShenzhenGreenFinanceCommitteeinChina,inpartnershipwiththeEnergyBlockchainLabs,InternationalInstituteofGreenFinance,andtheChinaEmissionsExchangearepilotingtheuseofblockchainandIoTchipsem-beddedingreenassetstodigitizethegreencertificationandverificationprocess.81AnotherexampleistheGreenAssetWallet,commissionedbytheGermanMinistryforEconomicCooperationandDevelopment(BMZ)and incubatedbyStockholmGreenDigitalFi-nance.Thispilotbringstogetheraconsortiumoffinancialinstitutions,researchinstitutesandfintechpartnerstodevelopablockchainplatformthatwillenablecost-effectiveandimmutablevalidationofgreeninvestmentsclaimsandverificationofgreenimpact.82

•IoTmakestheperformancetrackingandtracingofsustainableassetsmorecosteffectiveandefficient.Theavailabilityof largequantitiesof cheapperformancedata enables re-al-timemonitoringandimprovesfutureinvestmentdecision-makingprocesses.

•ThetechnologyunderlyingbigdatacanincreasetheuseofPAEDbypullingvastdatasetsofnon-standardizeddatafrommultiplesources,andallowthesetobestandardized,andpresentedinwaysthatmakesenseforfinancialusers.

ING Real Estate Finance (EU) digitizescommercialrealestateassetsandanalyzesenergyefficiencymodifi-cations,whichenableslowercostsofcapitalforsustain-ability loans.Sustainalytics83 (UK) provide predic-tiveanalyticsforsmartclimate investingandcheaperincorporationofenvironmental,socialandeconomicconsiderationsintoinvestmentdecision-making.Tru-Value Labs (US)isacustomizableAI-poweredenginethat helps investors identify sustainable investmentsthey are interested in. It uses machine learning andnaturallanguageprocessing(NLP)toanalyzeunstruc-tureddatainrealtime,extractingrelevantmetricsandturningthemintomaterialinsightsforinvestmentde-cision-making.84

The Shenzhen Green Finance Committee (China) ispilotingtheuseofblockchainandIoTchipsembed-ded in green assets to digitize the green certificationandverificationprocess.

Nespresso (France)haslaunchedablockchain-basedregister to track climate-positive actions to sharepositive social and environmental impacts withshareholders.100 The Islamic Development Bank (Saudi Arabia)planstouseblockchaintodevelopsha-ria-compliantproducts,tomeetdemandfromMusliminvestors,withfirms fromIndonesia toCanada, andallowing instantaneous clearing and settlement oftransactionsandassetsexchanges.101

TheInstituteforTechnologicalResearchSystemX in and the Caisse des Dépôts (France)haveworkedontheuseofblockchaintosupportthedevelopmentofthegreenbondmarketinamuchmoreautomatedanddigitalizedmanner.102

Ant Forest (China) creates incentives to green citi-zens’consumptionpatternsbyusingmobilepaymentplatforms, big data and socialmedia.Bundles (EU) has moved beyond the start-up phase to structurelong-termfinancing.Itsellswashingcyclesinsteadofwashingmachines,with devicesmonitoring use andstatisticsdisplayedinanappandincentivizesmorewa-terefficientwashingpractices.85

Crowdear (Argentina)isarewards-basedcrowdfund-ing platform. The main objective is to unlock newsourcesoffinancetoencourageentrepreneurstofocusonprojectsapplyingtechnologytoeducation,health,and environment outcomes.86 Brazil Innovation Lab for Climate Finance crowds in innovative sus-tainableinvestmentsolutions,manyofwhichleveragedigitalfinance.Forexample,CommunitySolar, isanonlinemarketplaceofcommunitysolarandwindproj-ectsthatconnectsenergyconsumerspayingamonthlyrentand investorsreceivingthefee.87 Cleantekmar-ket’s (Australia) platform connects clean technolo-giesprojectsandorganizationswithfinanceandothermarket participant.88 EcoCrowd89 (Germany) is a crowdfunding platform specialized in green projectsandsustainableinitiatives.EcoFinance’s90 (Russia) online service allows theunder-banked to send loan applications via SMS ortheweb,with funds accessible inminutes.YOLK91 (South Korea)usedcrowdfundingtoraisefinanceforasolarcharger.StartMe (South Africa)enablesentre-preneurs,schoolsandcommunitiestoutilizeacrowd-funding platform to raise funding for projects. TheincubatortheSwave (France),dedicatedtoFintechs,isexplicitlyworkingonhowtoreorientfinancialflowstowardagreenereconomy.92

Canada plans to invest US$950 million in superclu-ster innovation centers to develop AI solutions ap-plied to supplymanagement systems,whichwill havea ground-breaking impact on sustainable and inclu-sive economic growth.93 BioMachines (Indonesia) is helpingwithsustainablecocoafarmingbyusingsensortechnology to gather environmental data from labo-ratory andfield-based experiments, and enable knowl-edge transfer to cocoa farmers. Suchdata drivenprac-ticescanunlockaccesstofinanceforfarmers.94 Simpa Networks (India) uses a rooftop leasingmodelmadepossiblewithmobilepaymentsandcontroltechnologytounlock investments in solar home solutions for lastmilemarkets.95 Telecom Italia (Italy)isbuildinganewwirelessnetworkforIoT.Smartmeters forhomesandutilitiesareexpectedtobeamongthefirstdevicestobeconnectedinordertoimprovewaterandelectricitycon-sumption.96 Sustainable Smart Cities Project (Japan) helps tobetterbalancedemandand supply sideacrossvarioussectors,makinginfrastructureinvestmentmoreefficientbylimitinglargescaleinvestmentinthesupplyside.97 Mexico City (Mexico) isusinga“Smartgrid”systemwhichincludestrafficmanagementandincidentdetection,operating20,000sensorsandcamerasaroundthecity.Ithashelpedreducingelectricitytheft.Disasterandenvironmentalmonitoringarealsoincludedtokeepsupplyingdataintomakingthecityevensmarter.98 Is-tanbul (Turkey) hasdeployedthe“SmartCities”toim-plementIoTtechnologiestoimprovetransportationad-ministrationandtheenvironment,whichwilltransforminfrastructurefinancing.99

Big data

MLAI

Mobile platforms

IoT

Blockchain

Investment Incentivizing sustainable choices Unlocking new sources of finance Interaction between innovations in the financial sector and real economy

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b. Digital Finance and Sustainable Choices

Digitalf inanceisdemonstratingitspotentialtoincreasetheinvolvementofcitizensintheirrolesalongthef inancingvaluechain.Digitalizationofpurchasingdecisionscan influence consumers’ behavior by reducing search costs in selecting productsandservicesthataligntotheirpersonalvalues.Similarly,digitalizationcanalsofacil-itateaccesstoverydifferentsustainableinvestmentoptions.SuchopportunitiesarefacilitatedbythegrowingdeploymentoftheIoTthatprovideslow-costdataonsus-tainabilityimpacts.Combinedwithsocialmedia,windowsforawarenessandmobi-lizationcampaignsarecreatedenablingconsumerstomakef inance-relatedchoicesmore aligned to sustainable development outcomes. For example, the Ant Forestmobile application inChina creates incentives for green consumptionpatterns atscalebyusingamobilepaymentplatform,bigdataandsocialmedia.103LeveragingMLAI,thecompanyImpactonmakesprovensustainablesolutionsavailabletocit-izens andgroups interested in f inancing replications innew locations.104Changesincitizenthedemandformoresustainableinvestmentandconsumptionproductsinturninfluencesthedevelopmentofsuchproductsandpatterns.Digitaltechnol-ogies can further unlock f inancial incentives that reward sustainability in supplychains.Byprovidingmoredetailedandreliableinformationabouttheenvironmen-talimpactofcompanies’supplychains,IoTandblockchaincanhelpf inancialinsti-tutionsincentivizesustainabilitythroughthesupplychains.

Aspension and insurancepolicyholders, citizens canbemore easily informed.Asaresult,theycandemandandbeofferedmorechoicesforthedeploymentoftheirlong-termsavings, takingsustainabledevelopmentpreferences intoaccount.Simi-larly,digitalizationprovidescitizenswithgreateropportunitiestoengagemoredi-rectlyinlendingthroughthegrowingnumberofcrowdsourcingandP2Pplatforms,aswellasbecomingmoreeffectiveborrowerstoadvancesustainability-alignedsmallbusinesses.

c. Digital Finance and New Sources of Sustainable Finance

CrowdfundingandP2Pplatformsprovidelow-costaccesstof inancethroughmasscollaboration.ThisisofparticularrelevanceforSMEs,whichaccordingtotheIFC,

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accountforabout90%ofbusinessandmorethan50%ofemploymentworldwide,andarekeyenginesofjobcreationandeconomicgrowthindevelopingcountries.105 Suchplatforms,whenconsumerprotectionandf inancialstabilityissuesarecareful-lyaddressed,couldwellenhancethebenef itssought inChapter2astheycomple-mentorenhancethecapitalofferbythePE/VCmarket,facilitatingSMEs’accesstoanewpoolof‘bottom-up’investorsandf inance.106

Big data, AI and automation have also enabled new providers to offer targetedandmoreconvenientservicesthattransformcreditevaluation,offeringloanstoabroaderbaseof customers andbusinesses.For example,MercadoCrédito inAr-gentinaanalyzesmorethan400variablesinordertoprovideloanstosmallenter-prisesthatusuallycannotgetcreditfrombigbanksinordertounlockinnovationforsocialimpact.107

Online investmentplatforms are also creatingmarketplacesbringing together andmatchmakingsustainabletechnologybusinesseswithf inanceandothermarketpar-ticipants.Suchplatforms,whichofferacombinationofcurateddealflow,dataondeals,andAItomatchinvestorstotheirpreference,arehelpfultoboththePE/VCecosystemand institutional investors.Forexample,Cleantekmarket inAustralia isanonlineecosystemthatenablesanyorganizationactive inthecleantechsectortoconnectwithothersandaccessf inancethroughitsplatform.108ConvergenceFinancehasdevelopedanonlineplatformthatgeneratesblendedf inancedata,intelligence,anddealflowtoincreaseprivatesectorinvestmentinemergingmarketsbyallowinginvestors to quickly search databases for credible deals.109Another example is theGroundupProject, a Swiss-based f inancial technology company that offers a dealsourcingplatform for impactventures leveragingAI. It standardizes andvalidatesinformationaboutimpactventures,providesinsightsintobusinessriskandreward,visualizestrendsandaggregateddata.110

Bearinginmindtheseopportunities,itiscrucialtonotetheimportanceofexpand-ingaccesstosustainablef inanceproducts.Digitaltechnologieswithinthef inancialinclusionagendaareunderstoodintermsoftheirroleinincreasingaccesstof inan-cial services,which iscoveredby theworkof theGlobalPartnership forFinancialInclusion(GPFI).111UnderArgentina’sPresidency,theGPFIfocusedonhowdigi-

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tizationcouldbeatooltof inanciallyincludethoseindividualsandsmallbusinessesoperatingintheinformaleconomy.

d. Digital Finance and Innovations in the Financial and Real Economy

Digitalf inancealsofacilitatesnewinvestmentconf igurationsandbusinessmodels,whichPE/VCfundsareparticularlywellsuitedtoscaling.Thefollowingaresomecurrentexamples:

•Off-gridenergyservices:Oneofthemostwell-knownexamplesismobilepaymentplatformsenablingoff-gridcompanieswithnewsustainablebusinessmodelsonso-larassets.Thisenablespaymentstobeadjustedtothecashprofileof low-incomegroups,whilesmarttechnology(includinglow-costchips,circuitsandIoT)artic-ulatedintocleantechproductseasesremoteregulationoftheuseandfunctionalityofsolardevices.Forexample,SimpaNetworkinIndiausesarooftopleasingmodelenabledbymobilepaymentsandcontroltechnologytounlockinvestmentsinsolarhomesolutionsforlast-milemarkets.Thismodelcreatesopportunitiesforcompanyreceivablestobesecuritizedforinstitutionalinvestors.

•Circularbusinessmodels:Digitalfinancehasalsounlockedsustainablebusinessmodels arising from the interactions between the circular and sharing economy.ThesecouldbewellsuitedforPE/VCallocations.Thisincludesthesharingmodel(whichenablescompaniestomaximizevaluecreation),theresourcerecoverybusi-nessmodel(whichrecoversandreusesresourceoutputs,eliminatingleakages),andtheproductlifeextensionmodel(whichreduceswasteandcreatesnewsourcesofrevenue).112Data,real-timetransactionsandtheinherentscalabilityofdigitallyen-abledbusinessmodelshelpmitigatesomerisksforPE/VCinvestment.

•Insurancesector:IoTandmachinelearningunlock‘usage-basedinsurance’,allow-ingpricingtobebasedonactualbehaviorratherthanontraditionalfactorslikelo-cation.Thismayhowever,underminetheinsurancemodelofriskpooling,leavingsomegroupswithoutaccesstoinsurance.EnvironmentalIoTsensorswithtwo-waycommunicationalsoprovidepredictivealertsonpotentiallydangerousconditions,improvinginsurers’lossratios.113

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Indeed,IoTdeploymentscanhavepositiveeffectsonawiderangeofsustainabil-itygoals.According to theWEF,ananalysisofmore than640 IoTdeploymentsshowedthat84%ofexistingIoTdeploymentscanaddresstheSDGs,eventhoughthe impactson sustainabilitywerenot theirmaindriver.114The impactof IoT issignificantbecauseatitscore,IoTisaboutcollectingdata,measuringandremotecontrollingpreviouslyunconnected‘things’,reachingpeopleandobjectsthatothertechnologiescouldnot,whichunlocknewopportunitiesforfinancing.Sensorsandcloud-based analytics canbeused to evaluate theperformanceofoperations andmaintenancetechniques,enablingbetterinformedcapitalplanningforinfrastruc-tureinvestments.WithestimatesthattheaverageannualnumberofconnectedIoTdevicesworldwidewillreach125billionby2030,IoTcouldplayasignificantroleinencouragingfinancingforsustainabledevelopment.115

Themapping of practice acrossG20members and the private sector reveal threeimplications:

•Digitalfinance’s‘data power’increasestheavailabilityandaccessibilityofaccu-rate,low-costinformationthatcouldincreasesustainableinvestments.Thispowerisunderleveragedby thefinancial sector.The extent towhich thedataunlockedbydigitaltechnologiesisappliedtoovercomeinformationalasymmetriesislimited.Thisraisesthequestionabouthowdigitalfinancecanbemorewidelymainstreamedbythefinancialsectortoincreasesustainableinvestments.

•Digitalfinance’s‘innovation power’isstillmostlyatasmallscaleinsustainabledevelopment sectors,making capital deployment in these sectors relatively small.Thisraisesthequestionabouthowtherealeconomycanbetterleveragedigitalfi-nancetodrive innovationthatmakes investments insustainablebusinessmodels,sectorsandoutcomesmoreviableatscale.

•Digitalfinancemay createeconomic, social and environmental unintended consequences.Economically,digitalfinancecreatestrade-offsincertainindustries,

3.2.2 Implications and Unintended Consequences

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whichcouldresult in joblossesandgreater inequalities.Socially,theexplosionofonlineplatformsraisesquestionsrelatedtotheuseandprotectionofconsumerdata,aswellassocialexclusionofsomeminorities.116Environmentally,digitaltechnolo-giesmaybringunintendedeffectsifnotproperlyunderstoodandmanaged,includ-ingecosystemdegradation,largewaterrequirementsandhighenergyconsumptionfromglobaldatacentersandtheuseofdecentralizedledgertechnologies.117

Lack of, or insufficient awareness of the potential benefits and invest-ments opportunities.

Big data, machine learning and AI gather andprocess largequantities of low-cost data related to environmental and socialperformance enabling investors to better price environmentalrisks and opportunities. Greater transparency also empowerscitizens tobecomemoreactivealongthefinancingvaluechain.Aspensionandinsurancepolicyholders,theycanbemoreeasilyinformedand,as a result,demandandbeofferedmorechoicesforthedeploymentoftheirlong-termsavings,takingsustainabledevelopmentpreferencesintoaccount.

Example: ING Real Estate Finance (EU) developed a tool using big data to help their borrowers identify the energy improvement mea-sures for their buildings that provided the most attractive finan-cial returns and greatest carbon emission reductions. Based on this information, ING offers lower costs of capital for real estate loans used for energy-efficient modifications. Such green commercial loans could be repacked into green commercial mortgage-backed securities or other bundling for sale to institutional investors via the capital markets to help banks free up capacity.

TABLE 1 :

Creating Sustainable Assets for the Capital Markets

Challenges & Opportunities Examples of Associated Digital Finance Applications

Summary of I l lus t ra t ive Examples o f D ig i ta l Appl icat ions for Creat ing Susta inab le Assets for Cap i ta l Markets and Deploy ing Susta inab le PE/VC


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Sustainability classif ications and taxonomies:Riskof‘greenwashing’;challenges inmeasuring and validat-ingthe‘greenness’ofinvestments

Standards and labels: Lack of, orunderdeveloped certif ied labels hin-ders the identif icationof sustainableloans to bemarket-ref inanced or se-curitized.

Encourage the development of virtu-al tech platforms that bring together sustainable assets and investors.

IoTprovidesrealtimeaccesstolargequantitiesofcheapperfor-mance data, which makes measuring and tracking the perfor-manceofgreenassetscost-effectiveandefficient.Thedecentral-izednatureofblockchainallowsthe“greenness”ofinvestmentstobeverified,tracedandauditedinasecure,transparentandim-mutablemanner.Combined,thesetwotechnologiescanreducethedatacostsandincreaseinvestorconfidenceinmeasuring,la-belingandverificationofsustainableassets.

Example: In China, Beijing Nenglian Zhonghe Technology Co., Ltd. combines IoT and blockchain to create a green asset informa-tion service platform for financial markets. Data from green as-sets is collected through IoT, stored in real-time on the blockchain, and converted into financial information. The characteristics of the blockchain meet the financial markets requirements for asset infor-mation that is trusted and traceable, thereby unlocking investment.

Onlineinvestmentplatformsarecreatingmarketplacesbringingtogether and ‘matchmaking’ sustainable technology businesseswithfinance andothermarketparticipants. Suchplatformsof-feracombinationofcurateddealflow,dataondeals,andAItomatchinvestorstotheirpreference.

Example: Convergence Finance has developed a platform that gen-erates blended finance data, intelligence, and deal flow to increase private sector investment in global development in emerging mar-kets. By allowing investors to quickly search databases for credible deals or investors that match their investment needs, the Conver-gence platform broadens investors’ networks and simplifies their screening process.



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High risks associated with new sus-tainable technologies/business models.

Lack of definition, standardization and verification of sustainable tech-nologies/business models. A lack ofstandardized verification forwhat con-stitutes a sustainable way of investingandconsistentenvironmentalandsocialriskmanagementstandardsandpractic-es

Mobile payment platforms combined with IoThaveunlockednewbusinessmodels,including‘product-as-a-service’.Thisbusi-nessmodelallowscustomerstouseproductsthroughaleaseorpay-for-usearrangementversustheconventionalbuy-to-ownap-proach.Paymentscanbeadjustedtothecashprofileofthepoor,whilesmarttechnologymakesiteasytoremotelyregulatetheuseand functionalityofdevices.Suchmodelsmake investments insustainabletechnologiescommerciallyviable.

Example: Simpa Network in India uses a rooftop leasing model made possible with mobile payments and control technology to un-lock investments in solar home solutions for last-mile markets. As customers build up a financial track record, such companies are able to offer financing for consumers for other products. This model does create opportunities for company receivables to be securitized for in-stitutional investors.

Leveragingvastamountsofdata,machine learning and AIfa-cilitatethedevelopmentofenvironmental,socialandeconomicratingmethodologies,benchmarking,andscorecards,whichen-ablesmoreefficientandtransparentintegrationofESGconsider-ationsintoinvestmentdecision-making.

Example: Sustainalytics in the UK leverages big data and AI to provide cheaper incorporation of ESG considerations into invest-ment decision-making. Sustainalytics’ data services enable investors to integrate environmental and social research into their internal or third-party systems (such as Bloomberg). Data delivery is automat-ed and allows the creation of databases, reports and dashboards to facilitate data analysis and decision-making.

Developing Sustainable Private Equity and Venture Capital


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Severalgenericchallengescanpreventtheapplicationofdigitaltechnologiestosustainablefi-nanceatlength.First,weakdigitalinfrastructure,suchashigh-costandunreliablebroadbandconnectivityfallsshorttoalloworsupportthebenefitsthatdigitalfinancecanoffer.Second,high technologycosts, risks and limited robustness reduce thepotentialof scale.Technolo-giessuchasblockchainandIoTarestillinproofofconceptstage.Reachingconsensusinbit-coin-likeblockchainnetworkscomeswithhighenergycosts,whichlimitscalability.118Similarly,throughputcapacityforblockchainsisverysmall119andnetworksoperateinisolation.Further,asthenumberofdevicesconnectedtotheInternetscale,sowillthepotentialofcyberrisks.

Inadditiontothesegenericchallenges,specificchallengesplayingoutindevelopingsustainabledigitalfinanceare:

•Limited awareness and understanding of digital technologies and their interplay with sustainable finance: Researchthatteasesoutthefullpotentialandrisksofdigitalfi-nancetoenhancethemobilizationofsustainablefinance,particularlywithregardtospecific thematicareas, is still in its early stages.Thecombinationof sustainablefi-nance,whichisrelativelynew,withdigitalfinance,whichisrapidlychanging,createsgapsinunderstandingthenexusbetweenthetwoareas.

•Limited availability, quality and use of sustainability-related data for financial deci-sion-making: Largedatasets,notablyofenvironmentalperformancedatamaynotbeavailable,oratthequalityrequiredforfinancialinvestmentdecisions.Adoptionmaybeslowduetothelackofstandardsandmethodologiesfortranslatingbehavioraldataintoenvironmentalperformancedata.Therearealsocosts toadoptionand limitedcapabilitiestoanalyzesuchdatatomakeinvestmentdecisions.

•Nascent business models: Manysustainabletechnologyproviderscurrentlytestingandprovidingsolutionsarestart-ups,whichhaveahigherriskoffailure.Forlargermarketplayers,sustainableIoTimplementationcomesfromcompany‘innovation’budgets,anditwilltaketimebeforemainstreamlargerbusinessbudgetstoconverttheseintolargescaledeployments.120

3.2.3 Challenges

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Asthemappingshows,newopportunitiesareemergingtobetter leveragedataandthe innovationpotentialofdigitalf inanceforsustainablef inanceatscale.Thefol-lowingoptionscomeupashelpfulsteps inrealizingthepotentialbenef itsoftheseopportunitiesatscale:

1. Raise awareness about the potential, opportunities and risks of the applica-tion of digital technologies to sustainable finance

•Governments, international organizations and think tanks could take forward a comprehensive research agenda. The goal of such an endeavorwould be toprovidegreater levelsofgranularityonspecif icareasofsustainabledigital f i-nancethatrespondtotheanalyticalneedsofvariousstakeholdergroups.Suchresearchquestionscould include:Howcandigital technologiesacceleratead-vances inspecif icareasofenvironmentalandsocial impactor intheachieve-mentoftargetsunderspecif icSDGs?Howcandigitaltechnologieshelpf inan-cialinstitutionsbetteridentify,analyzeandintegrateenvironmentalandsocialrisksintof inancialdecision-making?Howcanf inancialcentersleveragedigitalf inance to improve sustainability?Howcandigital f inance transformthe fu-tureoff inancingfornewsustainableinfrastructurebusinessmodels?Whataretherisksorunintendedconsequencesofsustainabledigitalf inance?

• New and existing multi-stakeholder engagement platforms could be co-con-vened. The f inancial sector, policymakers, sustainable development expertsandthef intechcommunitycouldbeconvenedtolookatnationalorregionalsustainablef inancestrategiesthroughadigitalf inance lensandf intechstrat-egiesthroughasustainablef inancelens.Specif icworkstreamswithinnation-al platforms could catalyze dynamic forces for change. For example, a ‘greenbond tech’ task force could enablegreenbond issuers to join forceswithbigdata, AI and blockchain experts to identify opportunities for technology to

3.3 Voluntary Options for advancing sustainable digital finance

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reducecostsandscalegreenbonds.Nationalplatformswouldalsobeable toraiseawarenessaboutthevalueofenvironmentaldataandincreasedemandsbycitizensforgreaterintegrationofsustainabilityconsiderationsintoinvestmentdecisionsbypensionfunds,assetmanagersandbanks.Asanumberofnationalplatformsemerge,anetworkcouldbecreatedtoimprovecross-borderlearningandsharing.

• International cooperation could continue the momentum created by the G20 SFSG on the topic of digital technologies and sustainable finance. Suchcooper-ationcouldtakeplacebetweennationalgovernmentsthroughexistingforumssuchas theG20.Forexample, task forceswithin international forumscouldlookmoredeeplyatcross-borderchallenges,risksandopportunities.Workattheinternational levelwouldcreatethehigh-levelvisibilityneededtoengageindustry players, particularly largemultinationals with inherent capacity toscale, and small innovative companies. Internationalmulti-stakeholder plat-formscouldpromotecross-bordersharing,identifynewopportunitiestode-velopanddeploysustainabledigitalf inancesolutionsandscalebestpracticepilotsacrosscountries.Suchplatformswouldalsobebetterequippedtolinkenvironmentalresearchmitigatingthecarbonintensityoftheblockchainwithinnovative pilots leveraging blockchain to enhance themobilization of sus-tainablef inance.

2. Explore the relevance of supervisory arrangements for applying digital technologies to sustainable finance.

• Foster close interactions between innovative sustainable digital finance solu-tions and regulators/supervisors. This would help ensure that supervisors areon-boardedappropriatelyandasearlyaspossible inthedevelopmentandlifecyclemanagementoftheseapplications.Alevelplayingf ieldhastobeassured(same risks, same rules). Existing mechanisms could be leveraged to achievesuchinteractions.

3. Encourage investment in digital technologies that advance sustainable fi-nance, such as technologies that improve the assessment and availability of

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sustainable finance-related data.

•Encourage the integration of sustainability elements into the existing fintech ecosystem. Onewaytosupportthiscanbebylaunchingcompetitions,hackathons,incubatorsandacceler-atorsthatfocusspecificallyoncrowdinginsolutionsrelatedtosustainablebusinessmodels.

•Improve the visibility and transparency of new fintech solutions. Thecreationofspecificla-belsthatbetterdefinesustainabledigitalfinancesolutionscouldfacilitatetheidentificationofsuchsolutionsaswellasprovidegreatertransparencyaroundtheirbenefitsandimpacts.

•Define the requirements to scale innovative pilots using blockchain and IoT to address information asymmetries and lower information search costs. Thiswouldenablestake-holderstoidentifyconstraints,requiredpartnershipsandpotentialsolutionsearlyon,in-creasingthelikelihoodofscale,whichinturnfacilitatesuptakebyinstitutionalinvestors.

•Develop more standardized tools and instruments for translating a wide range of finan-cial transaction data into environmental data. Thiswouldhelpencourageinvestmentissustainabledigitalsolutionsthatprovideconsumerswithinformationabouttheenviron-mentalandsocialimpactoftheirpurchasingdecisions.Asaresult,consumerswouldfinditeasiertomakewell-informeddecisionsandoptforsustainablechoices.Currentlythemeth-odologyfortranslatingfinancialpurchasesdataintoenvironmentaldataislimited.

•Create new financial products that are easily accessible online and through mobile ap-plications (e.g. online retail sustainable bonds) within the applicable legal framework for investment services. Thiscanincreasecitizeninvolvementinthesustainableinvestmentvaluechain.

•Scale virtual tech platforms that bring together sustainable assets and investors within the ap-plicable rules on trading facilities. Thistypeofleapfroggingtechnologycouldallowemerg-ingmarkets’bankstorenewandrefreshtheirbalancesheetstosustainableinvestorsandthereforeallowforadditionalbalancesheetcapacitytounderwritenewsustainableloans.Manyyoungandinnovativefirms,drivenbyentrepreneurs,couldgrowthisopportunity,especiallyifsustainableVCismorewidelyavailable.Further,localandfederalgovernmentscouldprovidetheenvironmentforthesecompaniestogrowandsucceed.

75

ThefindingsthathaveemergedfromtheSFSG’sstocktakingandanalysistogetherwiththevoluntaryoptionsdevelopedunderArgentina’sG20Presidencycanhelpcountriesintheireffortsindeployingsustainablefinance.

Specifically,itcanbeusefultomakeavailabletheconsiderablesourceoflong-termcapitalfrominstitutionalinvestorsfortherefinanceofthegrowingpoolofsustainableloansonbanks’balancesheets;toovercomethelackoffundingforthedevelopmentofsustainabletechnologiesandofsustainablebusinessmodelsbyearly-stagecompaniesandSMEs;andto tapon theopportunities arising fromcurrent applicationsofdigital technologies tofacilitatethedeploymentofsustainablecapitalacrossassetclasses.

Conclusion

77

1 Thesurveyisbasedonananalysisoftheactivitiesof209oftheworld’sleadingimpactinvestingorganizations,includ-ingfundmanagers,foundations,banks,developmentfinanceinstitutions,familyoffices,pensionfunds,andinsurancecompanies.

2Onanationallevel,eachGSG’sNationalAdvisoryBoardhastheresponsibilitytodothemarketsizingatleastevery3to5years.

3GreenFinanceStudyGroup (2016).SynthesisReport.http://unepinquiry.org/wp-content/uploads/2016/09/Syn-thesis_Report_Full_EN.pdf


5Mostbanksarefinancedbyacombinationofon-demandandshort-termfixeddepositsandcorporateborrowingsfromotherfinancialinstitutionsorviacommercialpaper.Fewoftheseformsofbankfinancingmeetthelong-termtenorsofmanysustainablefinanceinvestmentssuchasinfrastructure(hedgingisrequired).Hence,thereisoftenamaturitymis-matchortheextracostofahedge.



8Thereisnounivocaldefinitionofthe“sharingeconomy”or“collaborativeeconomy”orauniformdescriptionofitscomprehensiveness.Furthermore,thereislimitedresearchdonesofaronitsenvironmentalimpacts.Yet,therearesomestudiesthatshowthatthereareelementsofthesharingeconomythatcouldenhancethesustainabilityfeaturesofbusi-nessesortheeconomy.Forexample,itallowsforthe‘optimizationofusage’,implyingthatthewasteofotherimportantvaluessuchastime(e.g.withsharingcarsortools)orspace(e.g.AirBnb)isminimized(http://sustainablefinancelab.nl/wp-content/uploads/sites/232/2016/04/FinanCE-Digital.pdf).Also,environmentalimpactsareverydependentonthe typeofcollaborativebusinessmodel studied,andthe typeof ‘traditional’ transaction it iscompared to (https://publications.europa.eu/en/publication-detail/-/publication/8e18cbf3-2283-11e8-ac73-01aa75ed71a1/language-en/format-PDF/source-68097620).

9Thisisinclusiveoflargeinfrastructureprojectsthatareoftenunderwrittenbyaconsortiumofbanksandfollowingtheendofconstructionpermanentfinancingputinplaceviaasyndicatedbankloan.

10OECD(2017).MobilisingBondMarketsforaLow-CarbonTransition,GreenFinanceandInvestment.http://dx.doi.org/10.1787/9789264272323-en

11Carney,M.(2016).TheSustainableDevelopmentGoalimperative.https://www.bis.org/review/r160523b.htm

12Ibid.Currentlylessthan1%ofinstitutionalinvestor’sholdingsaregreenbonds.

13Manyinstitutionalinvestors,suchaspensionfundsandinsurancescompanieshavelong-termstructuredliabilitiestiedtotheirclientsandtheirretirementneeds.Theseliabilitiesarewellsuitedforlong-termsecureassetssuchassustainabledebt.

14Althoughsomebankscanholdlong-termdebt(especiallystate-ownedorguaranteed),manyrelyuponondemandde-

Endnotes

78

positsandshort/mid-termcorporatefinancingtofundtheirbalancesheets.Hence,thereisageneralmaturitymismatchbetweenmanysustainableinvestmentsandmanybanks.

15Manydebtcapitalmarketproductssuchasasset-basedsecuritiesandcoveredbondshavealonghistorywithcertaindebtassetssuchascreditcardreceivables,autoloansorcorporateloans.However,theseproductshavenotbeenusedforsustainabledebtassets.Hence,theycanbe“re-purposed”toadvancesustainablelending.

16Carney,M.(2016).TheSustainableDevelopmentGoalimperative.https://www.bis.org/review/r160523b.htm 17 AnOECDcontributionin2016totheG20GreenFinanceStudyGroup,“ProgressReportonApproachestoMo-bilising institutional Investment forGreen Infrastructure”, includes33examplesofgreen infrastructure investmentsinvolvingbothinstitutionalinvestorsandthepublicsector(includingpublicfinancialinstitutions)andprovidescon-clusionsonhowgovernmentsarehelpingtomobilizeinstitutionalinvestmentingreeninfrastructure.Thisdatabasehasbeenupdatedfor2018andincludesmorethan140transactions. 18 World Economic Forum (2017). The money is there to fight climate change. https://www.weforum.org/agen-da/2017/09/the-money-is-there-to-fight-climate-change/

19Stein,P.Kludovacz,T.andRooprai,G.(2018).InputpaperonEmergingMarkets:SustainableBankingandCapital.

20Ahmad,E.(2015).Publicfinanceunderpinningsforinfrastructurefinancingindevelopingcountries.https://g24.org/wp-content/uploads/2016/02/Public-Finance-and-Infrastructure_23Feb_2014.pdf. New Climate Economy(2016).The sustainable infrastructure imperative Financing forBetterGrowth andDevelopment. http://newclima-teeconomy.report/2016/wp-content/uploads/sites/4/2014/08/NCE_2016Report.pdf

21Robins,N.andMcDaniels,J.(2016).GreeningtheBankingSystem:TakingStockofG20GreenBankingMarketPractice.http://unepinquiry.org/wp-content/uploads/2016/09/9_Greening_the_Banking_System.pdf

22NewClimateEconomy(2016).TheSustainableInfrastructureImperative.http://newclimateeconomy.report/2016/wp-content/uploads/sites/4/2014/08/NCE_2016Report.pdf.OECD(2017).MobilisingBondMarketsforaLow-Car-bonTransition,GreenFinanceandInvestment.http://dx.doi.org/10.1787/9789264272323-en.Carney,M.(2016).TheSustainableDevelopmentGoalimperative.https://www.bis.org/review/r160523b.htm.FSB/IMF/WB(2012).Identi-fyingtheEffectsofRegulatoryReformsonEmergingMarketandDevelopingEconomies:AReviewofPotentialUn-intendedConsequences.http://www.fsb.org/wp-content/uploads/r_120619e.pdf;Ang,G.,Röttgers,D.andBurli,P.(2017).Theempiricsofenablinginvestmentandinnovationinrenewableenergy.OECDEnvironmentWorkingPapers,No.123.http://dx.doi.org/10.1787/67d221b8-en

23Environmentalprotection,cleanenergy,Cleantransitandenergyefficiency

24PBoC/UNEnvironment(2015).ChinaGreenFinanceTaskForceReport.http://unepinquiry.org/wp-content/up-loads/2015/12/Establishing_Chinas_Green_Financial_System_Final_Report.pdf

25Theestimateisanyearlyaverageinvestmentgapfortheperiod2021to2030,basedonPRIMESmodelprojectionsusedbytheEuropeanCommissionintheImpactAssessmentoftheProposaloftheEnergyEfficiencyDirective(2016),http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1483696687107&uri=CELEX:52016SC0405

26EC(2018).ActionPlan:FinancingSustainableGrowthcitingEIB(2016).RestoringEUcompetitiveness.http://www.eib.org/attachments/efs/restoring_eu_competitiveness_en.pdf

Sustainable Finance Synthesis ReportEndnotes

79


27White&Case(2018).2018SettobetheBreakthroughYearforGreenLoansandGreenSecuritisations.https://www.whitecase.com/publications/alert/2018-set-be-breakthrough-year-green-loans-and-green-securitisations

28PrinciplesforResponsibleInvestment(2016).GreeningInstitutionalInvestment.http://unepinquiry.org/wp-con-tent/uploads/2016/09/3_Greening_Institutional_Investment.pdf

29Amongthesereportsare:EY,“Globalinsurancetrendsanalysis2016”;MunichRE,“InsuranceMarketOutlookfor2018/2019”.

30AsdetailedbyInternationalCapitalMarketAssociation(ICMA),“Green,SocialandSustainabilityBondsareanytypeofbondinstrumentwheretheproceedswillbeexclusivelyappliedtoeligibleenvironmentaland/orsocialprojects.Theyareregulatedinstrumentssubjecttothesamecapitalmarketandfinancialregulationasotherlistedfixedincomesecurities.”Source:https://www.icmagroup.org/green-social-and-sustainability-bonds/


32IberdrolaisatraditionalissuerofgreenbondsintheSpanishmarkets:thiscompanyissuedapublicgreenbondforthefirsttimein2014andhasbeenalargeissuereversince.Whatitisreallynewistheir“FrameworkforGreenFinancing”ofApril2018.AccordingtoIberdrola:“GreenFinancinginstrumentsissuedpriorthisFrameworkpublication(sinceApril2014to2017)followedsimilarprojectselectionandreportingprocedures.However,toassuremaximumhomogeneity,thecompanywillreportthemaccordingtothisFrameworktotheextentthatispossible.”Seehttps://www.iberdrola.com/shareholders-investors/investors/fixed-income/information-related-to-green-bonds.

33Includinginvestmentfundsandassetmanagers

34IncludingOECDassetowners(Pensonfundsinsurancecompanies,andglobalpublicpensionreservefunds),andexcludinginvestmentfunds,asofDecember2016.Source:OECDGlobalPensionStatistics,GlobalInsuranceStatisticsandInstitutionalinvestorsdatabasesandOECDstaffestimates.

35https://www.fsitaliane.it/content/fsitaliane/en/investor-relations/debt-and-credit-rating/green-bond.html

36OECD (2016). A quantitative framework for analysing potential bond contribution in a low-carbon transition.https://www.oecd.org/env/cc/quantitative-framework-bond-contributions-in-a-low-carbon-transition.pdf; OECD(2017). Mobilising Bond Markets for a Low-Carbon Transition, Green Finance and Investment. http://dx.doi.org/10.1787/9789264272323-en

37https://www.icmagroup.org/green-social-and-sustainability-bonds/


39McGarry,C.,Bark-Jones,M.andHauman,M.(2017).GreenLoansPavetheWayforGreenCLOsandGreenRMBS.https://www.whitecase.com/publications/alert/green-loans-pave-way-green-clos-and-green-rmbs

40TheCLOcasestudyisexpectedtobefinishedbeforetheendof2018.

41144AbondsareU.S.-basedofferingsthatdonotneedtosatisfythetwo-yearholdingperiodrequirementandpermitsqualifiedinstitutionalbuyerstotradethesepositionsamongthemselves.


80

42Segoviano,M.,Jones,B.,Lindner,P.andBlankenheim,J.(2015).Securitization:TheRoadAhead.IMFStaffdiscus-sionnote.https://www.imf.org/external/pubs/ft/sdn/2015/sdn1501.pdf

43EC(2015).Actionplanonbuildingacapitalmarketsunion.https://ec.europa.eu/info/publications/action-plan-build-ing-capital-markets-union_en,Mendelsohn,M.etal.(2015).TheSolarAccesstoPublicCapital(SAPC)MockSecu-ritization Project https://www.nrel.gov/docs/fy16osti/64347.pdf. CBI/LSE/CCCEP/Grantham Research Insitute/ESRC(2015).GreenSecuritisationRoundtable:ApublicsectoragendaforgreensecuritisationmarketdevelopmentinEurope.DiscussionPrimerforGreenSecuritisationRoundtable(8June2015,London).Segovianoetal.(2015).

44Caldecott,B.(2012),GreenInfrastructureBonds:Accessingthescaleoflowcostcapitalrequiredtotackleclimatechange.

45NewClimateEconomy(2016).TheSustainableInfrastructureImperative.http://newclimateeconomy.report/2016/wp-content/uploads/sites/4/2014/08/NCE_2016Report.pdf

46OECD’s2018updateofthedatabaseusedfor“ProgressUpdateonApproachestoMobilisingInstitutionalInvest-mentforSustainableInfrastructure”(OECD,2018forthcoming),surveyingsustainableinfrastructureinvestmentsin-volvingbothinstitutionalinvestorsandthepublicsector(includingpublicfinancialinstitutions).

47 Inter-AmericanDevelopmentBankandMercer (2017).Crossing thebridge to infrastructure investing: exploringwaystomakeitacross.https://www.un.org/pga/71/wp-content/uploads/sites/40/2017/06/IADB-and-Mercer-Cross-ing-the-Bridge-to-Sustainable-Infrastructure-Investing-Exploring-Ways-to-Make-it-Across.pdf.Thispaperisacompan-iontotheMercer-IADB(November2016)paper“BuildingaBridgetoSustainableInfrastructure”.Thissecondpartof IADBandMercer’swork,published in2017, shows the resultsof10 interviewswith large institutional investorsallocatingtoinfrastructuretounderstandhowtheyareapproachingsustainabilityconcepts.

48https://www.unpri.org/investor-tools/bofa-merrill-lynch-global-researchs-esg-in-equities-investing-study/2742.article49OECD’s2018updateofthedatabaseusedfor“ProgressUpdateonApproachestoMobilisingInstitutionalInvest-mentforSustainableInfrastructure”(OECD,2018forthcoming),surveyingsustainableinfrastructureinvestmentsin-volvingbothinstitutionalinvestorsandthepublicsector(includingpublicfinancialinstitutions).Also,UKGreenIn-vestmentBankplc(2016).AnnualAccountandreports,2015-2016.OrderedbytheHouseofCommons13July2016.http://greeninvestmentgroup.com/media/118884/gib-annual-report-2016-web-single-pages.pdf

50TCFD(2017).FinalReport:RecommendationsoftheTaskForceonClimate-relatedFinancialDisclosures.https://www.fsb-tcfd.org/publications/final-recommendations-report/;TCFD(2017).Annex:ImplementingtheRecommen-dations of the TCFD. https://www.fsb-tcfd.org/publications/final-implementing-tcfd-recommendations/; TCFD(2017).TechnicalSupplement:TheUseofScenarioAnalysisinDisclosureofClimate-relatedRisksandOpportunities.https://www.fsb-tcfd.org/publications/final-technical-supplement/

51Gold,J.(2017).AStandardESGFrameworkIsKeytoUnleashingMarkets’ResponsibleGrowth.https://www.sp-global.com/our-insights/A-Standard-ESG-Framework-Is-Key-to-Unleashing-Markets-Responsible-Growth.html

52IFC(2017).GreenFinance:ABottom-upApproachtoTrackExistingFlows.https://www.ifc.org/wps/wcm/con-nect/48d24e3b-2e37-4539-8a5e-a8b4d6e6acac/IFC_Green+Finance+-+A+Bottom-up+Approach+to+Track+Exist-ing+Flows+2017.pdf?MOD=AJPERES

53See:https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R2402&from=en


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54See:https://www.gov.uk/guidance/green-finance#green-finance-taskforce

55 See:https://www.dnb.nl/en/about-dnb/co-operation/platform-voor-duurzame-financiering/index.jsp

56Socialimpactbonds,alsoknownasPay-For-Successfinancing,apayforSuccessBondoraSocialBenefitBond,isacontractwiththepublicsectorinwhichacommitmentismadetopayforimprovedsocialoutcomesthatresultinpublicsectorsavings.Itcouldbeseenasasortofventurefundedwithprivateequity/capitalinthedemonstrationphaseofasolution.

57Seehttps://convergence.finance/

58G20GreenFinanceStudyGroup(2016and2017).Synthesisreport.Availableathttp://unepinquiry.org/g20green-financerepositoryeng/

59McKinseyGlobalInstitute(2016).Digitalfinanceforall:Poweringinclusivegrowthinemergingeconomies.https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Employment%20and%20Growth/How%20digi-tal%20finance%20could%20boost%20growth%20in%20emerging%20economies/MG-Digital-Finance-For-All-Full-re-port-September-2016.ashx

60InternationalDataCorporation(2014).TheDigitalUniverseofOpportunities:RichDataandtheIncreasingValueoftheInternetofThings.https://www.emc.com/leadership/digital-universe/2014iview/executive-summary.htm

61 PwC (2017). Sizing the prize. https://www.pwc.com/gx/en/issues/analytics/assets/pwc-ai-analysis-sizing-the-prize-report.pdf

62OECD(2017).Ensuringfinancialeducationandconsumerprotectionforallinthedigitalage.http://www.oecd.org/daf/fin/financial-education/G20-OECD-INFE-Report-Financial-Education-Consumer-Protection-in-the-digital-age.pdf

63JournalofBusinessEconomics(2017).https://link.springer.com/article/10.1007/s11573-017-0852-x

64ITU(2016).TheDigitalFinanceServicesEcosystems.http://bit.ly/2BiFoNK

65World Bank (2016).WorldDevelopment Report –Digital dividends. http://documents.worldbank.org/curated/en/896971468194972881/pdf/102725-PUB-Replacement-PUBLIC.pdf

66OECD(2017).Ensuringfinancialeducationandconsumerprotectionforallinthedigitalage.http://www.oecd.org/daf/fin/financial-education/G20-OECD-INFE-Report-Financial-Education-Consumer-Protection-in-the-digital-age.pdf

67http://www.fsb.org/what-we-do/policy-development/additional-policy-areas/monitoring-of-fintech/

68 International Association of insurance Supervisors (2016). June 2016 Newsletter. https://www.iaisweb.org/file/61139/iais-newsletter-june-2016-final

69Cryptoassetsarenotincludedinthispaper.

70EVRY(2015).BigDatainBankingforMarketers.https://www.evry.com/globalassets/insight/bank2020/bank-2020---big-data---whitepaper.pdf

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71McKinseyGlobalInstitute(2015).UnlockingthepotentialoftheInternetofThings.https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-internet-of-things-the-value-of-digitizing-the-physical-world

72Cliffrod,C.(2015).CrowdfundingNearlyTripledLastYear,Becominga$16BillionIndustry.https://www.entre-preneur.com/article/244503

73CityofLondonGreenFinanceInitiative(2017).GreenFintech–Projecttopicforconsiderationin2017.Discussiondraft.

74EY(2016).CapitalMarkets:innovationandtheFinTechlandscape.http://www.ey.com/Publication/vwLUAssets/EY-capital-markets-innovation-and-the-finTech-landscape/$FILE/EY-capital-markets-innovation-and-the-fintech-land-scape.pdf

75 Casale, F. (2014). Using RPA in Banking to Streamline Development. https://irpaai.com//wp-content/up-loads/2014/08/Wall-Street-Technology-Using-RPA-in-Banking-to-Streamline-Development.pdf

76 InternationalDevelopmentBank(2017).Digitalfinance:Newtimes,newopportunities,newchallenges.https://publications.iadb.org/bitstream/handle/11319/8199/Digital-Finance-New-Times-New-Challenges-New-Opportuni-ties.pdf?sequence=1

77IFCetal.(2018).Workdraft.PrivateEquityandVentureCapital’sroleincatalyzingsustainableinvestments.

78G20GreenFinanceStudyGroup(2016and2017).Synthesisreport.Availableathttp://unepinquiry.org/g20green-financerepositoryeng/

79OnebankleveragingdigitalfinancetooffersustainabilityloansisINGRealEstateFinance(EU).

80UNEnvironmentInquiryandClimateStrategy&Partners(2017).GreenTaggingMobilisingBankFinanceforEner-gyEfficiencyinRealEstate.http://unepinquiry.org/wpcontent/uploads/2017/12/Green_Tagging_Mobilising_Bank_Finance_for_Energy_Efficiency_in_Real_Estate.pdf

81BasedoncontributionsfromXing’anGe,ShenzhenGreenFinanceCommittee

82StockholmGreenDigitalFinance(n.d.).GreenAssetsWallet.https://stockholmgreenfin.tech/gaw/

83https://www.sustainalytics.com/

84https://www.truvaluelabs.com/about/

85http://sustainablefinancelab.nl/wp-content/uploads/sites/232/2016/04/FinanCE-Digital.pdf

86https://www.crowdium.com.ar/?gclid=CPaksozz-9ICFQcFkQod31kNlg

87https://www.climatefinancelab.org/the-labs/brasil/

88WorldEconomicForum(2017).BeyondFintech:APragmaticAssessmentOfDisruptivePotentialInFinancialSer-vices.http://www3.weforum.org/docs/Beyond_Fintech_-_A_Pragmatic_Assessment_of_Disruptive_Potential_in_Fi-nancial_Services.pdf

83



89https://www.ecocrowd.de/en/

90https://ecofinance.ru/

91https://www.kickstarter.com/projects/1398120161/solar-paper-the-worlds-thinnest-and-lightest-solar?ref=nav_search

92http://swave.parisandco.com/

93SupplyChainManagementAssociation(2017).AI-poweredsupplychainsuperclusterwillpropelCanada’srankingintheglobalinnovationraceandsustainablegrowth.http://scma.com/national/en/news/2017-scma-news/1546-ai-pow-ered-supply-chain-supercluster-will-propel-canada-s-ranking-in-the-global-innovation-race-and-sustainable-growth

94Libelium(2015).SustainableFarmingandtheIoT:CocoaResearchStationinIndonesia.http://www.libelium.com/sustainable-farming-and-the-iot-cocoa-research-station-in-indonesia/

95http://simpanetworks.com/

96IEEESpectrum(2017).ItalyLaunchesaNewWirelessNetworkfortheInternetofThings.https://spectrum.ieee.org/telecom/wireless/italy-launches-a-new-wireless-network-for-the-internet-of-things

97https://www.opengovasia.com/articles/7144-exclusive-enhancing-efficiency-flexibility-and-resilience-through-sus-tainable-smart-city-projects-in-japan

98Mxcity(2016).MexicoCityinthe2016SmartCitiesList!http://en.mxcity.mx/2016/12/2016-smart-cities-list/

99DailySabah(2017).SmartCitiesprojecttoincreasethelifequalityof15millionIstanbulites.https://www.dailysabah.com/technology/2017/05/15/smart-cities-project-to-increase-the-life-quality-of-15-million-istanbulites

100TheFuturesCentre(2017).NespressoFranceleadscompaniestrackingsustainableactionsonblockchain.https://thefuturescentre.org/articles/10962/nespresso-france-leads-companies-tracking-sustainable-actions-blockchain

101Reuters(2017).SaudiArabia’sIDBplansblockchain-basedfinancialinclusionproduct.https://www.reuters.com/article/us-islamic-f inance-f intech/saudi-arabias-idb-plans-blockchain-based-f inancial-inclusion-product-idUSKB-N1CP08W?il=0

102https://www.caissedesdepots.fr/en/caisse-des-depots-signs-partnership-agreement-systemx-institute-technologi-cal-research-paris-saclay

103https://docs.wixstatic.com/ugd/3d4f2c_b35460f1908f4404b9446617eb25aca6.pdf

104ForfurtherinformationontheprocessappliedbyImpactOnsee:https://www.impacton.org/

105IFC(2012).IFCandSmallandMediumEnterprises.https://www.ifc.org/wps/wcm/connect/277d1680486a831a-bec2fff995bd23db/AM11IFC+IssueBrief_SME.pdf?MOD=AJPERES

106Eitherthosethatwerebornasasustainablebusiness,aswellasthosethathavedecidedtobecomemoresustainable.

107MercadoLibre(n.d.).MercadoCrédito:préstamosparapotenciarlainclusiónfinanciera.https://ideas.mercadolibre.

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com/ar/noticias/mercado-credito-prestamos-para-potenciar-la-inclusion-financiera/

107https://www.entrepreneur.com/article/244503

108Salisbury,NandKhvatsky,J.(forthcoming).Usingsmartalgorithms,machinelearningandblockchaintechnologytostreamlineandacceleratedealflowintheclimatefinance.InBlockchainMovementforGlobalClimateAction,editedbyMarke,A.;https://www.cleantekmarket.com/about-us

109https://www.convergence.finance

110https://groundupproject.net

111TheGPFIfocusesonfourworkstreamsin2018:Digitalonboarding;inclusivepayments;useofalternativedatatoincreaseaccesstofinance;andconsumerprotectionandfinancialliteracy.TheseworkstreamsarecomplementarytotheSFSGresearchondigitalinnovationsandthemobilizationofsustainablefinance.

112WorkingGroupFinanCE(2016).Moneymakestheworldgoround.http://sustainablefinancelab.nl/wp-content/uploads/sites/232/2016/04/FinanCE-Digital.pdf

113Drinkwater,D.(2016).10real-lifeexamplesofIoTininsurance.https://internetofbusiness.com/10-examples-iot-in-surance/;Reiss,R. (2016).5WaysThe IoTWillTransformThe Insurance Industry.https://www.forbes.com/sites/robertreiss/2016/02/01/5-ways-the-iot-will-transform-the-insurance-industry/#d67d4cc66d06

114WorldEconomicForum(2018).TheeffectoftheInternetofThingsonsustainability.https://www.weforum.org/agenda/2018/01/effect-technology-sustainability-sdgs-internet-things-iot/

115https://ihsmarkit.com/industry/telecommunications.html

116Ford,P.(2018).SiliconValleyhasfailedtoprotectourdata.https://www.bloomberg.com/news/articles/2018-03-21/paul-ford-facebook-is-why-we-need-a-digital-protection-agency.TheEconomist(2018).EpicFail.https://www.econo-mist.com/leaders/2018/03/22/facebook-faces-a-reputational-meltdown

117 Digital Technologies and Environmental Change (2016). Lancaster University UK. http://www.research.lancs.ac.uk/portal/files/126987017/GAC_PolicyBrief.pdf

118Coindesk(2017).LightningCanScaleBitcoin,ButAreCostsaBarrier?.https://www.coindesk.com/will-bitcoins-lightning-network-used/.OECD(2017)DigitalEconomyOutlook.http://dx.doi.org/10.1787/9789264276284-en

119UNEnvironment Inquiry (2016).Fintechand sustainabledevelopment:Assessing the Implications.http://une-pinquiry.org/wp-content/uploads/2016/12/Fintech_and_Sustainable_Development_Assessing_the_Implications.pdf

120WorldEconomicForum(2018).TheeffectoftheInternetofThingsonsustainability.https://www.weforum.org/agenda/2018/01/effect-technology-sustainability-sdgs-internet-things-iot/

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Sustainable Finance Synthesis ReportAnnexes

Annexes

Annex 1: List of Input Papers

TheSFSGreceivedaseriesofinputpapers,listedbelow.TheseinputpapersarepreparedbyknowledgepartnersanddonotnecessarilyrepresenttheviewsoftheSFSG.

Input papers:

1. Developing Sustainable Debt Products for Long Term Institutional Investors(BankofEngland,MinistryoftheTreasuryofArgentina).November 2018.

2. Digitaltechnologiesformobilizingsustainablefinance(TheSustainableDigitalFinanceAlliance).October 2018.

3. G20 Input Paper onEmergingMarkets: SustainableBanking andDebtCapitalMarkets(InternationalFinanceCorporation).October 2018.

4. OECDProgressUpdateonApproachestoMobilisingInstitutionalInvestmentforSustainableInfrastructure.BackgroundPapertotheG20SustainableFinanceStudyGroup,(OECD,UniversityofOxford).October 2018.

5. PrivateEquity andVentureCapital’s role inCatalyzing Sustainable Investment,InputpaperfortheG20SustainableFinanceStudyGroup(InternationalFinanceCorporation).October 2018.

6. ProgressReportonSustainableFinance2018(UNEPInquiry2018).December, 2018.

7. Towardsasustainableinfrastructuresecuritisationmarket:Theroleofcollateralisedloan obligations (CLO) (Skandinaviska Enskilda Banken (SEB),White&Case,S&P Global Ratings, with inputs from the Co-Chairs of the G20 SustainableFinanceStudyGroup,andfromOch-ZiffCapitalManagement,APGAndICMA).November, 2018.

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Annex 2: Acknowledgements and Contacts

WethankallG20members,Spainasapermanentguest,andinvitedcountriesofArgen-tina’s G20 Presidency -Chile, Jamaica, the Netherlands, Rwanda, Senegal, Singapore,Switzerland-fortheiractiveparticipationandinvaluableinputstotheG20SFSG.Wealsothank the international organizations, includingBIS, FSB, IFC, IMF,OECD, and theWorldBank,fortheirimportantcontributionstotheworkoftheSFSG.WearegratefulfortheinsightaddedbyotherSFSGknowledgepartners,S&PGlobalRatings,SEB,theSustainableDigitalFinanceAlliance,UNEPInquiry,andWhite&Case.Finally,wethankthemanyprivate sector institutionsand initiatives thathavecontributed to theSFSG’sworkviaprovidingcasematerials,suggestions,encouragements,aswellasresponsestooursurveys.

Contacts:

BankofEngland:MichaelSheren,SeniorAdvisor([email protected])

People’sBankofChina:MaJun,ChiefEconomist,ResearchBureau([email protected])

UNEP:SimonZadek,Co-Director,UNEPInquiry([email protected])

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