This is what I learned about our sustainable financial ecosystem, after working for 18 months at In / Flow, a climate finance NGO.

• Climate finance doesn’t work without relentless collaboration and innovation. Science, academia, industry, markets, and governments must continue to work together. All knowledge and skills are needed to tackle the challenges we face. The more diverse the set of minds, the greater the chances of leveraging all necessary perspectives and minimizing blind spots. It is at the intersection of these spheres that the abundance of edge effects emerges.
• Projects, assets, and emission reduction activities abound, and the demand for green, social, and sustainable bonds and loans shows no signs of slowing down, with new investment vehicles being launched at an accelerated pace. The challenge lies in moving capital from the project to the investment. The bottleneck is at the top of the investment value chain, where project identification, due diligence, activation, and obtaining permits represent the biggest obstacle to capital deployment.
• Financial players overwhelmingly demand the harmonization of standards and frameworks. From a global perspective, the interoperability of taxonomies at the country level—i.e., the classification of activities by industrial sector for establishing criteria—is a condition to enable ambitious and credible sustainable trade on an international scale.
• The redistributive powers of fiscal policy and subsidies must continue to support the global transition. Policy and regulations are the cornerstone of sustainable finance. We can’t live with them, and we can’t live without them. The more adept we are at adapting our financial ecosystem to new rules of the game, the better the chances of thriving in a new world order. Policies have fallen behind lately and remain vulnerable to shifting political cycles. We must create policy frameworks that can stand the test of time.
• Market participants who are willing to embrace the challenge must also be rewarded and see that their commitment to sustainable investment leads to growth and superior returns. A good example of this is performance-linked instruments with a step-up coupon mechanism through which issuers can access lower capital costs by meeting a target. More advantageous financing for sovereign Debt Management Offices, stronger balance sheets for corporate issuers. Everyone may need to give something up in the short term. Investors may need to grit their teeth and adopt a long-term view (as they traditionally should) and will see lower long-term embedded risk. There are trade-offs, but everyone can win from this.
• Investment banks can play a key role in advising companies on how to balance their growth and sustainability agendas and guide the financing of ambitious and credible transition plans when needed. Debt capital markets (DCM) and corporate advisory expertise in structuring and pricing all labeled debt are essential to ensuring that credit spreads fully reflect both the financial and non-financial risks and opportunities of the projects, assets, and activities to which revenues are allocated. Banks and lenders that align will attract more business, see higher issuance volumes flowing through their DCM desks, and enable the liquidity depth sought by investors.
• There are data challenges for standardized metrics, integrated reporting, and risk assessments. Independently verified market data are critical to the credibility of sustainable capital markets. Science-based evaluation aligned with the goal of avoiding 1.5°C exposure from the use of funds and, indeed, transition plans is the only assurance investors can rely on to ensure that the sustainability fundamentals of a bond are anchored in authentically well-informed and reliable expertise. ISO certification and accreditation provide even greater assurance for the grayest types of investments. Retroactive and programmatic certification of bonds, assets, and entities is available to support and minimize issuer efforts.
• Index providers have stepped up by offering powerful benchmarks that define investment opportunity sets (pre-selected) for the investor community. Whether labeled as use-of-proceeds debt or thematic transition financing, index providers have designed ready-to-use indices for reference mutual fund products and active management and segregated mandates, as well as for passive replication of exposures in ETPs (exchange-traded products). Sustainable investments are now widely accessible to both retail and institutional investors.
• Stock exchanges provide ideal venues for the launch and marketing of new sustainable issuances. The fierce competition to attract sustainable debt listings has led them to up their game by expanding the scope of their capabilities and playing a significant role in advancing the issuer-investor interaction agenda on a case-by-case basis.
• Asset owners have the power to drive significant improvements in sustainable finance market techniques. Greening large institutional mandates held by public and corporate pension funds, insurance companies, endowments, and foundations is likely the greatest incentive we can give to other market players—including, but not limited to, asset managers—to execute their sustainable strategy. Greening institutional investment portfolios could be the fastest lever for meaningful greening. Most importantly, plan members have a duty to invest in the transition of their economy and society.
• Environmental and social issues are deeply intertwined, and we must adopt community-based, place-based, and resilience-inducing approaches for climate solutions to be fully effective. Indigenous community participation in the issuance of social and sustainable debt (a hybrid between green and social) is key to the resilience agenda, ensuring that in the event of disaster, economies and societies can recover quickly. Investors, demand a just transition.
• Similarly, capital must be attracted to and within emerging and frontier markets through sustainable investments in private assets, while ensuring the experience is local and community-based. Sustainable debt from emerging markets carries the same country-level risk as its conventional emerging market debt counterpart. Do not expect a price premium or risk discount to avoid disappointment. However, the Global South is home to countless green and sustainable investment opportunities that will ultimately lead to a reduction in the debt burden of emerging market sovereign and corporate issuers, driving an improvement in fundamentals and the stabilization—perhaps even the reduction—of emerging market credit spreads in the long term.
• Concessional financing from multilateral development banks (MDBs) and development finance institutions (DFIs) plays a key role in aggregating project financing, especially in highly fragmented and opaque loan markets. Their expertise in implementing climate and social development programs is critical to a successful transition of our global economy. Inspiring institutional investors to invest in these programs will also make a difference. Supranationals are experts in infrastructure investments, and while in the past they lagged in investments, since 2008 they have multiplied sixfold, and pension funds consider them a source of returns and protection against market volatility.
• The use of artificial intelligence (AI) is already contributing enormously to the fight against climate change and the incorporation of climate resilience into our ecosystem. Existing AI systems offer tools that predict weather, track icebergs, identify oil spills, methane leaks, and other types of pollution. In the insurance sector, AI already helps the risk assessment framework refine the calibration of the impact of natural hazards on the real economy. Private capital is especially suited to seed these early-stage climate technology solutions, as many sectors in transition require patient, determined capital.
• Trust that markets will create a new financial instrument for every problem we face. Despite initial scrutiny over sustainability-linked bonds, it is now clear that forward-looking performance-linked structured products not only constitute a powerful tool for enabling the transition of high-emission and hard-to-abate sectors of our global economy, but they also help monitor issuers’ progress on their path to net-zero. KPI selection, scientifically proven threshold setting, and target and coupon calibration depend entirely on the sector and thus require sector-specific scientific expertise.
• Governments and companies demonstrating leadership by phasing out fossil fuels and phasing in emission-reducing activities and projects will eventually see a favorable impact on their borrowing costs. Issuers’ ability to skillfully communicate strategically aligned transition plans to investors, as well as execute and report on their progress on the path to net-zero by 2050, could be key to weathering the transformation of our economies and societies. Securing financing through sustainability-linked and impact financial instruments can and will embed their strategies with greater credibility and help them build trust among financial market participants and other stakeholders.
• Whether you support this trend or not, the truth is that carbon markets are developing, and banks and exchanges are arming themselves with some of the brightest minds in the field. On the Voluntary Carbon Market (VCM) front, safely structured and vetted, biodiversity impact credit (in the form of Verified Carbon Units or VCUs) could play a significant role, provided that any offsets genuinely support biodiversity conservation or nature-based solutions.