Q3 2022

SUSTAINABLE FINANCE MONITOR

Editors:
Sonja Gibbs, Managing Director and Head of Sustainable Finance (sgibbs@iif.com)
Jeremy McDaniels, Senior Advisor, Sustainable Finance (jmcdaniels@iif.com)

Editor’s Note

Dear Reader, IN THIS ISSUE

Midway through 2022, progress on the global sustainable 1. The Big Picture
finance agenda faces new challenges as policymakers grapple • Towards a Nature-Positive Economy
with complex geopolitical and macroeconomic challenges. Chief • Transitioning Away from Coal
among these is balancing energy security priorities with the • Focus: GFANZ updates
urgent need for climate change mitigation and adaption.
2. Global Sustainable Finance Update
A perfect storm of disruptive factors, including rising global • Policy and Regulatory Developments
interest rates, ongoing fallout from Russia’s war in Ukraine, • Open Consultations
major increases in energy and commodities prices and supply • Initiatives, Frameworks, and Tools
chain challenges highlight the risk of a global cost of living • Research Roundup
crisis—with particular impact on emerging and developing
3. Market Snapshot
economies. Central banks are facing difficult tradeoffs between • Q3 Debt and Equities Update
inflation targets and recession risks. High inflation and rising
credit costs are increasingly reducing purchasing power and 4. IIF Sustainable Finance Activities
raising the risk of social strains. An “ESG backlash” is growing
with the political backdrop in some quarters less hospitable to
climate priorities.

More broadly, the credibility of commitments for climate action could be at risk if governments begin to
backtrack on emissions reductions and transition goals. Less climate ambition in developed countries
could create major risks for confidence in the global climate agenda, potentially eroding trust in
developing countries. Many emerging and developing economies are already facing growing headwinds
as external financing conditions deteriorate. Further polarization of views on climate and sustainability
agendas could thus make it harder for EM policymakers to implement transition measures in an orderly
and just manner, particularly given the negative impact of high inflation and rising interest rates on
economic growth and living standards.

In this challenging environment, the IIF is seeking to convey industry perspectives on practical solutions
across market and policy domains, which can help ensure effective prudential management of climate-
related risks, enable enhanced disclosures, and support innovation in emerging areas, such as transition
planning and net zero alignment. The growing focus on transparency on climate-related and
environmental risk has increased dialogue regarding the role of the financial system in managing risks and
supporting the low-carbon transition. In this context, the IIF’s recent responses to the U.S. Securities and
Exchange Commission and the Financial Stability Board on climate disclosure and supervisory and
regulatory approaches to climate-related risks underscore the importance of common building blocks and
alignment with global standards – which will be key to reduce the risk of fragmentation, including in
emerging areas such as transition finance. Importantly, as regulators and supervisors consider their
mandates with regard to climate change, they are examining complex issues around potential adjustment
of the capital framework to account for climate risk—including at the forthcoming Bank of England
conference on climate and capital on October 19-20. As a contribution to these discussions, the IIF will
shortly be publishing a new paper on climate-related risks and the capital framework, drawing on our
ongoing member engagement to offer insights on the potential costs and benefits of different potential
interventions, and recommendations for the way forward.

Finally, as institutions work to integrate environmental risks and opportunities into financial decision-
making alongside climate risk, we expect an increasing focus on “pricing in” the value of nature – one of
the themes we examine in this issue of the Sustainable Finance Monitor.

Looking ahead through year-end, the IIF will conduct a series of in-person and hybrid events on
sustainable finance – including our virtual Emerging Markets Sustainable Finance Summit on September
15. Our flagship IIF Annual Membership Meeting—in person for the first time since 2019–will be held in
Washington D.C. from October 10-14, and include a full range of speakers, panel discussions and side
events on key sustainable finance issues.

- Sonja Gibbs, Managing Director, Head of Sustainable Finance, IIF

1. THE BIG PICTURE1

1.1 Towards a Nature-positive Economy

With over half of the world’s economic output moderately or highly dependent on nature, there is an
urgent need to disincentivize the degradation of natural capital. Humans are dependent on these
resources and the ecosystem services they provide for survival and economic growth, but resources from
the equivalent of 1.7 Planet Earths are required to maintain current living standards. By 2030, following
business-as-usual practices, nature loss could lead to a decline in global GDP of an estimated $2.7 trillion,
with developing nations that are particularly dependent on natural capital severely affected. Investments
in nature through the recent approval by the U.S. House of Representatives of the Recovering America’s
Wildlife Act and the European Union’s proposal of legally binding nature restoration targets signal a shift
in the salience policymakers are assigning to addressing nature loss.

The biodiversity and climate crises are mutually reinforcing and pose both physical and transition risks
to economic and financial systems. However, most efforts to incorporate environment-related risks into
financial decision-making have so far focused on climate change rather than biodiversity – especially in
the area of sovereign debt. In a study led by economists at Cambridge University, researchers modeled

1
Authors: Sonia Griffen, Intern, Sustainable Finance; Michaela Palmer, Policy Associate, Sustainable Finance;
Jeremy McDaniels, Senior Advisor, Sustainable Finance

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the effect of biodiversity loss, the decline of ecosystem services, and environmental degradation on
economies and found that nature-related risks may lead many developing nations to come close to
default. A lack of integration of nature- and biodiversity-related risks into debt markets through credit
ratings is found to lead to mispricing, which misleads investors and thus may affect market stability.

Investment in the transition to a nature-positive economy should value ecosystem services and nature-
based solutions. These two actions help to mitigate climate change, to accelerate adaptation to the
effects of climate change, and to increase agricultural productivity and sustainability, thus creating long
term monetary and non-monetary value. Nature-based solutions are defined by the International Union
for Conservation (IUCN) as “actions to protect, sustainably manage, and restore natural or modified
ecosystems, that address societal challenges effectively and adaptively, simultaneously providing human
well-being and biodiversity benefits.” Nature-based solutions can thus simultaneously address mitigation,
adaptation, and loss and damage by tackling interrelated crises, thus decreasing risk. Financial flows –
both public and private – play a crucial role in protecting and restoring ecosystems to promote a nature-
positive economy; however, the average global biodiversity financial gap is estimated to be around $711
billion per year.

As countries across the Northern and Southern hemispheres simultaneously face heatwaves and
droughts, which are threatening human lives and critical ecosystem services, there is a growing need to
minimize and address the exposures to hazards and the vulnerabilities of industries, communities, and
economies to climate-related disruptions to economic sectors highly reliant on nature, such as
agriculture. Over the last 20 years, humanitarian appeals to the United Nations for compensation due to
extreme weather events have increased by over 800%, yet only 54% of appeals have been met since
2017. Nature-based solutions have already proven to be important in decreasing risk from disasters – for
instance, the extensive cover of mangroves in Indonesia decreased the loss of lives and livelihoods from
a 2004 tsunami following an undersea earthquake. A lack of investment in nature-based solutions
enhances social, cultural, human, and economic loss – for instance, the degradation of wetlands meant
there was no natural barrier for protection from Hurricane Katrina, and significant deforestation in Haiti
has crippled the agricultural industry.

Food systems are the single largest cause of biodiversity loss on land and are responsible for 80% of
deforestation and 29% of greenhouse gas emissions. The impacts of biodiversity loss and climate change
threaten the sustainability and output of food systems, and up to 52% of agricultural lands are already
moderately to severely degraded. Growing food insecurity affects geopolitics, security, and public health,
as seen in the ripple effects of recent significant and sustained hikes in global food prices. However, the
effects of food shortages are not felt equally around the world: already debt- and climate-vulnerable
countries such as those in sub-Saharan Africa are hard hit as food costs in the region make up about 40%
of spending. Within the food system, agricultural practices including reducing tillage, transitioning to
regenerative agriculture, and alternative cropping strategies can help avoid carbon emissions, increase
soil carbon storage, and improve water quality and availability, habitat, and soil quality. Beyond nature-
based solutions, finding ways to invest in food transactions, particularly where there is weak vertical
integration of food systems (mostly seen in developing markets) will also be important – for instance, 14%
of food is lost before it reaches consumers.

Although these solutions require significant investment, if implemented properly they can positively
stimulate economic growth. An impact assessment by the European Commission found that every euro
spent on ecosystem restoration returns between 8 and 38 euros depending on the nature of the

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investment. The United Nations found that nature-based solutions (including habitat restoration,
reforestation, coastal protection, and invasive species removal) create jobs at over 10 times the rate of
fossil fuels, and according to the Nature Conservancy the Recovering America’s Wildlife bill may directly
create almost 33,600 jobs every year.
1.2 Financing a Transition from Coal
Phasing out coal – especially in emerging markets – is coming into sharper focus as a critical element of
achieving net zero goals. Given that coal is the most widespread fossil fuel source on the planet, many
developing countries remain significantly reliant on coal-fired electricity; in certain markets, including in
Asia, coal use continues to increase in absolute terms. Recent analysis has found that there are currently
more than 425 planned fossil fuel projects which could result in the release of more than 1 Gigatonne (Gt)
of CO2, which if developed, would exceed the global carbon budget required to keep in line with a 1.5° C
goal by a factor of two; over 50% of these projects are coal-fired power plants.

Coal poses significant risks through its adverse environmental and health effects, especially water and
air pollution. Coal also emits significant amounts of methane, and although it has a warming impact of up
to 80 times carbon dioxide, is often treated as a “CO2 equivalent,” which leads to significant
underestimations of its impact. Ultimately, coal is only “economical” because its externalities are not
internalized under current legal and governance regimes. However, coal plants will face significant
transition risks as net zero, methane-reduction, and nature-positive commitments increasingly come into
force, particularly given that the International Energy Agency has identified phasing out unabated coal-
fired power plants (those without technologies reducing carbon emissions) as an early-action priority.

Renewable energy plants are increasingly becoming more economical than coal-fired plants. The
levelized cost of electricity for newly installed renewable energy sources has been decreasing and is
estimated to be cheaper than coal in 77% of instances, with this figure increasing by 2030. Further, half
of coal plants globally could profitably be replaced by renewables with storage. Although coal is often
associated with economic growth, in its publication “The Great Carbon Arbitrage,” the International
Monetary Fund (IMF) found that the most efficient way to decarbonize is to start by phasing out coal. The
IMF expects a total net economic gain of $77.89 trillion with a transition from coal to renewables in line
with a goal of net zero by 2050. In order to limit warming to 1.5° C, coal-fired power plants have the
potential to create $1.4 trillion in stranded assets. In order to limit stranded asset risk and maximize the
economic efficiency of a transition, it will be important to have a focus on repurposing coal assets –
including land space, grid connections, workforce, and equipment including generators and synchronous
condensers – in efforts to facilitate renewable energy implementation.

To ensure a just transition away from coal and maintain energy security in emerging markets, developed
countries will need to play a key role in financing this effort. In South Africa, where much of the coal
infrastructure is almost at the end of its lifespan, the UK, France, Germany, the U.S., and the EU have
agreed to an $8.5 billion deal to help transition the economy from coal to renewables – an effort will
ultimately require an estimated $250 billion. The partnership will provide financing to build renewables
(the country has large solar and wind resources) and transmission lines, and compensate coal-dependent
communities through the creation of new industries and jobs. The state-owned utility, Eskom, is heavily
in debt (largely from investments into coal plants) and consumers have faced many blackouts, so this
commitment aims to mix climate ambition with economic growth and stability. This initiative could be an
important model for financing transitions away from coal in emerging markets to lower climate-related
risks, improve public health, and increase energy security.

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1.3 Global Financial Alliance for Net-Zero (GFANZ): Key Recommendations and
Guidance for Financial Institutions
On June 15, GFANZ published five papers and announced the creation of a Climate Data Steering
Committee. These papers discuss recommendations and guidance for how financial institutions can drive
real- economy decarbonization in line with the objectives of the Paris Agreement. GFANZ seeks to increase
ambition and credibility through further convergence between financial institutions and identifies key
areas for future work. The new Steering Committee will bring together key stakeholders to create an
open-data public platform to assemble and standardize net-zero transition data from the private sector.

Recommendations &
Guidance on Financial
Institution Net-Zero
Transition Plans
Guidance on Use of Sectoral
Pathways for Financial
Institutions
Introductory Note on
Expectations for Real-
Economy Transition Plans
The Managed Phaseout of
High-Emitting Assets
2022 Concept Note on
Portfolio Alignment
Measurement
This report introduces voluntary recommendations and guidance to align with
and support financial institutions in a net-zero transition that limits global
warming to or near 1.5° C and reaches net-zero by at least 2050. GFANZ
identified four strategies for how financial institutions can achieve this through
the allocation of capital or related services: (1) financing or enabling the
development of climate solutions; (2) financing or enabling companies aligned
with net-zero goals; (3) financing or enabling the transition of real-economy
firms through sectoral pathways; and, (4) financing or enabling managed
phaseout projects. This global, pan-sector transition plan provides the
foundation (objectives and priorities), implementation strategy, engagement
strategy, metrics and targets, and governance for driving real-economy
emissions reductions. A public consultation on the document is open until July
27.
This report provides a pathways framework for how financial institutions can
support and use sectoral pathways to inform credible net-zero transition plans,
specifically due to their importance in target setting, net-zero transition
planning, net-zero implementation, and measuring and monitoring. Sectoral
pathways model how much of the remaining carbon budget a sector can use
and how a sector can transition to be in line with these emissions goals
through the use and development of technologies and other solutions.
This note introduces how financial institutions should support and accelerate
the development of credible, real-economy net-zero transition plans, including
disclosure expectations and how to utilize existing tools and frameworks in
these transition plans. Companies must share information with financial
institutions to facilitate this effort. The complete report will be available at
COP27.
This report details how financial institutions should encourage an accelerated
phaseout of high-emitting assets. These strategies should engage stakeholders
and utilize sectoral pathways to align with net-zero goals and manage climate
and financial risk. However, financial institutions should avoid withdrawing
financing from high-emitting projects, and this strategy instead supports using
finance to encourage the replacement of high-emitting assets with alternative
technologies or climate solutions to avoid simply passing emissions from one
portfolio to another.
The Concept Note on Portfolio Alignment provides guidance for financial
institutions on how to align lending and investment portfolios with net-zero.
This report identifies binary target measurements, benchmark divergence
models, and implied temperature rise (ITR) models as important
metrics/methodologies, and discusses previous cases for reference, barriers to
adoption, and focus areas for moving forward. The complete report will come
at COP27.

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2. GLOBAL SUSTAINABLE FINANCE UPDATE2

2.1 Policy and Regulatory Developments

Region Country Description

Americas Canada The Accounting Standards Oversight Council (AcSOC) and Auditing and
Assurance Standards Oversight Council (AASOC) approved the creation
of the Canadian Sustainability Standards Board (CSSB) per
recommendation by the Independent Review Committee on Standard
Setting in Canada. This Board will work in line with standards published
by the International Sustainability Board (ISSB). The CSSB is expected to
be fully operational by early April 2023.
Americas Canada The Government of Canada launched Canada’s Greenhouse Gas Offset
Credit System as part of its 2030 Emissions Reduction Plan on June 8th.
This system allows registered participants to gain offset credits under a
consistent approach for measuring GHG emissions or removal, giving
market incentives for municipalities, foresters, farmers, Indigenous
communities, and other groups or individuals to remove or reduce
carbon emissions from or into the atmosphere. This system is aligned
with the Pan-Canadian Greenhouse Gas Offsets Framework.  
Americas Canada The Bank of Canada (BoC) published its Financial Stability Review on
June 9th, which discusses the importance of better incorporating climate
change risks into the financial system. The publication also states that
the proposed requirements regarding disclosure of climate-related risks
by the Securities and Exchange Commission and the International
Sustainability Standards Boards are more “prescriptive” than the
proposed requirements of the Canadian Securities Administrators.
Americas USA On June 14th, the U.S. House of Representatives passed the Recovering
America’s Wildlife Act (RAWA). If approved by the Senate, RAWA would
invest $1.397 billion per year in state, local, and tribal efforts to work on
reversing biodiversity and ecosystem decline. This bill would be the most
significant wildlife conservation investment in decades and invest in
locally-driven conservation strategies recover endangered species and
protect wildlife from becoming endangered.
Americas USA The U.S. Federal Deposit Insurance Corporation recognized climate
change as a significant financial risk in its 2022 Risk Review Report.
Climate change is recognized as both a physical and transition risk, but
due to the longer-term nature of transition risks, only physical risks are
incorporated in this review. The physical risk of climate-related extreme
weather events is of particular concern.
Americas USA On June 6th, President Biden used executive action to spur domestic
clean energy technology manufacturing. Specifically, he authorized the
U.S. Department of Energy to use the Defense Production Act to
accelerate the domestic production of clean energy technologies
including solar power, transformers and electric grid components, heat
pumps, insulation, electrolyzer fuel cells, and platinum group metals. He

2
Author: Sonia Griffen, Intern, Sustainable Finance. This section draws on the ECOFACT AG Policy Outlook, the world’s leading database on
hard and soft law initiatives pertaining to sustainable finance and corporate responsibility. The database covers over 30 topics addressed by
regulators, supervisors, and standard setters, in over 50 countries representing more than 85% of global GDP and at the international level. The
Policy Outlook monitors both existing and upcoming regulatory initiatives as well as changes in their interpretation. For further information
contact policy@ecofact.com

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 increased federal procurement measures to spur domestic solar
manufacturing by developing Master Supply Agreements and applying
“Super Preferences” for these systems. Biden also created a 24- month
bridge for certain solar laws.
Americas USA In its Semiannual Risk Perspective released on June 23rd, the U.S. Office
of the Comptroller of the Currency (OCC) stated that its examination
teams would work with large banks to address climate-related financial
risks in its management strategies. Improved data collection and
scenario analysis processes will be important to better incorporate these
risks into bank strategies.
Asia China Hong Kong’s Green and Sustainable Finance Cross-Agency Steering
Group announced progress made in building sustainable finance
capacity. The Steering Group also announced it will begin to develop the
structure and core elements of a local, green classification framework
(i.e., taxonomy).
Asia Japan The Bank of Japan published the report “Climate Change Initiatives:
Disclosure Based on TCFD Recommendations.” This report discusses how
Japan will disclose climate change financial efforts in four key areas in
alignment with TCFD recommendations: governance, strategy, risk
management, and metrics and targets.
Asia India On May 6th, the Securities and Exchange Board of India created an
advisory committee to address ESG issues in the securities market. The
committee’s tasks should be focused around enhancing the Business
Responsibility and Sustainability Report, developing better ESG ratings,
and making improvements to ESG investing, particularly in Mutual
Funds. These tasks especially focus on developing better disclosure
standards and measurements. 
Australia Australia The Australian Securities and Investments Commission (ASIC) published
new greenwashing guidance and urges companies offering sustainability-
related products to review their practices. It outlines how companies can
avoid greenwashing by clearer labelling, improving sustainability
terminology and metrics, and communicating more effectively.
Australia Australia The Australian government formally committed to reducing greenhouse
gas by 43% from 2005 levels by 2030 in order to align the country to net-
zero emissions targets by 2050. The new government also outlined a set
of policies to invest in the transition to renewable energy, with particular
attention to transmission and storage.
Europe EU The European Central Bank (ECB) announced on July 4th that it would
introduce new measures to incorporate climate change into its monetary
policy framework. The ECB will begin to publish information regarding
climate-related considerations for corporate bond holdings regularly
starting in October 2023 as part of an attempt to decarbonize those
holdings. The ECB will “tilt” the balance sheet of those companies who
are performing better in terms of their climate-related considerations,
although the number of corporate bond purchases will still be
contingent on the inflation target. Companies with high carbon
footprints will also be limited in terms of their share of assets that are
part of the collateral framework. The ECB is also introducing climate-
related disclosure requirements and seeks to improve its risk assessment
and management tools and policies.
Europe EU The European Central Bank performed supervisory stress tests which
indicated that banks do not properly integrate climate-related risks. 60%

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 of banks do not have climate risk stress-testing frameworks, and there is
a lack of data and understanding regarding preparedness and best
practices. Focusing on transitioning in line with Paris Agreement
objectives will lower losses.
Europe EU The European Council and Parliament reached a provisional agreement
on June 21 on the Corporate Sustainability Reporting Directive
(CSRD). Parliament and Council will have to formally approve the
agreement before it is published in the OJEU.
Europe EU The European Securities and Market Authority (ESMA) sent a letter to
the EU Commission detailing the findings of its consultation on the size
and scope of ESG rating providers in the EU. The findings indicated
shortcomings in coverage for specific sectors and a lack of transparency
around how ESG factors are included in rating providers’ methodologies.
Europe EU The European Banking Authority (EBA) sent a report to the EU
Commission that evaluates and proposes changes to the Mortgage
Credit Directive (MCD). The report discusses how the MCD can
contribute to both financial stability and sustainability. Among other
suggestions, the EBA recommends amending the MCD to increase the
uptake of green mortgages.
Europe EU The European Council agreed on five key legislative proposals in the ‘Fit
for 55’ package on June 29th. EU countries agreed to common positions:
updating of the EU Emissions Trading System (ETS); the establishment of
a Social Climate Fund to lessen the impact of carbon pricing on poor and
vulnerable citizens; sharing effort between member states in non-ETS
sectors; updating and increasing targets regarding the land use, land use
change and forestry sector; and a 100% CO2 emissions reduction target
by 2035 for new cars and vans.
Europe EU The European Parliament endorsed draft climate legislation to decrease
EU greenhouse gases by at least 55% in 2030 (from a previously agreed
40%) and impose increased import taxes on goods including steel and
aluminum. The Council has also agreed on the Carbon Border
Adjustment Mechanism on cement, aluminum, fertilizers, electric energy
production, iron and steel in an effort to account for carbon leakage in
the 55% reduction package. Final approval will likely come in a few
months.
Europe EU In a speech on June 22nd at the Annual Conference on Bank Steering
and Management, a Member of the Executive Board and the Vice-Chair
of the Supervisory Board at the European Central Bank (ECB) announced
that EU lenders should align with guidelines regarding climate-related
and environmental risks by 2024. This official also said that the ECB will
begin “on-site inspections” in banks of climate-related financial risk
management.
Europe EU In its 2021 Annual Report, the European Banking Authority (EBA) stated
that incorporating climate-related and environmental financial risks as
well as other ESG considerations into regulations and supervisory
standards would be a priority in 2022. As part of this effort, the EBA
recognizes the importance of improving disclosure standards, updating
the prudential framework, and conducting and improving climate risk
stress tests.
Europe EU The European Parliament voted against excluding specific nuclear and
gas energy activities from environmentally sustainable activities within

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 the Taxonomy Delegated Act on July 6th. If the Council does not object,
the Taxonomy Delegated Act will come into force in January 2023.
Europe Denmark On June 24, Danish lawmakers agreed to a new corporate carbon tax,
making theirs the highest carbon tax in Europe. This carbon tax is
reduced for companies engaged in mineralogical processes to discourage
a mass exodus of companies.
Europe Germany Bafin stated that it will continue to fight greenwashing despite halting
work on its Guideline for Sustainable Investment Funds. Bafin will
continue to tackle greenwashing by assessing annual audit reports for
funds and asset management companies under its supervision.
Europe Sweden Sweden’s Riksbank is expanding its reporting of climate-related
information to include the carbon footprint of foreign exchange reserve
assets.
Europe UK The UK Department for Work and Pensions (DWP) published new
expectations for pension schemes. Starting October 1, 2022, pension
schemes must publish a report outlining how their investments support
the 1.5°C Paris Agreement climate target. The reports will help pension
savers see the impact of their investment decisions and better
understand how pension schemes address and mitigate climate risks.
International BCBS The Basel Committee on Banking Supervision (BCBS) issued principles
for the effective management and supervision of climate-related
financial risks. The 18 principles cover corporate governance, internal
controls, risk assessment and management, and reporting. They seek to
improve practices and to provide a common baseline for banks and
supervisory authorities.
International NGFS The Network for Greening the Financial System (NGFS) published its
2022-2024 work program. This program prioritizes increasing efforts to
improve supervisory practices in relation to: managing climate-related
risks; design and analysis of climate scenarios; implications of climate
change for monetary policy; guidance for central banks on transition to
net zero; nature-related financial risks; and capacity building for its
membership.

2.2 Open Consultations

Region Jurisdiction Entity / Consultation Deadline

International GFANZ The Global Financial Alliance for Net Zero (GFANZ) July 27, 2022
published a draft of its Net-zero Transition Plan
framework (NZTP framework). It aims to help financial
institutions make widespread changes to their business
strategies as part of the transition to a net-zero future.
Europe EU The European Banking Authority (EBA) opened a August 2, 2022
consultation on the exposure drafts of the ESRS, which
are a series of documents that include the complete
first set of draft standards, appendices, and a cover
note explaining the consultation as well as other draft
ESRS for specific topics. The topics are organized under
climate, social, and governance headings. The ESRS aim
to complement the CSRD, and, once finalized, will be
adopted as a delegated act by the EU commission.

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Americas USA The U.S. Commodity Futures Trading Commission August 8, 2022
(CFTC) released a Request for Information (RFI) for
public comment on climate-related financial risk to
better inform its understanding and oversight of this
topic in relation to the derivatives and commodities
markets.
Europe EU The European Financial Reporting Advisory Group August 8, 2022
(EFRAG) opened a consultation on the exposure drafts
of the ESRS, which are a series of documents that
include the complete first set of draft standards,
appendices, and a cover note explaining the
consultation as well as other draft ESRS for specific
topics. The topics are organized under climate, social,
and governance headings. The ESRS aim to
complement the CSRD, and, once finalized, will be
adopted as a delegated act by the EU commission.
Europe EU The EU Commission launched a public consultation on August 18, 2022
the use of benchmarks administered outside the EU.
The Commission is seeking input from benchmark
administrators within the EU as well as outside. The
outcome of the consultation is expected to be
published in the fourth quarter of 2022.
Americas Canada The Office of the Superintendent of Financial August 19, 2022
Institutions in Canada issued a draft version of a
“Climate Risk Management” guideline which proposes
a prudential framework that takes into account
climate-related risks – both physical and transition risks
– to build financial resilience. Mandatory climate-
related financial disclosures aligned with the
international Task Force on Climate-related Financial
Disclosures (TCFD) framework will be required for
financial institutions starting in 2024.
International World Bank The World Bank has an open consultation on greening August 31, 2022
public credit guarantee schemes (PCGSs) for small and
medium enterprises (SMEs). PCGs can be important for
SMEs to unlock financing to decarbonize. The Task
Force helping the World Bank seeks consultation on the
proposed “Guidelines for Integrating Climate Change
Mitigation and Adaptation into PCGs for SMEs.”
Europe United Kingdom The UK Financial Reporting Council (FRC) released a September 7, 2022
consultation on new requirements for insurance
actuaries to include climate change risks and ESG-
related risks.
Americas Canada The Canadian Association of Pension Supervisory September 15,
Authorities (CAPSA) issued Environmental, Social, and 2022
Governance (ESG) Considerations in Pension Plan
Management Guidelines. The guidelines explain how to
incorporate ESG issues into pension plan management.

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2.3 Initiatives, Frameworks, and Tools

NGFS releases Final Report on Bridging Data Gaps

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) released a
“Final Report on bridging data gaps” on July 6th. This report outlines policy recommendations for
building upon and using current climate-related data and initiatives under the COP26 umbrella, and
further recommendations for how to improve the quality, availability, and comparability of climate-
related data. Specifically, the NGFS recommends further convergence of global disclosure standards,
increasing efforts to standardize taxonomies and sustainable finance classifications, harmonizing
forward-looking metrics, and better leveraging existing data sources, approaches, and tools. To support
these recommendations, the NGFS created a directory that links climate-related metrics and data
sources with stakeholders so financial institutions can effectively use this data for the public good. Data
is important for increasing transparency and establishing credible transition plans that are reliable for
investors, but there are many identified challenges that remain in relation to this data.

NZBA releases target-setting protocol

The Net-Zero Banking Alliance (NZBA) released the second edition of their target setting protocol on
June 27th, which guides Alliance members on how to use science-based targets to decarbonize portfolios
in line with net-zero by 2050 goals. The NZBA guides these institutions to focus on setting and achieving
initial targets for 2025 in four key areas – through engagement targets, sector targets, sub-portfolio
emissions targets, and financing transition targets. These targets are combined with a reporting
mechanism for asset owners.

Provisional Claims Code for the voluntary carbon credit market

The Voluntary Carbon Credits Initiative (VCMI) released a Provisional Claims Code to ensure the integrity
of these markets. The Claims Guidance is intended to unlock additional climate finance, particularly from
the private sector, to meaningfully contribute and help achieve the goals laid out in the Paris
Agreement. Integrity is needed to ensure that climate-related commitments and claims set out by
companies, consumers, investors, and governments are credible.
.
The Launch of the Global Methane Pledge Energy Pathway
The United States, EU, and 11 other countries launched the Global Methane Pledge Energy Pathway on
June 17 to reduce methane emissions in the oil and gas sector. This Energy Pathway is the
implementation step of the Global Methane Pledge that was launched at COP26, and provides financial
and technological support to maximize the potential of cost-effective methane mitigation and eliminate
flaring no later than 2030.

The Establishment of a “Climate Club”

G7 leaders committed to the establishment of a “Climate Club” by the end of 2022. Leaders who join the
“Climate Club” would agree to coordinated and ambitious rules and standards over economic climate
action in order to avoid green trade wars, specifically strife regarding green tariffs.

11
2.4 Research Roundup

Quantifying risks avoided by limiting global warming to 1.5 or 2 C above pre-industrial levels
An article published in Climatic Change examines risk through metrics related to water and heat stress,
disease, flooding, and projected impacts on agriculture and the economy in three different climate
scenario pathways from the Paris Agreement: 1.5° C, 2° C, and 3.6° C. Researchers found that by limiting
global warming to 1.5° C, risks to society could be up to 85% lower compared to a high level of warming
(3.6° C). By limiting warming to 1.5° C from 2° C, risk would be reduced by up to 44% and global
economic impacts would be an estimated 20% lower. This study identified West Africa, India, and North
America as the regions that will have the highest increases in risk due to global warming.

“Carbon Bombs” – mapping key fossil fuel projects

An article published in Energy Policy identified and mapped the 425 projects that release over 1
Gigatonne of CO2 worldwide. Potential emissions from these so-called “carbon bombs” would twice-
over exceed the global carbon budget to remain under the 1.5° C threshold. Of these 425 projects, 230
were coal (93 of which had not yet started production in 2020) and 195 were oil and gas (76 of which
had not started production in 2020). If extraction is not initiated in these 169 projects, an estimated
third of emissions could be avoided from these carbon bombs. There are ten countries with over ten
carbon bombs, and China leads with 141, followed by Russia with 41, followed by the United States with
28.

Actions for reducing U.S. emissions by at least 50% by 2030

An article published in Science identifies the pathways for reducing U.S. emissions by 50-52% by 2050,
and halving emissions by 2030, thus putting the United States on track with the rest of the world to limit
warming to 1.5° C. Researchers found that, in comparison to historical efforts to reduce emissions,
efforts would need to triple. By 2030, the electricity grid must run on 80% clean energy and the majority
of vehicles sold will need to be electric; the primary barrier to these actions will be policies as opposed
to costs. This study also quantifies the benefits of this transition: air pollution would be reduced, up to
200,000 premature deaths would be avoided, and up to $800 billion in environmental and health costs
would be avoided.

Beyond CO2 equivalence: The impacts of methane on climate, ecosystems, and health
An article published in Environmental Science & Policy argues that methane is not properly accounted
for in current emissions governance given its treatment as a “CO2 equivalent” under the UNFCCC. The
concentration of methane within the atmosphere is continuing to rise, which has severe impacts on the
climate, ecosystems, and health. Methane captures up to 80 times the amount of heat in the
atmosphere, even though it does not stay in the atmosphere for as long as carbon dioxide, and is a
significant contributor to air pollution. Researchers identified multiple different pathways by which
methane mitigation action can be strengthened.

Cascading drought-heat dynamics during the 2021 Southwest United States heatwave
An article published in Geophysical Research Letters found a small but systematic positive feedback loop
between drought and heat after studying the dynamics between the two during the June 2021
heatwaves in the Southwest U.S. This study points to the negative effects of cascading hazards, which is
concerning as heatwaves and droughts continue to plague many parts of the world with increasing
intensity and severity.

12
Nature loss and sovereign credit ratings
Researchers at Cambridge University studied the impact of nature loss - including biodiversity loss,
decline of ecosystem services, and environmental degradation - on sovereign creditworthiness by
specifically examining credit ratings, default probabilities, and the cost of borrowing in 26 sovereign
countries. Researchers found that the exclusion of biodiversity and nature-related risks in sovereign
debt markets misleads investors as they are unable to correctly identify, price, and manage risk, and the
macroeconomic consequences may lead to market instability and discourage innovation. This exclusion
will have the greatest impact on the sovereign creditworthiness of nations highly dependent on natural
capital.

The energy security case for tackling gas flaring and methane leaks
In a recent report by the International Energy Agency, researchers estimate that 210 billion tons per
year of natural gas are lost to non-emergency flaring and leaks across the oil and gas supply chain. If
countries that export oil to the EU implemented non-emergency flaring and fixed these leaks, the EU
could increase imports through existing infrastructure to make up for a third of the oil that was
imported from Russia in 2021.

13
 Chart 1: In turbulent market conditions, flows to ESG funds fell sharply in
3. MARKET SNAPSHOT3 H1 2022–but are still positive ytd

$ billion
Weaker flows to ESG funds—but still in 180
Equity funds
positive territory: Against a challenging 160
140 Mixed allocation funds
backdrop for global capital markets, ESG-
120 Fixed-income funds
labelled investment flows declined again in Q2
100
(Chart 1). At around $50 billion, ESG fund flows 4-quarter moving avg.
80
were at their slowest pace since Q120. 60
Nonetheless, ESG flows have remained in 40
positive territory, in sharp contrast to the large 20
outflows seen from conventional funds since 0
the onset of the Russia-Ukraine war (Chart 2): -20
2018 2019 2020 2021 2022

• ESG equity fund flows have been hit harder Source: Morningstar, IIF
as concerns about the health of the global
economy intensified. Overall, ESG equity Chart 2: ESG funds continue to attract positive net flows –in sharp
contrast to large outflows from non-ESG funds
funds saw net cash inflows of over $26
percent of AUM, cumulative flows (both scale)
billion in Q2—down from $40 billion in Q1. 60 8
Non-ESG 7
• Even as rising interest rates weighed on 50 funds (rhs)
6
investor demand for bonds, ESG fixed- 40
income funds still attracted over $10 billion 5

in Q2, down from $12 billion in Q1 2022. 30 4

ESG funds
3
20
Russia's invasion
• Mixed allocation funds recorded inflows of of Ukraine 2
some $13 billion in Q2–the slowest pace of 10
1
net cash flows since Q3 2020. 0 0
Jun 20 Dec 20 Jun 21 Dec 21 Jun 22
• Flows were almost entirely directed to ESG
Source: Morningstar, IIF
funds in Europe. In sharp contrast, US ESG
fund flows turned negative in Q2 (-$2
Chart 3: Fears of inflation and further interest rate hikes rattle ESG markets
billion), marking the first quarterly outflows
since Q4 2018. Since end-2019, European index, end-2021=100
105
funds have attracted nearly 85% of total ESG
flows, while US funds received over 10% of 100 ESG
IG bonds
total ESG flows.
95 ESG
HY bonds
• As turbulent market conditions continue, 90
the size of the ESG-aligned fund universe has 85
declined to $2.6 trillion in Q2 2022, down
80 ESG
from $2.9 trillion in Q1 2022 and $3.1 trillion stocks
in Q4 2021 (Chart 3). 75
Jan 22 Feb 22 Mar 22 Apr 22 May 22 Jun 22

Source: Bloomberg, IIF

3
Authors: Emre Tiftik, Director of Sustainability Research; Paul Della Guardia, Financial Economist; Khadija Mahmood, Economist; Raymond
Aycock, Research Analyst

14
4. UPDATE ON IIF SUSTAINABLE FINANCE ACTIVITIES

SFWG Outputs and Sustainable Finance Research

• Green Weekly Insight: Signs of Recovery in ESG Markets (7/7/2022)
• Green Weekly Insight: Carbon Footprinting for Emerging Markets (6/30/2022)
• Green Weekly Insight: Are Rising Energy Prices Affecting EV Sales? (6/23/2022)
• Green Weekly Insight: Tackling Nature-related risks (6/16/2022)
• Green Weekly Insight: Triple Threat: Debt, Climate, and Inequality (6/9/2022)
• Green Weekly Insight: Scaling Voluntary Carbon Markets (6/2/2022)
• Green Weekly Insight: Climate collaboration in a polarized world (5/26/2022)
• Oil Market: Supply and Demand Balance in H2 2022 & 2023 (5/23/2022)
• Green Weekly Insight: A New ESG Scorecard for Emerging Markets (5/12/2022)
• Macro Notes: Russian Natural Gas Exports to Europe Set to Fall (5/4/2022)
• IIF Sustainable Finance Monitor – April 2022

Upcoming Events and Webinars

• September 15: 2022 IIF Emerging Markets Sustainable Finance Summit
• October 10-14: 2022 IIF Annual Membership Meeting

The IIF sustainable finance team sends regular updates on the schedule of activities for 2022. Please
send any questions or requests to Ellen Ehrnrooth (eehrnrooth@iif.com).