Aligning global finance and the environment
Sustainable finance has an important part to play in addressing the environmental challenges that we face. With no script yet written, there’s much ground-breaking work to be done.
The world has finally woken up to the urgency of climate change and biodiversity loss. Financial institutions and their supervisors increasingly worry about environment-related risks and resulting stranded assets that could affect the solvency of individual firms and the stability of the financial system as a whole. Around the world, pension funds, banks, insurers and asset managers with trillions of dollars of assets are pledging to help tackle these interlocking environmental crises.
Yet more pledges and promises are no longer enough: these commitments must now be honoured. Moreover, there’s a need for data, analytics and expertise from a range of disciplines to measure and manage the risk of stranded assets, and to provide the financial products and services required for the real economy to reach net zero and become nature positive. There’s no quick fix – but who can help define best practice and socialise its adoption and implementation in this critically important topic?
The Oxford Sustainable Finance Group exists specifically to take on these challenges. It was set up to try to align the global financial system with environmental sustainability by, firstly, helping to mobilise investment into solutions to environmental problems; and, secondly, to improve the resilience of the financial system and of individual financial institutions by measuring and managing these environment-related risks.
‘We are one of the largest research groups focused on these topics,’ says Dr Ben Caldecott, Director of the group and the inaugural Lombard Odier Associate Professor of Sustainable Finance. ‘I really do believe that Oxford is the most exciting place in the world to be working on sustainability topics, in large part because of the interdisciplinarity. We have a deep strength in sustainable finance, but we can also bring to bear world-leading expertise in other areas from across Oxford on particular questions, and help to translate that in a way that’s useful for financial institutions, regulators and policymakers.’
Interest in this area has grown significantly over the last decade, as central banks and supervisors have seen the urgent need for firms to think about these issues systematically – 95 have signed up to the Central Banks and Supervisors Network for Greening the Financial System, thereby committing to doing further work in this area.
‘It’s a pleasure and a privilege to be able to work on this with financial practitioners and other stakeholders’
Dr Caldecott is clear that reaching net zero is the only way to tackle climate change and stabilise global temperatures, and the roles that finance and investment play really do matter. ‘Every sector of the global economy has to go through a profound transformation,’ he says. ‘This will require investment in new business models, new technologies, new infrastructure and new skills. The availability of capital and financial services is absolutely essential to support and enable transformational change, sector by sector.’
Measuring risk requires the use of new technologies and methods. Earth observation, using satellite imagery and other sensors, and artificial intelligence (AI) are key tools to help reveal the pollution and the environment-related risks that exist in investment portfolios. ‘We are working to improve transparency and it’s currently very patchy,’ says Dr Caldecott. ‘When you can process the observational data using AI, you arrive at insights based on real data that are current and up to date. Instead of relying on the disclosure of information, you can see how companies are performing on sustainability.’
These issues have now reached the public consciousness, with questions about whether investments are environmentally sustainable. ‘How do we make sure that the preferences of retail investors with a pension and some savings are reflected to make their money matter?’ asks Dr Caldecott. ‘We are doing more work on what we call ‘transition finance’, and we’re also working with organisations to ensure that their clients and investee companies become more sustainable.’
Education is an imperative, so teaching and capacity building have been prioritised. Expertise in sustainable finance is now being securely embedded for the future – from undergraduate and master’s students to a sizeable DPhil cohort. A range of executive education courses, delivered in person or online, or in some combination, is also available; and there’s a new Public and Third Sector Academy for Sustainable Finance to provide free or heavily discounted capacity building and training for central and local government, regulators, supervisory authorities, multilateral institutions, NGOs and philanthropy – constituencies that are often underserved, especially in emerging and developing countries. All the courses offered are devised working closely with end users and practitioners. No other research group internationally offers this breadth, depth and quality of teaching on sustainable finance and investment.
Photo: iStock
Oxford is also using its considerable convening power to bring relevant parties together in high-trust spaces through a range of conferences, forums and symposia, and the Oxford Sustainable Finance Group creates public datasets to help improve decision-making across the financial system, including new open-source global asset-level datasets for the most polluting sectors of the global economy. Dr Caldecott’s group is also helping to ‘grow the pie’ – for example, by conceiving and founding the Global Research Alliance for Sustainable Finance and Investment, which now has 29 member universities collaborating to turn sustainable finance into a more mature academic field.
Swiss private bank Lombard Odier is partnering with the Oxford team and – a move that underlines the value of this work – recently created the first endowed professorship of sustainable finance at any major global research university. The gift was organised through Swiss Friends of Oxford University, whose president is Howard Rosen CBE.
Dr Caldecott’s expertise is in demand: in addition to leading the Oxford Sustainable Finance Group, he is also the COP26 Strategy Advisor for Finance in the UK Cabinet Office and is the Director and Principal Investigator for the new UK Centre for Greening Finance and Investment, established by UKRI and involving a consortium of leading UK research institutions. What keeps him motivated when there is so much to be done?
‘This is a rapidly developing, fast-changing area, and one that has real impact,’ Dr Caldecott says. ‘We have the very real privilege, and I dare say responsibility, to develop and deploy the future of sustainable finance, which, in fact, will be the very future of finance. It’s a very exciting time and we have no time to lose. Greening the global financial system is a necessary condition for tackling climate change, stopping biodiversity loss and addressing a whole host of other things we all care deeply about.’
Dr Caldecott and colleagues across the University are establishing a new Oxford Nature Finance Initiative to help mobilise capital at scale to protect and restore ecosystems and biodiversity around the world. To find out more, contact ben.caldecott@smithschool.ox.ac.uk.
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