During the pandemic, and partly as a result of pandemic recovery plans, sustainable finance saw strong growth across equities, fixed income products and alternative assets, and in both public and private markets. According to European Commission sustainable finance is the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
Sustainable finance market overview
In 2021, the sustainable finance market continued to grow, in terms of both the number and the value of sustainable products. UNCTAD estimates the total value of sustainable financial products at $5.2 trillion, up by 63% from 2020. However, UNCTAD analysis shows that not all of this investment is truly sustainable and that alignment with the SDGs remains limited. Sustainable investments comprise sustainable funds and sustainable bonds, including green, social and mixed-sustainability bonds.
The number of sustainable funds reached 5,932 by the end of 2021, up 61% from 2020. The total assets under management (AUM) of these funds reached a record increase of 53% from the previous year amounting to $2.7 trillion. Much of the growth of sustainable funds remains concentrated in developed markets. Europe is by far the largest market, with a share of 81% of AUM. Sustainable funds account for 18% of the assets of the European fund market, showing the relative maturity of the market and the catalytic impact of sustainable finance regulation in Europe. The United States is the second largest market. However, sustainable funds represent only 1% of its total fund market. China is the third largest sustainable fund market worldwide, with AUM of nearly $50 billion.
UNCTAD experts highlight several trends. First, despite the rapid growth in recent years, sustainable funds still account for only about 4% of the global fund market. Second, most of the existing funds are self-labelled, and a lack of consistent standards and high-quality data to assess their sustainability credentials and impact has given rise to green-washing concerns (where investors can be misled by the branding and specifically the naming of products that are mis-sold as being more sustainable than they truly are). Third, developing countries are mostly absent from the sustainable fund market. Developing economies, especially LDCs, face tremendous barriers to developing their own sustainable fund markets or benefiting from the international market, because of their limited market size and the higher risks perceived in their capital markets.
Europe dominates sustainable funds market with an 81% share of all such assets. In 2021, assets in sustainable funds in Europe were boosted by record inflows (up 63%), strong product development and rising equity prices.
As sustainable investment products, sustainable funds can play an important role in filling the Sustainable Development Goals (SDGs) financing gap, in both developed and developing economies. Leading private investment funds, such as BlackRock, Amundi and Robecco, have launched funds dedicated to the SDGs, and some funds have used the SDGs as a framework to evaluate the impact of their portfolio.
Examining the holdings of the more than 800 sustainable equity funds UNCTAD identified assets of these funds across eight of the key SDG sectors: transport infrastructure, telecommunication infrastructure, water and sanitation, food and agriculture, climate change mitigation (renewable energy and cleantech), health, education and ecosystem diversity. This investment totalled $156 billion, or 26% of their total AUM at the end of 2021. Four sectors – health, renewable energy, food and agriculture, and water and sanitation – account for almost 95 % of the assets committed to these SDG sectors. The health sector, which covers health infrastructure, medical services, pharmaceuticals and medical devices, is the most common and single largest SDG sector for fund investments, followed by climate change mitigation. Compared with 2020, the funds’ investment in the health sector declined by 1.7%, while their investment in climate change mitigation rose by 1.5%, pointing to increased interest in green assets.
The sustainable bonds market also continued its strong growth in 2021. For the first time, new sustainable bond issuance exceeded $1 trillion (including green, social and mixed-sustainability bonds, as well as sustainability-linked bonds). The increase in sustainable bond issuance is especially visible in emerging markets. Cumulatively, the total value of outstanding sustainable bonds is now estimated at nearly $2.5 trillion. The European Union and the corporate sector continue to push social and mixed-sustainability bond issuance to new heights.
While it is a truism that investors face uncertainty and risk in many guises, one risk is foreseen and even financially quantifiable: climate change. As the world tries to move on from the pandemic while dealing with inflation, supply chain disruptions and the impact of war, investors, governments and international organizations should remain focused on the physical and transition risks of climate change.
UNCTAD experts identify several factors why sustainable investment in global capital markets has recently seen strong growth. To begin with, the accelerating and cascading impacts of climate change are rapidly revealing the physical and transition risks of non-sustainable investments. In turn, russia’s war against Ukraine has provoked reflection on the energy transition and its consequences for investors. Inflationary pressures and supply chain resilience, for example in energy, are adding further impetus to sustainability concerns. In addition, the regulatory response to environmental and other sustainability-related issues, including climate change commitments, has accelerated and will support moves towards more sustainable financial markets in both developed and developing countries.
Ukraine is also taking advantages of sustainable investment practices. On December 2021, Diia.Business Portal launched a platform for attracting impact investing – investments made in companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside a financial return. The platform enables businessmеn to present their investment projects and investors to find the projects of their interest. This move was supported by UNDP.