Charting the Course: Insights on the Evolution, Regulation, and Future of Sustainable Finance with Wincel Kaufmann.

Wincel Kaufmann, Former Global Sustainable Investing Leader at Blackrock. In her global capacity, Wincel oversaw Sustainable Investing for BlackRock’s Global Real Estate funds. She also held the position of APAC Head of Sustainable Investing for Private Markets.

Wincel is an Advisory Board Member of the World Alliance for Efficient Solutions, a non-profit organization that recognizes and supports innovative solutions that are both environmentally and economically viable. It brings together 4000+ innovators, investors, adopters, experts and promoters who are committed to the adoption of clean and profitable Solutions. She also serves as a judge for the Women of the Future Awards, a programme that celebrates and inspires the next generation of female leaders.

She holds a global executive MBA from INSEAD, a bachelor’s degree in economics from the University of the Philippines and a CFA Certificate in ESG Investing.

Carl Penfold: Could you provide overview of the growing importance of sustainable finance, its evolution, and the role of global banks in driving this change?

The transition to a sustainable economy requires significant financial investment, and global banks and private capital play an important role in this process. According to the International Energy Agency (IEA), the investment required to transition our global economy is $125 trillion. This capital cannot be sourced only from public funds; it requires investment from the public and private sectors.

As we move away from a global economy that has relied on fossil fuels for over a century, this transition needs to happen in a just and orderly way. This ensures we meet environmental and social objectives, manage the challenges of affected communities, and maintain economic stability. The involvement of global banks and private investors is important because they provide the necessary capital to fund innovations, infrastructure, and new technologies that drive sustainable growth. By investing in sustainable projects, financial institutions help mitigate climate change risks while taking advantage of new opportunities in a greener economy.

Carl Penfold: How have regulations around sustainable finance evolved in recent years?

Regulations have changed significantly over the last five years and are continuously evolving. The EU SFDR (Sustainable Finance Disclosure Regulation) is a key regulation influencing the financial markets.

EU SFDR (Sustainable Finance Disclosure Regulation): The SFDR aims to increase transparency in the market for sustainable investment products, prevent greenwashing, and ensure that investors can make informed decisions. It mandates financial market participants and financial advisers to disclose how they integrate sustainability risks and consider adverse sustainability impacts in their investment decisions.

In the US, the Securities and Exchange Commission (SEC) requires climate-related disclosures for publicly listed companies to ensure that investors have access to consistent, comparable, and reliable information about the impact of climate change on their business.

In Hong Kong and Singapore, regulators have introduced mandatory disclosures for publicly listed companies. These include requirements for climate-related disclosures and integrating environmental, social, and governance (ESG) considerations into financial practices.
These evolving regulations reflect a growing recognition of the importance of sustainable finance in addressing global environmental and social challenges.

Carl Penfold: Are there any upcoming regulatory changes that are expected to significantly impact the industry?

Upcoming regulatory changes that are expected to affect the industry significantly include:

  1. ISSB (International Sustainability Standards Board): The ISSB has replaced the TCFD (Task Force on Climate-Related Financial Disclosures). TCFD recommendations have been incorporated into the ISSB standards, leading to widespread adoption. This is positive for companies, customers, and shareholders as the ISSB takes on the role of a centralised authority.

  2. EU Corporate Sustainability Due Diligence Directive (CSDDD): This new EU directive requires companies to evaluate their supply chains, focusing on labour practices and human rights protection.

  3. EU Energy Performance of Buildings Directive: This directive puts Europe on track to achieve building decarbonisation by 2050. The revised directive mandates zero-emission buildings as the standard for new construction. All new buildings are required to have zero onsite emissions from fossil fuels starting January 1, 2020, for publicly owned buildings, and January 1, 2030, for all other new buildings. Additionally, the EU will phase out boilers powered by fossil fuels, ensuring solar readiness and, where technically and economically feasible, buildings will be 100% powered by renewables.

For companies, identifying data and disclosure gaps is not enough. Changes in governance and risk management practices are required to improve resilience to climate change and meet investor and customer expectations.

Carl Penfold: What are the key challenges faced by banks in implementing sustainable finance strategies?

The speed of transition is a key challenge faced by our global economy. Some of the key challenges banks face in implementing sustainable finance strategies include the pressure to decarbonise their portfolios. Customers and regulators expect immediate action to reduce carbon emissions. Keeping up with evolving regulations and ensuring compliance is complex and resource-intensive; banks must stay ahead of new laws and standards to avoid penalties and manage reputational risk. Identifying and addressing data and disclosure gaps is important to assess environmental impact and make informed decisions. Effective risk management practices need to be implemented, including integrating sustainability into governance and risk frameworks.

For example, banks are under pressure to remove their portfolio’s exposure to coal. Coal is expected to be phased out in OECD countries by 2030 and globally by 2040, requiring substantial shifts in investment strategies and the development of alternative energy sources.

Carl Penfold: From a global perspective, how do you see different regions or markets approaching sustainable finance differently?
From a global perspective, different regions or markets approach sustainable finance at various speed. The European Union is leading the transition with regulatory frameworks and substantial incentive programs to promote green finance and ensure adherence to sustainability standards. The US approach to sustainable finance is more polarised due to geopolitical factors, with significant differences in commitment levels across states and political administrations. China is now a global leader in solar, wind, and battery technologies. According to the IEA, China’s share of solar PV production is more than 80% globally, with the world’s top 10 suppliers of solar PV based in China. This strength has been key in reducing the cost of solar PV but also poses risks due to the concentration in the global supply chain amidst current geopolitical challenges.
Carl Penfold: How do these challenges differ across asset classes?

In Infrastructure, where investment mandates focus on renewables such as solar, wind, electric vehicles (EVs), EV charging, and batteries, the transition element is clear and straightforward. Investors are directed towards projects that directly contribute to a cleaner energy future.

In Real Estate, which is typically carbon-intensive, the primary challenge lies in reducing carbon emissions during the construction phase (Embodied carbon, Scope 3) and increasing energy efficiencies in existing buildings (Operational carbon, Scope 1 and 2). Smart meters are becoming common, enabling users to manage and control their energy consumption more effectively. There is a movement from “brown” to “green” buildings through refurbishment and retrofits, which upgrade older buildings to meet new energy performance standards. Properties that fail to meet these new standards affect the valuation and become stranded assets.

In private equity, emerging opportunities are found in technology and innovation to decarbonise various industries. These investments are often in early-stage companies developing new solutions to reduce carbon footprint across different sectors.

Carl Penfold: Are there specific sectors or industries where you’ve observed heightened investor interest in sustainable finance initiatives? If so, what factors contribute to this trend?

Boards across various sectors now recognise the importance of ESG (Environmental, Social, and Governance) principles to remain relevant to customers as responsible businesses or investors. Shareholders pay attention to the governance of boards, with a strong emphasis on board composition and independence. One way to assess effective governance is diversity. When it comes to women on board, countries like France, Norway, and Italy, up to 45% of board members are women, followed by Switzerland at 33% and Spain at 30%. Many boards, regardless of their sector, are focused on securing their social license to operate by demonstrating a commitment to sustainable and socially responsible practices.

Institutional investors, such as pension funds, insurance companies, and sovereign wealth funds, have increased their allocation to sustainability-linked assets. Pension funds, in particular, aim to become Responsible Investors, driven by the expectations of pensioners who want their funds to not only avoid harm but also create positive outcomes for society. This shift is influenced by growing awareness among stakeholders about the environmental and social impacts of their investments, regulations and the increasing evidence that sustainable investments can deliver competitive financial returns.

Carl Penfold: Have you observed any changes in investor attitudes towards sustainable finance over recent years, and what factors do you believe are driving this change?

Yes, there has been a significant shift in investor preference towards sustainable finance over recent years. One of the primary drivers of this change is the EU’s Sustainable Finance Disclosure Regulation (SFDR), which has increased transparency and accountability in sustainable investing. As a result, investors in the EU are increasingly allocating funds to sustainable investments, a notable shift from 10 years ago when such allocations were uncommon. This change is driven by growing awareness of environmental and social issues and regulations and recognising that sustainable investments can yield competitive financial returns while addressing long-term risks.

Institutional investors are actively seeking to increase their allocations in the private markets. In the 2023 Investor Survey conducted by BlackRock, investors highlighted three factors driving their allocation towards private markets: income generation (82%), capital appreciation (58%), and the emphasis on stronger Environmental, Social, and Governance (ESG) investment (43%). There are two important findings from the survey. Firstly, sustainability has become one of the top considerations for investors. Secondly, investors continue to prioritize the ability to generate income and achieve strong returns, regardless of the specific investment theme or activity.

Carl Penfold: How can banks effectively measure the impact of their sustainable finance initiatives?

Banks can effectively measure the impact of their sustainable finance initiatives through several key strategies. Measuring the carbon intensity of assets and portfolios remains crucial for transparency, providing clients with the necessary data to manage and reduce their emissions. By tracking and reporting on these metrics, banks can demonstrate the environmental impact of their investments and help clients make more informed decisions.

Ease of access for investors is also important. In Switzerland, the country’s leading bank applies sustainability criteria to investments, and clients may opt out if they do not wish to apply sustainability criteria to their investments. This approach simplifies the investment process and increases access to sustainable investments.

Carl Penfold: Are there any best practices or emerging trends in impact measurement that firms should be aware of?

In Europe, the speed of implementation of EU SFDR as well as local regulations on energy utilisation such as the UK Energy Rating system, is creating a huge volume of stranded assets in the market. As real estate is required to achieve a specific rating to continue operating by 2030, most of the London real estate will require significant capital to upgrade the building systems.

For example, many heritage buildings have not undergone significant renovations to improve their energy efficiency. As part of the UK government’s commitment to reducing carbon emissions and promoting sustainable development, new regulations are introduced that mandate all commercial buildings to achieve a minimum energy efficiency rating to be leased. The UK Government Net Zero Strategy 2, announced in October 2021, increases the minimum Energy Performance Certificate requirement for the letting of commercial property to “B”, from the current minimum of “E”, by 2030 with potential interim milestones. As of June 2022, 80% of London offices do not meet this energy efficiency requirement and will require comprehensive upgrades (Centre for Cities, 2023). Many of the existing office buildings fall short of meeting the required energy efficiency standards due to outdated insulation and inefficient heating and cooling systems. These buildings may be considered non-compliant with the regulations and are unable to secure new tenants or buyers.

Regulatory-driven change is not unique to the UK. In France, the Décret Tertiaire sets ambitious goals for decreasing building energy consumption by 40% in 2030, 50% in 2040, and 60% in 2050 compared to 2010 (Green Building Consulting, 2022). In the US, New York City’s Local Law 97 mandates a 40% reduction in carbon emissions by 2030 and an 80% reduction by 2050 for buildings larger than 25,000 sqft (NYC Sustainable Buildings, 2022).

Regulations on climate change and global Net Zero goals are driving asset repricing and present a huge opportunity within real estate to transform ‘brown’ assets into ‘green’ real estate. This asset repricing will continue as global ESG regulations tighten to reach Net Zero 2050 targets.

Carl Penfold: Where do you see the future of sustainable finance heading in the next 5-10 years?
In the next 5-10 years, sustainable finance will become a standard part of the investment process and essential to business operations for boards and investors. ESG considerations will be embedded in decision-making frameworks, influencing corporate strategies and financial products. Sustainability will no longer be an optional or niche aspect but a fundamental component of the financial and corporate work.
Carl Penfold: What role will global banks & funds play in driving further innovation and adoption in this space?
As providers of capital, global banks and funds are enablers of innovation and adoption in sustainable finance. Their role involves financing and partnering with governments and international organisations such as the IMF or World Bank. These partnerships are particularly important for supporting emerging markets, where many significant challenges and opportunities in sustainable development are found. By collaborating on financial solutions and sharing expertise, global banks and funds can help drive the transition to more sustainable practices and address environmental and social issues where they are most needed. There is a need for more catalytic and patient capital—funding willing to take on higher risks and accept longer time horizons to achieve positive outcomes.
Carl Penfold: Are there any emerging trends or technologies that you believe will shape the future of sustainable finance?

Several emerging trends and technologies will shape the future of sustainable finance. The energy transition, with advancements in renewable energy technologies such as solar, wind, and energy storage, is driving the shift away from fossil fuels and will require significant capital investment. Improving the ease of access to sustainable investments is important. Developing platforms and tools that simplify the investment process and provide clear, transparent information about the sustainability impact of various asset classes. Robust measurement and reporting frameworks can demonstrate the tangible benefits and effectiveness of these investments, therefore building trust and encouraging more widespread adoption.

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