World Investment Report 2022


Chapter 4 – Capital Markets and Sustainable Finance

Sustainability-themed investment products are booming

Throughout the pandemic, sustainable finance in global capital markets has seen strong growth. UNCTAD estimates that the value of sustainability-themed investment products in global financial markets amounted to $5.2 trillion in 2021, up 63 per cent from 2020. These products include (i) sustainable funds and (ii) sustainable bonds, including green, social and mixed-sustainability bonds.

The number of sustainable funds reached 5,932 by the end of 2021, up 61 per cent from 2020. The total assets under management (AUM) of these funds reached a record $2.7 trillion, an increase of 53 per cent from the previous year (figure 14).

Much of the growth of sustainable funds remains concentrated in developed markets. Europe is by far the largest market, with a share of 81 per cent of AUM. Sustainable funds account for 18 per cent 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 per cent of its total fund market. China is the third largest sustainable fund market worldwide, with AUM of nearly $50 billion.

It is important to highlight several concerns. First, despite the rapid growth in recent years, sustainable funds still account for only about 4 per cent 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. 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.

UNCTAD has been monitoring more than 800 sustainable equity mutual funds since 2020. Overall, these funds exhibit a better sustainability profile than their conventional peers. However, their sustainability ratings vary widely, and the low-performing funds fall short of their self-claimed sustainability credentials. For example, with respect to climate ratings, both thematic funds with a green investment focus and sustainable funds in general tend to perform better than the overall fund market. But about 25 per cent of self-declared green funds have a net exposure to fossil fuels of more than 5 per cent (with some cases up to 20 per cent), calling their “greenness” into question.

The sustainable bonds market also continued its strong growth in 2021 (figure 15). 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 was especially visible in emerging markets. Cumulatively, the total value of outstanding sustainable bonds is now estimated at close to $2.5 trillion. The European Union and the corporate sector continue to push social and mixed-sustainability bond issuance to new heights.

Institutional investors have some way to go in mainstreaming sustainability

In 2021, public pension funds (PPFs) held more than $22 trillion in assets, or almost 40 per cent of global pension fund assets. The assets of sovereign wealth funds (SWFs) grew to $11 trillion. Institutional investors can exert a significant influence over their investees and the sustainable investment market through asset allocation and active ownership. UNCTAD’s analysis of the sustainability integration practices of the world’s top 100 PPFs and SWFs shows that, although the number of institutional investors reporting on sustainability performance has increased since 2020, a majority (53 funds) still fails to report. SWFs remain relatively less transparent than PPFs. Many non-reporting funds are based in China, Japan, the United Arab Emirates, the United States and Saudi Arabia.

Among the 47 front-runner funds that do publish information on sustainability integration, many acknowledge the material risks posed by ESG issues, with funds changing their investment strategies and policies accordingly. A majority of these funds have made efforts to introduce internal policies and guidelines to support the integration of an ESG or SDG perspective in their investment strategies, often anticipating transition risks and targeting net zero in their portfolios by 2050, at the latest.

Stock exchanges play an important role in promoting sustainable finance

Stock exchanges and other market operators continue to integrate ESG considerations in market infrastructure (figure 16). The number of exchanges with written guidance on ESG disclosure for issuers continues to grow rapidly, from just 13 exchanges in 2015 to 63 at the end of 2021. The number of stock exchanges that provide training on ESG topics to issuers and investors continues to increase as well; more than half of stock exchanges now offer annual training. Mandatory ESG reporting has also been on the rise in recent years, supported by both exchanges and security market regulators. The number of exchanges covered by mandatory rules on ESG disclosure, currently 30, has more than doubled in the past five years.

Exchanges also have an important role in promoting gender equality. The number of exchanges engaged in annual “Ring the Bell for Gender Equality” events has grown from just 7 in 2015 to over 110 in 2022. Beyond raising awareness, exchanges support mobilizing finance for gender-equality-themed investment products, improving women’s access to financial markets and promoting greater levels of female participation in corporate boardrooms.

Policies, regulations and standards are rapidly evolving

The rise of sustainability-themed investment products has been accompanied by an increasing number of principles and standards. Many of these have been driven by the private sector or developed through international initiatives, as exemplified by the large number of voluntary standards for products, disclosure and sustainability integration. More recently, governments in both developed and developing economies have been stepping up their efforts to support the growth of sustainable finance by putting in place the necessary policies and regulatory frameworks.

UNCTAD’s monitoring of sustainable finance measures and regulations reveals that 35 economies and country groupings, accounting for about 93 per cent of global GDP, had 316 policy measures and regulations in force at the end of 2021 (figure 17). More than 40 per cent of these measures were introduced in the last five years, and 41 new measures were adopted in 2021 alone. At least 45 measures are still in the pipeline. These regulatory trends illustrate the accelerating pace of sustainable finance policymaking.

Almost half of the policies and regulations identified relate to sustainability disclosure. Sector-specific regulations with respect to asset management, sustainable banking and sustainable insurance are the second biggest policy area, representing about 20 per cent of all measures. Policy and regulatory gaps are more visible in three relatively new policy areas: taxonomies, product standards and carbon pricing. However, many measures under development are concentrated in these areas. Most countries covered by UNCTAD’s data set have a national sustainable finance strategy or framework in place.

At the international level, efforts to coordinate and consolidate sustainable finance regulations and standards gathered momentum in 2021. The International Organization of Securities Commissions (IOSCO) continues to develop its work on sustainable finance to provide guidance to securities regulators around the world, and international standards development for corporate ESG disclosure is accelerating. Between 2021 and 2022, the International Financial Reporting Standards (IFRS) Foundation launched its new International Sustainability Standards Board and signed an agreement with the Global Reporting Initiative. Combined, these developments aim to create a new global baseline for corporate sustainability reporting.

Climate action in capital markets is urgent

Global efforts to decarbonize the world’s economies have important implications for business and the investment community. Mitigating climate change risk also offers opportunities that both investors and issuers can capitalize on.

Research into the scope 1 greenhouse gas emissions of the top 100 issuers by market capitalization listed on G20 exchanges shows that the emissions of publicly listed companies vary significantly from one market to another. Some markets are particularly exposed to systemic risks during the transition to net-zero economies. For example, among the companies analysed in the G20, over half of the scope 1 emissions are emitted by firms listed on just five exchanges. Exchanges, regulators and policymakers should monitor the emissions of companies listed on public markets to ensure an orderly transition to net-zero economies.

Stock exchanges are playing an important role in helping their markets navigate the low-carbon transition. Many exchanges are now hosting training on TCFD-aligned corporate climate disclosure. To help exchanges lead a transition to more climate-resilient markets, the UN Sustainable Stock Exchanges initiative, in collaboration with the UN Special Envoy on Climate Action and Finance, launched a voluntary Action Plan and an associated set of tools.

Much remains to be done to fully leverage the potential contribution of capital markets to sustainable development. The focus now is on strengthening the integrity of sustainability-themed investment products to address green- or sustainability-washing concerns, and on harmonizing corporate ESG disclosure.

Moving towards a more geographically balanced market will require more international cooperation. For countries with less developed markets and weaker regulatory and standard-setting capacities, technical assistance will be necessary to support market development and to strengthen sustainability reporting ecosystems.

Through the work of its Global Sustainable Finance Observatory and other sustainable investment-related programmes, such as the Sustainable Stock Exchanges initiative, the Sustainable Institutional Investment Programme and the International Standards of Accounting and Reporting programme, UNCTAD is committed to working together with key stakeholders from both the public and private sectors to increase the contribution of financial markets to the SDGs, as mandated by the UN General Assembly.