December is a good time to look back at how the sustainable finance debate has evolved in 2018. It has definitely been an interesting and eventful year. We would like to point to four aspects that are highly relevant for 2019, all of them linked to the dimension of time:

• Both the speed and breadth of regulatory change pertaining to sustainable finance are unprecedented. A web of intertwined soft and hard law standards addresses topics across the board, from the business and human rights agenda to gender and diversity issues, and – predominantly – climate change. Such regulatory action is not a coincidence. It is the result of growing concerns about severe societal and economic challenges. Unfortunately for the financial sector, it seems that regulators – and even many sustainability experts – find it wiser or easier to regulate financial institutions than the real economy.
• In his most recent speech,[1] Mark Carney detailed the risks of a delayed response to climate change. While he highlighted recent achievements, such as the broad response to the TCFD recommendations, he also pointed to challenges. One of them is the fact that the financial risks stemming from climate change tend to be beyond financial institutions’ planning horizons (“the tragedy of the horizon”). This makes it very difficult for them to develop a comprehensive understanding of the related financial risks.
• This is not only a problem for the financial sector, but also, ironically, for policymakers. The Paris Agreement defined an overall target, but does not include an agreement on policy changes. Each country provides its own national climate plan.[2] As today’s national climate plans, even collectively, will in no way suffice to meet the target of the Paris Agreement, they make it almost impossible for financial institutions to provide reliable predictions of the transition risks for individual sectors. As a result, financial institutions come to the conclusion that climate change will not become financially material for their operations in the next few years. However, the IPCC has recently called[3] for much stronger mitigation efforts, which would have severe implications for policy over the next ten years. For financial institutions, such changes in policy remain intangible, as it is unclear whether they will actually occur.
• The central topic of the Sustainable Finance Working Group of the International Institute of Finance (IIF)’s recent[4] meeting was the urgent need for the financial sector to demonstrate leadership in the sustainable finance debate. There was broad concern that the financial sector was behind the curve, and that there is a need for it to approach sustainable finance in a more meaningful way. This should happen very soon, as groundbreaking developments are expected in 2019.

We believe that one important message the IIF and financial institutions could convey to regulators is the need for policy roadmaps that will enable them to understand and manage transition risks. Such information would also help to make the case for investment opportunities, and would allow financial institutions to provide better support for the transition to a low-carbon economy.