In recent years the shores of sustainable finance have been battered by the choppy waters of geopolitics. Despite a surge in growth, public interest, and market momentum between 2020 and 2022 (a result of progressive policy, disclosure frameworks, and an
explosion in environmental, social and governance [ESG] investment products) sustainable finance feels as though it is slowing. From 2022 onwards the energy crisis – triggered by Russia’s invasion of Ukraine – drove international investment in fossil fuels;
regulations tightened to stymie greenwashers; and ESG more broadly went into
retreat in the wake of Trump 2.0’s rhetoric.
Despite these geopolitical setbacks, the need for economies to go green – and for projects to source investment – is no less than before. In fact, the Intergovernmental Panel on Climate Change (IPCC)’s modelling
shows that global greenhouse gas (GHG) emissions must peak in 2025, and decline significantly by 2030, if we are to avoid the most catastrophic collapses in the biosphere and comply with the 1.5°C warming limit. From 10-21 November 2025, COP30 will be held
in Belém, Brazil – where participatory governments will look to finalise new nationally determined contributions (NDCs) that are economy-wide and cover all GHGs.
But in order to power an industrial revolution of this size, an estimated
$2 trillion funding gap will need to be plugged every year, until at least 2030. Though this may sound insurmountable, total global investment into the low-carbon energy transition peaked at
$2.1 trillion in 2024; 80% of which came from private sources.
It is no surprise that the sustained mobilisation of the private sector will be critical to the preservation of the planet. One of the key means to achieve this is through the supply of sustainable securities, which integrate ESG factors into investment
decisions and (in theory) achieve both financial returns and positive societal outcomes.
In this instalment of Finextra’s Explainer series, we explore the challenges around sustainable securities, their role in the marketplace, and how technology will support their evolution.
What qualifies as ‘sustainable’?
Sustainable securities are financial instruments, like bonds and stocks, which are issued to finance projects or entities with positive environmental or social impacts. This can include green bonds, social bonds, sustainability-linked bonds or other similar
ESG-minded vehicles.
On the back of an increased global drive to achieve net-zero GHG emissions, the market for sustainable securities boomed in recent years, before it was hobbled by the
drill-baby-drill agenda. The sustainable bond market, for example, expanded at a compound annual growth rate (CAGR) of
43% from 2014 to 2023 – now representing 14% of the global fixed income market. The green bond market, meanwhile, has grown nearly
sixfold since 2018 – reaching a market capitalisation of $2.9 trillion in 2024, with annual new issuance hitting $700 billion. There has been an uptick in wind farms, nuclear
power, electric vehicles, and even promise of a commercial hydrogen-powered aircraft.
But, while momentum is there, the on-the-ground impact of sustainable finance rightly remains under scrutiny. Debate rages on – both in the private and public spheres – about where the proceeds should be funnelled and how impact should be measured. The trillion-dollar
question on everyone’s lips is: Will the issuance of sustainable securities alone be enough to turn down the planetary thermostat?
Tackling this mammoth challenge largely comes down to how precisely we can define a ‘sustainable security’ and how successfully we can optimise and disclose the impacts. As is the case with any nascent market, the immaturity of these instruments does mean
there are regulatory soft spots; areas which some bad actors have sought to exploit via greenwashing, greenwashing, and greenhushing.
Sadly, all kinds of organisations have been accused of making false or misleading claims about their sustainable commitments – from global financial institutions to high street brands. Recently, the globally-recognised environmental award, B Corp – boasting
over 9,600 members across 102 countries and 161 industries – was
hit by accusations of greenwashing; and that its accreditation isn’t strict enough on multinational companies. Clamping down on malpractice is key to ensuring that public and private funds flood into change-actioning projects, as opposed to trickling through
the cracks and into shareholders’ pockets.
The United Nations, for its part, defines sustainable finance as the practice of aligning financial systems, investments and decision-making processes with the Sustainable Development Goals (SDGs) and global sustainability objectives. The SDGs, of which
there are 17, were adopted by all UN member states in 2015 and seek to address global challenges such as poverty, inequality, climate change, environmental degradation, prosperity, and peace and justice, by 2030.
While this is the most prominent and powerful definition of sustainability that we have, it is arguably not the best framework we could conceive of – not least because enforcement is lacking. According to a
report compiled by the Sustainable Development Solutions Network (SDSN) none of the 17 UN’s SDGs are on track to be met by 2030.
International lawmakers must come together now – while managing the vested interests of the private sector – to tighten regulations around how sustainable securities are defined, and compel firms to take concrete steps toward decarbonisation.
The transformational force of technology
There is perhaps an even greater issue at play here – an elephant in the sustainable-finance room – which transcends all other regulatory and funding challenges. As many commentators, including
S&P Global Ratings, point out, our model of shareholder capitalism is not designed with the preservation of natural capital in mind. Instead, it prioritises economic growth, irrespective of the cost to the planet and people. In plainer terms, shareholder
capitalism means that a dead tree is worth more than one that is alive; in effect, the plundering of natural resources in financially incentivised.
To get around this philosophical malaise, commentators have tabled the stakeholder capitalism model; a system whereby firms factor in the interests of all stakeholders – not just shareholders – when making business decisions. This ties performance evaluations
not just to profit, but to the wellbeing of employees, customers, suppliers, communities, and the wider environment. The objective of stakeholder capitalism, therefore, is to generate long-term value for all participants in the chain – as opposed to simply
boosting short-term revenue. The added benefit is that under this forward-thinking model, transition risk is mitigated.
Fortunately, there are already mechanisms through which stakeholder capitalism can be embedded into our financial system. Particularly promising are those that leverage cutting-edge technology. Take, for example, the tokenisation of natural resources – a
data technique that replaces financial or natural assets with unique, non-sensitive identifiers, or tokens.
In 2021 the
Porini Foundation partnered with conservationist organisation, Nature Seychelles, and the International Union for Conservation of Nature (IUCN) to help protect 59 endangered magpies indigenous to Seychelles islands, an archipelago in the Indian Ocean. To
stimulate investment in the preservation of the species, the remaining birds were made
collectible. To do this, the Porini Foundation tokenised the magpies by creating a digital version of each, in non-fungible token (NFT) format, before placing them on the market to be bought and sold. Within the first 12 hours, over 50% of all the
NFTs were sold.
This project created the world’s first NFT for conservation (NFTC), generating not only financial assets for buyers and sellers, but revenue that was deployed to protect the Seychelles magpie and eventually remove it from the IUCN’s endangered list. This
is an example of how technology can enable stakeholder capitalism – encouraging both economic growth and the preservation of nature; because if the magpie becomes endangered again, the value of the asset is impacted.
In this manner, tokenisation – along with
other technologies like artificial intelligence (AI) and advanced data
analytics – could hold the keys to climate prosperity.
The terminus of sustainability
The human brain is evolved to address immediate challenges and dangers; from building shelters to stay dry, to knapping flint-tipped spears to defend against marauding tribes. Because of these very pragmatic requirements, it is estimated that the maximum
number of stable relationships a person can maintain is 150 (known as Dunbar’s number).
Global warming is a challenge of planetary scale – obliging us to not just contemplate a long-term, all-encompassing existential threat, but to work productively and harmoniously in inconceivably large and diverse social groups, spanning nations and time
zones, with little – or at least abstract – benefit to the individual. This is a challenge that will test the limits of our collective intellectual capacity, as well as our ability to uproot the economic systems that for hundreds of years our societies have
rested on.
In the coming years, as more and more planetary boundaries are smashed, financial markets will have no choice but to come together and deliver the economic diversification that is required – if not to reduce their own exposure to physical and capital risk.
Just when this tipping point will be triggered, however, is unclear. It will depend upon the geopolitical climate; how well governmental coalitions can work together to mandate action; how regulatory tides develop; and, of course, to what extend private
capital – the lynchpin of all net-zero ambitions – can be mobilised by sustainable securities.