The evolution of sustainable finance: Interview with Steve Waygood

Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, delves into the evolution of Sustainable Finance, reflecting on the transformative journey from the 1990s to the present day.

In the early 1990s, when I began my journey in Sustainable Finance, the landscape was vastly different. Companies lacked guidance on disclosing their impact on climate change, and the awareness of climate-related economic issues was in its infancy. It wasn't until 2000 and 2001 that a significant turning point occurred with the establishment of the Carbon Disclosure Project, which has grown now to be over $100 trillion worth of investors urging nearly 10,000 companies worldwide to improve their emission data.

The current state of climate and sustainability regulation

The urgency in measuring and managing emissions stems from the realization that the physical risks of climate change pose a severe threat to global economies. Beyond mere accounting, understanding and mitigating these risks have become essential to prevent potentially catastrophic economic damage. Therefore, it is acutely relevant to investors to make sure we know how particular companies, sectors and geographies are likely to fare in the transition.

This is why the creation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 was pivotal, a body I have been a part of since its beginning. Recognising the need for a transition plan, the Transition Plan Task Force (TPT) was established at COP 26 and launched in April 2022, to complement TCFD. This collaboration is crucial to ensure a smooth transition toward sustainable growth and to avoid extreme transition or physical risks.

Transitioning the global economy away from fossil fuels towards one that can be genuinely sustained is imperative. Striking the right balance in this transition is critical, but the pace must balance avoiding too much transition risk while addressing the urgent need to mitigate physical risks.

Crucially, every economic activity has an impact on climate change and climate change has a bearing on all economic activity, necessitating a systemic transition. Calls for change, often echoed by protesters advocating for systemic shifts during UN conferences, highlight the need for action. The question remains: how fast and to what extent?

What else is on the horizon?

In the UK, corporate climate reporting has seen improvements, but challenges persist within financial institutions, especially in delivering on net-zero commitments. The issue of reporting and offsetting scope 3 emissions poses a dilemma, emphasizing the need for governments to establish carbon prices to align markets with the Paris Agreement.

While progress has been made in corporate disclosure, the same cannot be said for countries. With approximately $100 trillion in outstanding government bonds globally, understanding how different countries manage and mitigate transition and physical risks becomes paramount. But country climate risk disclosure is currently very, very poor – particularly when compared with companies. There is a need for investors to be much better informed about country level risks.

I have actively participated in many COPs since COP 6. Aviva Investors has played a crucial role in influencing outcomes. At COP our focus extends beyond networking. We go there with an agenda for change and often provide negotiators with insights into how finance works and offer draft negotiating text. The real commercial opportunity for us lies in engaging governments to help them ensure a smooth and well-governed transition.

At the heart of the Paris Agreement is the crucial question of how the world finances the transition to a low-carbon, resilient economy. Calls for a global vision and governance process to harness trillions of dollars for a sustainable transition become increasingly urgent. In our paper: The tipping point for climate finance,  we outline the need to harness investment of $4-6 trillion per annum in a way that both underpins sustainable development and moves money incrementally towards activity aligned with that future. Achieving this will require a coordinated programme of action – starting with clear policy and market signals that change the economics of the transition.

In conclusion, the journey of Sustainable Finance over the past decades reflects both the progress made and the challenges that lie ahead. From the birth of climate disclosure initiatives to the establishment of global standards, the path forward requires coordinated efforts from governments, businesses, and investors.