Human-induced climate change has become the world's single most threatening global challenge.

Extreme weather events breaking all the wrong records, wildfires encroaching on cities, food security
imperiled, energy sources being weaponized in wars, biodiversity under attack, and so the list of
symptoms of climate change keeps growing.

Despite a long trail of supranational conventions, conferences, accords and agreements, not
dissimilar to inquiries into financial advice, the urgency is acknowledged, but progress to action has
been slow to come. In all those forums, finance has been blamed for its role in creating the problem,
but at the same time it has been identified as an indispensable part of any solution.

For example, the Paris Agreements in 2015 aims to make finance flows consistent with a pathway
towards low greenhouse gas emissions and climate resilient development. Climate finance is defined
as local, national or transnational financing drawn from public and private sources that supports
mitigation and adaptation actions in addressing climate change.

Climate finance is needed for mitigation because large-scale investments are required to significantly
reduce emissions. Using insurance terminology, you could call this preventive action. Climate finance
is equally important for adaptation, as significant financial resources are needed to adapt to the
adverse effects and reduce the impacts of a changing climate.

Using the same terminology, this would be treatment action. The Convention, the Kyoto Protocol and
the Paris Agreement all call for financial assistance from countries with more financial resources to
those that are less endowed and more vulnerable. This recognizes that the contribution of countries to
climate change and their capacity to prevent it and cope with its consequences vary enormously.

It is clear the finance sector has a role to play when deciding to discontinue financing of major
polluters, particularly in industries generating significant greenhouse gas emissions, like coal. But
does that role extend beyond divesting coal assets from mutual fund portfolios?

The Paris Agreement certainly expected a much more active support role for the finance sector, as a
moral obligation emerging from finance's social license. While a hallmark of ESG commitment and
relatively straightforward to verify, the ethical investment portfolio is only one component of climate
finance.

Other elements include lending criteria, investment banking services, social impact investing, CSR
activity focus, greenhouse discounting rates, etc. ESG reporting is now part of the annual integrated
reporting cycle.

but it still lacks consistency across financial institutions and over time. The consistent treatment of
ESG reporting is important as the Paris Agreement emphasized the need for transparency and
enhanced predictability of climate finance. Transparency will improve with availability and accessibility
of meaningful measures capturing all dimensions of climate finance.

That should include a motivation for the choices made. For example, in the choice between negative
and positive screening. To assess performance, independent external climate finance audits should
become part of the annual financial auditing process and detect and avoid greenwashing.

ESG reporting is important, but it is backward-looking, a framework for measurement. Impact

To further distinguish impact investing from ESG, the former originated in the public sector, where
impact investing was a private sector initiative. So where ESG aims at public understanding of
environmental, social and governance factors,

The for-profit nature of impact investing incentivizes financial institutions to drive capital toward these
interests. Key ethical question is whether the finance sector is still geared up for excessive growth,
focused exclusively on shareholder value, ignoring any externalities and regardless of the long-term
consequences.
A large swath of the academic finance discipline has held on to the archetype of rational, utility-
maximizing financial actor, and has been taken to task by an increasingly distrustful public. But in the
last 30 years or so, increasingly loud voices of finance professors have postulated an alternative,

the occasionally or frequently irrational financial market participant, whose intentions and actions are
determined by behavioral finance traits. The problem is that many senior finance practitioners were
educated in the rational agent days.

Which means that new finance models, including the stakeholder model, using social discount rates
and value-at-risk measures, among other features, are only slowly filtering through into practice.

Prodding financial institutions into action is the increasing demand for environmentally friendly
sustainable or ethical investment options from investors worldwide, particularly those of a younger
demographic. To meet this demand, managed funds and superannuation funds offer investment
products focused on environmental, social and corporate governance considerations. A major ethical
concern arises

whether the practices of green funds that offer these products aligns with their marketing of these
products. In other words, whether the financial product or investment strategy is as green or ESG-
focused as claimed.

ESSIC defines greenwashing as the potential for financial institutions to overrepresent the extent to
which their practices are environmentally friendly, sustainable or ethical. This issue has been
recognized by international regulators. Misrepresentation of the green nature of financial products and
services poses a threat to a fair and efficient financial system.

Essentially, this misrepresentation distorts relevant information that a current or prospective investor
might require to make informed investment decisions, motivated by ESG considerations. Perhaps
even more important is the signal it sends, reinforcing the public cynicism about the genuine nature of
a financial institution's commitment to ESG.

Worse yet, excessively positive reporting will make people complacent, something we clearly cannot
afford.