By Nick Robins

At the Earth Summit in 1992, the financial sector was conspicuous by its absence. Sustainable development was then the domain of largely reluctant governments and an insistent civil society. When business did get involved, it was usually the industrial sector, not the providers of capital. Scroll forward 20 years and, battered by austerity, governments remain reluctant to show leadership. But a shift in the financial sector is now underway, increasingly recognising that long-term returns are linked to sustainable development.

Institutional investors have gone the furthest. First the bubble of the 1990s and then the more recent credit crunch exposed the follies of a short-term focus on profit maximisation unrelated to the resilience of markets and the underlying foundations of continued prosperity. More than 1,000 investment institutions with more than $30 trillion in assets under management now support the UN Principles for Responsible Investment (PRI).

Launched in 2005, the principles require signatories not only to integrate environmental, social and governance factors into investment and ownership decisions, but also support regulatory and policy developments that enable this to happen. At Rio this year, the PRI will be joined by the Principles of Sustainable Insurance, extending the incorporation of sustainability from the asset management activities of insurers to their core risk-management function.

Crucially, these initiatives are not designed as a substitute for regulation. The continuing erosion of natural and social capital directly impinges on the ability of banks, insurers and investors to deliver the durable, risk-adjusted returns they need. Large pension funds and insurers, for example, are best understood as 'universal investors' holding assets across the economy. This means that environmental costs generated in one part of their portfolios will be picked up in another: one estimate from the PRI places the annual environmental costs generated by the world's largest 3,000 publicly traded companies at more than $2 trillion.

Market failures such as these require market reform. So what could Rio+20 do to harness this growing awareness and activism? Five areas stand out:

Financiers need clear and credible short, medium and long-term targets. At the heart of the draft package for Rio+20 is the proposal to agree a set of Sustainable Development Goals by 2015. These have the potential to provide financial institutions with crucial guidance for investment decisions.

Governments need to grasp the nettle of reforming market incentives. Over $410 billion of government funding is still deployed each year to subsidise fossil fuels; only $66 billion is provided for renewables. In 2009, the G-20 committed to phase out 'inefficient' fossil fuel subsidies. Rio+20 needs to deliver a timeline for this.

Scarce public capital needs to be deployed in ways that mobilize private investment. It is clear what works. Development banks have helped to reduce project risks by co-investing alongside private investors. One proposal coming out of the financial industry is for a new body which would insure the expected revenues of renewable projects, for example, against shifts in government policy.

Financial decisions are too often based on an incomplete picture of the world economy: land has disappeared as a factor of production in economic forecasting. Rio is expected to raise the issue of how to integrate sustainability into macro-economic models. Real commitments on this are important.

Shareholders need to keep score at the micro-level and that means high-quality, consistent and comparable reporting by business. The investor-led Corporate Sustainability Reporting Coalition is calling on governments to agree at Rio to develop a convention that would integrate environmental, social and governance factors into the annual reports of listed companies.

The ultimate test of Rio+20 is whether it can change the real world. This time governments could make a few small but systemic commitments that could help to mobilise $200 trillion in outstanding global equities, bonds and loans behind the transition to a sustainable economy.

(Nick Robins is head of the HSBC Climate Change Centre of Excellence.)


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