How Investment Funds Can Drive the Green Transition

IMF Blog, October 4, 2021

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The transition to net-zero greenhouse gas emissions requires additional investment of as much as $20 trillion over the next two decades.
The world’s $50 trillion investment fund industry can play an important role financing the transition to a greener economy.
Funds with a sustainability label totaled about $3.6 trillion at the end of 2020, representing only 7 percent of the overall investment fund sector.
Funds with a specific climate focus accounted for $130 billion of that total.
Net flows into sustainable funds increased notably in 2020; climate-themed funds grew especially fast, surging by 48 percent of assets under management.

Sustainable funds differ from conventional funds because they have a sustainability objective while also seeking financial returns; within this class, some funds are environment-focused and a subcategory is concerned with climate change mitigation specifically.
Stewardship tools (direct engagement with firms and proxy voting) enable funds to influence corporate sustainability practices.
Conventional investment funds voted in favor of almost 50 percent of climate-related shareholder resolutions in 2020, up from about 20 percent in 2015.
Funds with a sustainability focus voted in favor of about 60 percent of such resolutions, and close to 70 percent in the case of environment-themed funds.
Growing popularity of sustainable funds increases capital available to high-sustainability-rating firms, boosting firms’ bonds and shares issuance.

Despite faster growth, sustainable investment funds remain a small fraction of the investment fund universe: $3.6 trillion or 7 percent at end-2020.
Climate-themed funds composed $130 billion of sustainable fund assets at end-2020.
Net flows into sustainable funds increased notably in 2020, with climate-themed funds surging by 48 percent of assets under management.

Strengthen the global climate information architecture (data, disclosures, and sustainable finance classifications) for firms and investment funds.
- Better classification systems, where fund labels and taxonomies are uniformly used and understood, help summarize a fund’s investment strategy and its approach to engagement and stewardship.
- Fund labels have become an increasingly important driver of fund flows, especially in the retail segment.
- The IMF, together with the World Bank and the OECD, aims to develop principles for such classification systems to harmonize existing approaches and support sustainable finance market development.
Implement proper regulatory oversight to prevent “greenwashing” and ensure that labels fairly represent funds’ investment objectives, thereby increasing market confidence and boosting flows into sustainable funds.
Deploy tools to channel savings toward funds that enhance the transition once information and oversight are in place.
- Example: enhanced eligibility of climate-themed funds for favorable tax treatment in savings products (such as retirement plans or life insurance products) could complement other climate-mitigation measures, such as carbon taxes.

IMF Blog — How Investment Funds Can Drive the Green Transition, October 4, 2021.