Derisking Capital: The Regulatory Future of Sustainable Investing

Sustainable investing is a concept trying to lead capital to develop environmental and social friendly projects. According to Alex Edmans, Tom Gosling and Dirk Jenter in their article “Sustainable Investing: Evidence from the Field”, the United Nations has established PRI, which now manages more than $6.5 trillion. It is a huge potential market and represents the future development direction of capital for good. However, this article has researched for the investor’s concern about sustainable investment: financial returns and company competence. The article points out that many investors have a nuanced view of ES (environmental and social) issues and rank it behind the normal financial indexes. 

In my view, sustainable investing has two pain points: first, one is how to attract investment into sustainable areas. For example, in the SIRI Practicum this semester, our client transits from traditional finance to the carbon credit voluntary market. They are now trying to measure carbon market risks with a traditional financial model, like project finance, infrastructure and private equity. During the process we helped them combine carbon market risks into financial language, I found what investors are really caring about are three things: costs, benefits and risks. They have hesitated to get into the carbon credit market not because the carbon market is “sustainable” and “environmentally friendly”, but because the carbon market is risky in development, construction, verification and operations. In the presentation delivered by a UNCDF representative, blended finance is one way to solve this problem now. The lead investors will be the public sectors, international development funds and multilateral banks. Their representation will highly reduce the risks and consideration from private sectors and then monetize more capital to flow in sustainable investment areas. For example, in carbon markets, a lot of carbon projects have been granted from MDB or international funds, or signed long-term carbon selling contracts with the government or big companies.

The second pain point is how to make sure the capital return rate and safe exit. Sustainable investment now is more like a concept rather than a complete financial market mechanism. Take our project about the carbon market as an example, the ARR projects (Afforestation, Reforestation, Revegetation) now facing an obstacle about investment safety. Because ARR is a nature-based carbon project, the capital return can be swept by a mountain fire or a drought summer. But at the same time, the ARR project is also a kind of project which needs very big initial capital investment to plant trees and restore land. If this kind of risk happens, it will make the investment totally “unsustainable” for investors.

To address these issues, now the revolution trend is a top-bottom structure. The related principles and regulations will firstly be raised by international organizations or international frameworks. For example, according to the article “Consolidated Set of the GRI Standards”, the GRI sustainability reporting standards is issued by the Global Sustainability Standards Board (GSSB), an NGO initiated by the US CERES and UNEP. SASB, which is now combined with IFRS, was initiated by the IFRS fund. The TCFD was founded by G20 financial ministries and central bank leaders. Now in the market ISSB has stronger power, which was also funded by IFRS funds. One exception is TNFD, which was founded by the TNFD commission, supported by market power, but still gets support from United Nations and national governments. 

However, good news is that with the compulsory requirement being adopted in several countries, the report of ESG and ESG compliance has become more necessary for entrepreneurs’ operations and investment. In China, a company cannot get an IPO without an ESG disclosure report.

In summary, the evolution of sustainable investing is undergoing a fundamental shift from a voluntary "moral choice" to a rigorous financial imperative. As evidenced by the practical challenges in the carbon credit market and nature-based ARR projects, the primary hurdle is not a lack of interest, but a lack of a mature mechanism to price and mitigate unique ecological risks. However, the transition toward a top-down regulatory structure—led by international bodies like the IFRS and ISSB—is providing the "financial language" necessary to bridge this gap. By leveraging tools such as blended finance to derisk private capital and adhering to increasingly mandatory ESG disclosure requirements, such as those seen in China’s IPO market, sustainable development is no longer a peripheral concept. It has become a cornerstone of corporate resilience and a prerequisite for market entry. Ultimately, the future of capital lies in its ability to reconcile short-term financial returns with long-term planetary boundaries, turning "investing for good" into "investing for survival."