Introduction

This report applies a systems lens to examine how financial sector structures and actors influence sustainability outcomes. Despite rising investor awareness that environmental and social issues affect long-term returns, corporate and financial practices remain largely unchanged. The report identifies limited integration of environmental risks, lack of science-based metrics, and weak understanding of systemic interactions as barriers to progress. Finance directs global economic activity and therefore plays a central role in shaping human and planetary futures. However, sustainable finance remains hindered by inconsistent ESG data, poor quality control, and unreliable disclosure standards. Recent regulatory shifts recognise biodiversity and climate risks as material financial issues, but private capital mobilisation still lags. The authors propose two complementary goals: promoting sustainable investments while reducing harm from existing activities.

Methodological Approach

The analysis uses systems thinking to explore how financial actors interact and influence one another. It employs a qualitative conceptual review based on the PRISMA Extension for Scoping Reviews (PRISMA-ScR) to identify key actors and mechanisms of influence. The study focuses on eight financial actors—public equity investors, banks, venture capital providers, insurers, development banks, stock exchanges, ESG raters, and proxy advisors—and evaluates how their actions can reinforce or hinder sustainability transitions.

Key Financial Actors And Their Mechanisms Of Influence

Institutional investors, such as pension and sovereign wealth funds, can influence corporate sustainability through active ownership, shareholder engagement, and voting. Their universal ownership model exposes them to systemic environmental risks. However, passive investment and short-termism weaken their impact.

Banks shape sustainability by controlling access to and cost of capital. Instruments such as green bonds and sustainability-linked loans tie financing to environmental targets. Yet inconsistent definitions of “green” and limited post-issuance verification risk greenwashing and reduce credibility.

Venture capital (VC) plays a role in funding early-stage companies that develop sustainable solutions. Through close engagement and governance influence, VC can embed sustainability practices at firm level. However, limited exit options and non-sustainable subsidies constrain green innovation.

Insurers, managing over US$40 trillion in assets, can promote sustainability by restricting cover for harmful sectors and incentivising resilience. Competitive pressures, free-rider problems, and moral hazard often limit collective progress.

Development banks de-risk sustainable projects and mobilise private capital through concessional finance and guarantees. They can catalyse private participation but face challenges such as political instability, weak capacity to assess environmental impacts, and limited investable opportunities.

Stock exchanges promote transparency through listing requirements and sustainability indices. However, increasing corporatisation and conflicts of interest undermine their ability to enforce sustainability standards.

ESG raters and proxy advisors shape investment decisions by defining and disseminating sustainability data. Weak transparency, low accountability, and methodological inconsistencies reduce their reliability and can distort capital allocation.

Reinforcing Virtuous Cycles Or Locking-In Unsustainability

Five potential virtuous cycles are identified.

1. Collaboration among public equity investors, lenders, and venture capital can align incentives, scaling sustainable start-ups and influencing incumbent firms.
2. Development banks can de-risk sustainable investments, attracting private finance.
3. Combined pressure from insurers and lenders can compel companies to reduce environmental harm.
4. Accurate ESG and proxy data can improve decision-making and encourage sustainable corporate practices.
5. Stock exchanges can create standardised disclosure and sustainability-focused trading platforms, facilitating green investment flows.

Barriers include fragmented data, poor definitions of sustainability, agency problems, and collective action dilemmas. The report notes that current green debt instruments often fail to impose penalties for unmet targets, perpetuating unsustainable practices.

Levers For Change

Three levers for change are identified: funding (e.g., conditional lending), authority (e.g., investor engagement), and filtering (e.g., market access). Aligning these across the financial system could reinforce sustainability transitions. Institutional investors’ alliances, such as the Net-Zero Asset Owner Alliance, exemplify collaborative approaches to drive systemic change.

Breaking Barriers: The Role Of Regulators And Sustainability Science In Facilitating Virtuous Cycles
The report highlights the need for science-based definitions of sustainability and standardised disclosures to reduce systemic risk exposure. Sustainability science can contribute through:

• Translating scientific knowledge into financial frameworks and improving sustainability competency within finance.
• Developing robust environmental impact assessment methodologies.
• Enhancing corporate sustainability reporting through engagement with standard-setting bodies.
• Expanding conceptions of financial risk to include ecological degradation and systemic environmental dependencies.

Overall, the report argues that coordinated, evidence-based collaboration between financial actors, regulators, and scientists is essential to align capital flows with long-term ecological resilience and sustainability goals.