Summary

The report examines how financial systems influence sustainability outcomes using a systems approach. It finds that despite rapid growth in sustainable finance—such as UNPRI signatories rising from 100 in 2006 to over 4,900 institutions—corporate practices and environmental trends remain largely unchanged due to structural and informational barriers.

Introduction

Finance shapes economic activity and, therefore, environmental and social outcomes. While awareness of climate and ecosystem risks has increased, sustainable finance faces limitations, including inconsistent ESG metrics, weak data quality, and concerns about financial returns. These issues contribute to greenwashing risks and reduce trust in sustainable investments.

Methodological approach

The study uses systems thinking to analyse interactions between financial actors. It combines a scoping literature review with an assessment of feedback loops, identifying how actors reinforce or hinder sustainability outcomes through interconnected practices and influence mechanisms.

Key financial actors and their mechanisms of influence

The report identifies eight key actors, including institutional investors, banks, venture capital providers, insurers, development banks, stock exchanges, ESG raters, and proxy advisors.

Institutional investors influence sustainability through active ownership, shareholder resolutions, and engagement, but face barriers such as short-term incentives and weak sustainability metrics. Banks and lenders can shape outcomes through loan conditions and green bonds, although unclear definitions of “sustainable” and weak verification limit effectiveness.

Venture capital supports innovation in sustainable technologies but lacks consistent sustainability evaluation frameworks. Insurers influence risk through premiums and underwriting but face collective action challenges. Development banks can de-risk sustainable investments and catalyse private capital, though political and market constraints limit impact.

Stock exchanges can promote transparency via listing requirements and sustainability indices, but corporatisation may weaken their regulatory role. ESG raters and proxy advisors provide critical data and governance influence, yet inconsistent methodologies and low transparency reduce reliability.

Reinforcing virtuous cycles or locking-in unsustainability

The report identifies five potential “virtuous cycles” where coordinated actions across actors reinforce sustainability outcomes. For example, pressure from investors and lenders can create markets for sustainable innovations funded by venture capital. Development banks can expand investable opportunities by de-risking projects, while insurers and lenders can increase costs for unsustainable practices, encouraging change.

However, these cycles are often blocked by poor data, weak ESG metrics, lack of standardisation, and collective action problems. In particular, unreliable ESG data leads to misallocation of capital and weakens incentives for corporate sustainability improvements.

Levers for change

Three main levers for influencing sustainability are identified: funding (access to capital and cost of capital), authority (engagement and governance influence), and filtering (deciding which firms receive capital or market access). Coordination across these levers is critical to overcome first-mover disadvantages and reinforce system-wide change.

Breaking Barriers: The Role Of Regulators And Sustainability Science In Facilitating Virtuous Cycles
The report highlights the need for science-based metrics, improved disclosures, and better integration of environmental risks. Sustainability science can support this through knowledge translation, development of impact assessment tools, and improved corporate reporting standards.

It also emphasises the importance of redefining financial risk to include environmental impacts and strengthening collaboration between scientists and financial practitioners to align investment decisions with long-term sustainability goals.

Methods

A scoping review approach was used, drawing on academic and industry literature across finance, sustainability science, and related fields. The analysis focuses on private financial actors and their interactions, excluding regulators except where relevant to context.

Limitations of study

The study does not provide a full transformation roadmap but instead identifies how incremental changes in financial practices can generate system-wide effects. It also focuses on private actors, limiting consideration of regulatory and macroeconomic influences.