Sustainable Finance Lab SWEDEN is grounded in the assumption that the power of financial markets to shift society onto a more sustainable track rests largely on its ability to help reduce the harm currently done to the climate, environment and to certain aspects of society, while simultaneously bolstering innovative solutions through investments that can steer us in the right direction.
We therefore structure our work under four themes that in different ways address the key challenges for today’s financial markets to achieve these two overarching goals.
Good intentions abound, and the rapid growth of green and social financial instruments launched on the market is a reflection of this. However, the fact that social and environmental impacts of financial decisions are not considered material to most financial market actors remains a primary challenge. A central task therefore remains; to develop sustainability metrics that incorporate not only short-term financial material risks, but also the risks to society and business at large of transgressing planetary boundaries and fueling social inequities. Furthermore, corporate non-financial reporting requirements are mostly voluntary, not standardized, making evaluation and comparison of companies and portfolios difficult.
SFL conducts research at the interphase of social and environmental sustainability to advance such metrics, informed by insights from – and dialogue with – industry.
Example project: Current ESG measures are largely based on capturing financial materiality and risk. This project assesses the impact of this state of affairs on the ability of ESG ratings to promote reallocation of capital towards climate stabilizing and SDG-positive outcomes. We do so by trying to compare the content of dominating ESG rating frameworks and assessing their ability to capture social impacts and Earth system dynamics of relevance for avoiding climate destabilization. We develop environmental metrics for capturing interconnectivity among important planetary processes (and possible climate tipping points) that determine Earth system and climate stability and compare and contrast them with existing ESG ratings to evaluate to what degree current ESG investments differ in their likelihood of promoting salient sustainability goals, in comparison with non-ESG investments. We also incorporate key social sustainability dimensions such as income and employment among different social groups.
The evolving structure of our international economy and the stress on our social-ecological systems has increased the risks arising at different scales, from individual and company levels, through to the national and global levels. Growing evidence shows that the organization of the economy exposes us to events occurring far beyond national borders. Shocks propagate and are amplified across international supply chains. This evolving hazards landscape simultaneously undermines risk assessments based primarily on historical data.
With new and innovative sources of data, and advances in theory, SFL conducts research that promotes sustainable development of capital markets by unpacking the complexity of the risk landscape. Specifically, we work to clarify the link between risk and sustainable development, and identify new risk assessment approaches that help mitigate risks both to, and from, investments.
We also do research that elucidates how biases and established principles for assessing risk and opportunity steer what is perceived as risky investments. Addressing and reducing such biases can increase financing for innovative SMEs and start-ups in the green sector, and significantly enhance the capacity of the financial industry to both ‘reduce harm’ and increasingly ‘do good’.
Example project: This project builds on work that maps Sweden’s exposure to extreme weather events occurring outside Sweden and develop new tools and understanding to help strengthen the link between risk and sustainable development, and identify policies that can help mitigate these risks. Working with our partner organizations we translate our scientific insights to practice, developing practical stress tests to augment current investor practice.
Governments and decision-makers shape norms that guide investment decisions through policies. A recent example is the central bank Network for Greening the Financial System (NGFS). Yet norms that currently guide financial investments are the result of a long legacy of theory development within narrowly defined academic disciplines. Entrenched norms about which science is salient for financial decision making, and hence legitimate to include in efforts to develop financial and fiscal policies and practices, is therefore a barrier to more inclusive, sustainable and efficient financial markets.
SFL works to widen the sustainable finance arena to include a broad set of disciplines, from sustainability science to business administration, sociology, philosophy, and entrepreneurship. By challenging entrenched but defunct norms in the financial industry, including gender stereotypes and social categorization, we hope to contribute with disruptive perspectives for positive change.
Example project: Evaluating the effectiveness of Swedish public policies in the area of Sovereign Green Bonds and Green Savings Accounts. Policies are evaluated by their estimated effects on both economic incentives and social norms, in particular their ability to support financial markets in both ‘avoiding harm’ and ‘doing good’. We will also engage with international policy initiatives – including the EU Action Plan and UNEP FI activities – to allow a broader and more global evaluation of Swedish norms and policies.
The ultimate goal of research within SFL is to support real innovation in, and transformation of, financial markets. Our fourth theme therefore draws on insights from the former three to co-develop new and innovative strategies and tools for real change.
We seek to develop new and innovative instruments for sustainable finance, including for instance those built on AI prototypes.
Example project: One example includes work on how explicit gender stereotypes and unconscious biases interfere with investors’ financing decisions. This work will inform efforts by the financial sector to overcome persistent biases in capital allocation decisions, discriminating women and certain societal groups. As a first endeavor SFL will build an AI/machine learning algorithm to correct for gender bias and ensure a gender neutral AI. This pioneering approach offers potential to motivate financial market actors to implement new gender-neutral tools for investments.