The sector is at the same time struggling with legitimation issues. A survey of 15 industry sectors revealed that the financial sector ranks last in credibility, falling considerably behind sectors such as automotive, food and beverage, entertainment, and fashion. By seriously addressing the challenges of climate change, the sector might regain credibility as one working on behalf of society and not against it.

Some trends are however pointing to the fact that the sector is awakening. Financial flows are increasingly directed towards sustainable assets, and in just a few years, broad investor alliances have come together to make a plea to governments and companies to increase their climate action ambitions.

The financial sector can be expected to face extensive regulation in the near future, compelling it to follow a more sustainable path. In 2016, the Principles for Responsible Investment (PRI) identified almost 300 regulations in the world’s 50 largest economies which supported ESG investing, with most of these created after 2013. Active and responsible ownership is also the main element of a new EU directive that applies to more than 8,000 listed companies. The member states now have up to two years to transpose the new provision into domestic law.

Looking at consumers, a recent survey revealed that if millennials are considering investing, 86% say they would be interested in sustainable investing.

From an investor perspective, companies are facing growing pressure to capitulate to their climate change demands. The Climate Action 100+ initiative, a group of 296 international investors with more than $31 trillion in assets under management, is demanding the 150 most polluting companies in the world to align their actions and emissions with the Paris Agreement within the next five years. This sentiment was also on display at last year’s COP24 in Katowice. These alliances have become so big that the major oil companies are starting to consider divestment on par with other financial risks.

Looking at consumers, a recent survey revealed that if millennials are considering investing, 86% say they would be interested in sustainable investing. This corresponds with a general trend that millennials demand something from companies in terms of purpose. As a recent PwC report outlines, wealth and asset managers have to enhance transparency and ethical business conduct if they want to attract millennials at all.

The grave risk of stranded assets should also make investors ditch fossil fuels. If we are serious about meeting the targets of the Paris Agreement, including staying below a 2°C rise in global temperatures, it means that 60-80% of coal, oil and gas reserves of publicly listed companies could be classified as ‘unburnable’. This imposes a huge ‘transition risk’ for the whole financial sector with a risk of $30 trillion of stranded assets in the oil sector alone.

As the return on investment of ESG investments is only becoming more convincing, the whole field is gradually maturing, and it bolsters these once niche assets with credibility, making them appear as less risky than just a few years ago. The pool of sustainable investment funds has grown large enough to be able to ensure investments for sustainable assets, while enabling sufficient diversification.

There are increasingly new platforms and indices for comprehensive and transparent public ranking of the world’s largest listed companies according to the carbon intensity of their activities.

For many years, the challenge of standardised metrics for reporting has made many investors hesitant when it comes to sustainable investments. A PwC report showed that 82% of investors were frustrated with the inconsistencies in sustainability reporting.

But the EU has recently launched a proposal to develop over time a unified classification system on what can be considered sustainable economic activities, thus facilitating sustainable investments. Once there are better reporting metrics, the notorious snowball effect could start.

There are increasingly new platforms and indices for comprehensive and transparent public ranking of the world’s largest listed companies according to the carbon intensity of their activities. These mechanisms incentivise companies to reduce their emissions, and can protect investors from exposure to climate risk.

Another challenge is getting access to finance for small energy firms, which tend to be ignored by traditional finance schemes and considered high risk. But there are increasingly solutions that can bring finance to renewable energy projects, and provide a green and reliable return on investment for everyday people. Also, the crowd-investing model for financing solar energy solutions provides electricity to communities that cannot bear the upfront costs themselves, while delivering a financial return for investors.