Addressing demands for transparency in capital markets

In recent years, sustainability-related disclosures have gained significant importance in the financial sector, with increased calls for greater transparency.

Financial institutions, corporates, and governments are now expected to factor in environmental and social impacts, both risks and opportunities, in their financial activities. There is heightened scrutiny from investors who want to minimize the environmental, social, and governance (ESG) risks in their portfolios, and they increasingly want clarity on how the money they provide is contributing to activities with a positive effect on people and the planet. Nongovernmental organizations and the broader public have also become acutely aware of the facilitating role financing and investment decisions have on climate, deforestation, biodiversity loss, air and water pollution, and society.

This puts sovereigns, corporations, and financial institutions under pressure to demonstrate their progress toward ambitious climate and sustainability goals and to account for climate and sustainability risks. They must also be transparent and accountable for the prioritization of their investments toward national environmental and social objectives and international commitments.

As climate change's impacts and associated risks continue to have a real effect on economies and capital financing, the need for this transparency and rigor in sustainability reporting will remain, both for sustainable finance instruments and at the sovereign, corporate, and financial institution levels.

Standardizing sustainability reporting standards

Central banks and some financial regulators have begun to address the challenge by integrating these considerations into their monetary policy frameworks and considering climate risks in their investment portfolios. They are also introducing sustainability-related disclosure guidelines or requirements for financial institutions and listed companies under their supervision. A recent study shows that 38 countries have introduced mandatory ESG disclosures, while an additional 27 countries have introduced voluntary ESG disclosures. Many of these build on existing reporting frameworks such as the Global Reporting Initiative, Carbon Disclosure Project, and Taskforce on Climate Related Financial Disclosures.

Despite their good intentions, the plethora of sustainability-related reporting and disclosure frameworks, with their lack of alignment and standardization in requirements, has made it difficult for entities to understand which framework is most relevant to them. The International Accounting Standards Board is addressing these challenges by standardizing non-financial disclosures. To date, 400 organizations from 64 jurisdictions have signed a statement committing to advancing the global adoption of the first two IFRS Sustainability Disclosure Standards, IFRS S1 and IFRS S2.

Transparency in sustainable financial instruments

Ensuring transparency and comparability of sustainability claims in sustainable financial instruments is equally important. Sustainable finance has emerged as a powerful tool to align investment with positive social and environmental outcomes. Since 2020, the Investors Relations team at the World Bank Treasury has been reporting on its sustainable development bond issuance program covering all IBRD bonds, the allocation of bond proceeds, and the impact on projects that its funding supports in member countries.

Over the past decade, sustainable finance instruments such as green, social and sustainability (GSS) bonds have reshaped the landscape of traditional finance by focusing on how bond proceeds are used to achieve positive impact and the link between the issuer’s sustainability policies, action plans, and funding strategy. Cumulative issuances of GSS bonds reached $5.4 trillion in June 2024. The growth of the market hinges on the integrity and credibility of these bonds.

To facilitate the development of this market, the World Bank Treasury’s ESG and Sustainable Finance Advisory Program works with policymakers, ministries of finance, regulators, and central banks to develop sustainable financial systems. We also help borrowers consider sustainable financial instruments, enabling transactions and building a borrower’s capacity to engage with investors who incorporate ESG considerations into investment decisions, and work with other international financial institutions and standard setters to promote good practices and guidelines. As of June 2024, the program has helped countries mobilize more than $22 billion of private capital for climate and environmentally beneficial projects that meet their sustainable development goals.

The earmarking of proceeds to specific types of environmental or social projects and activities is what differentiates labeled sustainable bonds from conventional bonds. Issuers of sustainable bond instruments adhere to principles, requirements and recommendations published by the International Capital Market Association. A core component of these principles is reporting project-level information to investors and how the intended impact of these projects contributes toward the issuer’s sustainability goals.

The World Bank Treasury leverages its experience of engaging with investors on its own green bond and Sustainable Development Bond programs to help public sector issuers prepare the post issuance allocation and impact reports that make these financial instruments unique. These reports provide insights into how environmental and social themes are being prioritized by the issuer to address country-specific gaps. The absence of, or poor-quality, reporting of such disclosures can mislead investors and affect the integrity of the broader sustainable finance market. More importantly, many investors are now scrutinizing issuers’ sustainability strategies and actions before investing even in conventional bonds. Sustainable bond allocation and impact reports play a key role in facilitating investors’ decision-making by highlighting the link between the issuer's funding strategy and its sustainability commitments.

Gaps and opportunities for improvement

To identify transparency gaps and opportunities, a recent World Bank Treasury report looks at the types of projects countries are financing through GSS bonds and assesses whether current reporting aligns with investor expectations and best practices. The report found that while most emerging market sovereign issuers of GSS-labeled bonds publish post issuance allocation and impact reports, there is still room for improvement. The results will be used to tailor technical assistance programs to improve our clients’ reporting practices.

Transparency and rigor in sustainability reporting are essential to meeting investors’ expectations. Standardizing disclosures can be a catalyst to increase climate-related and sustainable financing's ability to grow with integrity and fulfill investment requirements of the Sustainable Development Goals and global climate commitments.