Sustainability through disruption

Global disruptions such as pollution or financial instability can be an opportunity for leaders to take steps that secure a sustainable future in the long-term, says Simon Zadek, co-director of the UNEP Inquiry into the Design of a Sustainable Financial System.

After decades of reluctance on the part of world leaders, a rapid, smooth, and purposeful transition toward sustainable development seems unlikely. Indeed, throughout human history, such major changes have more often been forced upon the world by circumstances, with leaders focusing on shorter-term concerns like political turmoil or economic stagnation until serious disruptions to their economies and societies arise.

But this need not be the case. Policymakers can develop solutions that leverage immediate challenges to guide the shift toward a more sustainable, inclusive future.

This year, which has been dubbed “the year of sustainable development,” provides an ideal opportunity in this regard. At high-level meetings in Sendai, Japan, in March and in Addis Ababa, Ethiopia, in July, world leaders will pursue closer collaboration on disaster-risk reduction and on mobilizing finance for development, respectively. In September, the United Nations will launch its Sustainable Development Goals, to serve as the framework for global development efforts until 2030.

Moreover, global climate negotiations will reach a critical point in December, when world leaders meet for the United Nations Climate Change Conference in Paris. And the agendas of the forthcoming G-7 and G-20 summits will both feature measures to combat climate change.

Such multilateral frameworks catalyze progress. Indeed, agreements like last year’s deal between China and the United States to reduce carbon-dioxide emissions – not to mention initiatives to mobilize business, such as We Mean Business – are unlikely to happen without them. Nonetheless, as Mancur Olson famously observed, it is the individual interests of the parties that drive collective success.

For example, China’s recent embrace of sustainable development, which will serve the planet’s long-term interests, is driven by the domestic challenges posed by air, water, and land pollution. Rather than agonize over growing disruptions, China’s government has decided to hasten the shift toward a dynamic green economy, even if it means stranding assets and allowing businesses that do not suit China’s shifting needs to fail – an approach that will deliver a long-term competitive advantage. The rest of the world should recognize the benefits of allowing short-term disruptions to drive, not distract from, the sustainability agenda.

Even perverse signals can be mitigated and leveraged. Instead of allowing low oil prices to encourage consumption, governments could take the opportunity to impose a small, politically acceptable energy or carbon-equivalent tax – an approach advocated by many economists and development specialists, including Jeffrey Sachs, Lawrence Summers, and Kemal Derviş.

One area where such an opportunity is already apparent is financial reform. Today’s historically low interest rates should encourage long-term investment, as they lower the current cost of capital. But new financial regulatory frameworks – such as Basel III, which aims to reduce risk in the banking sector, and Solvency II, the European Union’s equivalent for insurance companies – are inadvertently discouraging such investment. This undermines both short-term efforts to boost employment and the long-term objective of sustainable growth.

It does not have to be this way. As the UN Environment Programme emphasized in a briefing at the World Economic Forum in Davos, saving the financial sector from itself can accelerate the transition to sustainable development. For example, effective risk management and longer-term policy objectives would be better aligned if regulators reduced capital requirements for banks that extend loans for climate-resilient and environmentally friendly investments. Similarly, central banks’ inflated balance sheets – the result of short-term crisis-response measures – could, through refinancing arrangements, be used to boost green investment. Further quantitative easing, such as by the European Central Bank, could be directed toward greener asset-backed securities.

Even perverse signals can be mitigated and leveraged. Instead of allowing low oil prices to encourage consumption, governments could take the opportunity to impose a small, politically acceptable energy or carbon-equivalent tax – an approach advocated by many economists and development specialists, including Jeffrey Sachs, Lawrence Summers, and Kemal Derviş. Such a tax would not only sustain the price signals needed to steer societies onto a more sustainable energy path; it would also provide revenues that could be channeled toward employment creation and long-term green investments, thereby leveraging private capital.

Likewise, central banks’ macro-prudential activities, which evolved largely in response to the global financial crisis, could focus on longer-term risks to the financial sector, including the cumulative impact of climate change, environmental policies, and disruptive clean technologies. Bank of England Governor Mark Carney has taken the lead in initiating a prudential review of the impact of climate change on the United Kingdom’s insurance sector. Other institutions – including multilateral bodies like the Bank of International Settlements, the Financial Stability Board, and the G-20 – should follow suit.

What the world needs now are leaders who are willing to bridge the gap between daunting short-term demands and desirable long-term outcomes. Instead of remaining preoccupied with the present, world leaders should view 2015 as an opportunity to ensure that today’s disruptive crises provide the foundation for tomorrow’s sustainable prosperity.

Simon Zadek is Co-Director of the UNEP Inquiry into the Design of a Sustainable Financial System, a visiting scholar at Tsinghua School of Economics and Management, and a senior fellow at the Global Green Growth Institute and the International Institute for Sustainable Development.

Copyright: Project Syndicate, 2015.
www.project-syndicate.org

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