A quiet revolution is happening in global finance, where some policymakers and regulators are introducing rules to reduce the environmental impact of business. But a more concerted effort is needed to achieve a worldwide transition to a financial system which is aligned with, and supports sustainable development, a new report by the United Nations Environment Programme (UNEP) has found.
Titled The Financial System We Need, the report outlines some of the innovative policy measures already being rolled out across the world to embed sustainability deeper into the financial system.
It also packages the lessons learned from these policies into a toolkit aimed at helping decision-makers to move the financial system away from resource-intensive, polluting investments to sustainable, inclusive, low-carbon activities.
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Achieving this shift will not only create a green economy, it will also support the realisation of the Sustainable Development Goals, said UNEP. These are a set of 17 goals adopted by the UN in September, which set 169 measurable targets around poverty eradication, climate change mitigation, and community resilience. These goals define the global development agenda from 2015 to 2030.
Launched on Thursday at the annual meetings of the World Bank and International Monetary Fund (IMF) in Lima, Peru, the report is a culmination of a 20-month-long inquiry by UNEP into what a sustainable financial system should look like.
Achim Steiner, executive director, UNEP, said in a statement that the inquiry “has for the first time compiled and analysed inspiring initiatives … that seek to better align the financial system with sustainable development”.
Through an in-depth study of the financial systems of 15 countries including India, China, Brazil, and the United States, the report found that there are already more than 100 policy innovations which improve system processes in stock markets, support sustainable finance efforts, and strengthen regulations governing the sector.
For example, the Johannesburg Stock Exchange in South Africa and the BOVESPA exchange in Sao Paulo, Brazil, were two of the earliest bourses to require sustainability disclosure, says the report. The central banks of Bangladesh and Brazil also focus strongly on social and environmental risk management and green finance, with both countries saying that this contributes to financial stability.
China is also taking several steps to achieve a sustainable financial system, including putting green finance at the heart of the development of the finance sector under its 13th Five-Year Plan and forming a special committee to look at the issue.
In the United Kingdom, the Bank of England conducted a review of climate risks to the country’s financial sector, while the United States has in place a slew of incentives for investments in infrastructure and clean energy.
The initiatives showcased were drawn from across the world, but most of the momentum comes from emerging economies, noted UNEP, with Steiner pointing out that “there is much to be learned from the developing world”.
Putting the pieces together
But these scattered efforts do not add up to a sustainable global financial system, said the experts behind the report.
As John Lipsky, former first deputy managing director, IMF, and a member of the UNEP inquiry’s advisory council put it: “Reforming the financial system remains unfinished business.”
“We have stabilised the system, but have a long way to go in designing a financial system that meets the needs of sustainable development,” he added.
We now need to raise the level of ambition and cooperation to ensure that the…global financial system can evolve to serve its core purpose of growing and sustaining the real economy.
Achim Steiner, executive director, United Nations Environment Programme
To show how the finance sector can go beyond ‘business as usual’ approaches to market development and ad-hoc innovations, UNEP proposed a Framework for Action, which is a toolbox of policy proposals for five key segments of the financial system: banks, bonds, equities, institutional investors, and insurance. These recommendations are based on the best practices identified in the report.
Banks, for example, can increase access to sustainable finance by providing low-cost loans and guarantees, and also improve governance by conducting tests to assess the impact of issues like air pollution, climate change, and inequality on portfolios and business models.
Global equity markets, made up of about 45,000 companies with a total market capitalisation of US$70 trillion, can also do their bit by insisting on better transparency and disclosures among companies.
The insurance sector, meanwhile, must work to close the “protection gap” - that is, the fact that less than three per cent of the population in the 100 poorest countries is insured against natural hazards. There is no single approach to closing this gap - and solutions include financial assistance and policies to make insurance mandatory - but it should be a top priority, said the report.
To help with implementing its recommendations, UNEP also laid out the next steps that decision makers in the financial system can immediately take at a national and international level.
Individual countries should conduct an assessment of their own financial systems to identify needs and opportunities for prioritising sustainability, and band together public agencies, financial institutions and civil society groups to work together on this.
International cooperation is also necessary to create a global governance structure that focuses explicitly on sustainability, and finance policymakers can even set up an international research consortium to promote under-explored topics and themes in sustainable finance.
Actors from the private and people sectors must also contribute, said UNEP. Banks and pension funds can contribute their leadership and knowledge to efforts to shape policies and incentives; the sustainable development community can contribute expertise and help increase public awareness; and individuals, whether consumers, employees in financial institutions, or civil society actors, can offer unique skills and perspectives on how financial systems can meet human needs.
“We now need to raise the level of ambition and cooperation to ensure that the…global financial system can evolve to serve its core purpose of growing and sustaining the real economy,” said Steiner. The real economy refers to transactions associated with producing goods and services, as opposed to buying and selling on financial markets.
Rachel Kyte, vice president and special climate envoy, World Bank Group, added in the statement that the inquiry has uncovered a new generation of policy innovations to make sure the financial system serves the needs of inclusive and sustainable economic development.
“Its findings … support the delivery of our most important sustainability goals,” she said.