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How can the financial system serve a green and inclusive economy?


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In May 2014, Nick Robins, co-director of the United Nations Environment Programme (UNEP) Inquiry into the Design of a Sustainable Financial System, discussed "How can the financial system serve a green and inclusive economy?" in a Critical Theme seminar hosted by IIED.

In the seminar, Robins outlined the rationale behind UNEP's new Inquiry into the Design of a Sustainable Financial System, which has been tasked to deliver policy recommendations in 2015 that could help underpin the implementation of the new Sustainable Development Goals and the Paris climate agreement.

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How can the financial system serve a green and inclusive economy?

  1. 1. How can the financial system serve a green and inclusive economy? May 2014
  2. 2.  A new area of green policy innovation is emerging  Inquiry to identify policy options in 2015  First milestone reached – Council meeting in DC  Priorities for next phase o Foundation analysis to map the agenda o Country convenings to learn real world lessons o Thematic research for cross-cutting priorities Inquiry: work in progress 2
  3. 3. Advance policy options that would deliver a step change in the financial system’s effectiveness in mobilising capital towards a green and inclusive economy. This means aligning the rules of the game that govern the financial system with the long-term health & sustainability of the real economy Objective of the Inquiry 3 Policy options Financial system effectiveness Green economy
  4. 4. Inquiry timeline Dec 2015Jan 2014 Map current practice Learning across the system Establish analytical frameworks Opportunities for innovation Conduct thematic analysis Options for policy design Engage with key stakeholders Catalyse leadership and action 4
  5. 5. Inquiry guidance from Advisory Council Rachel Kyte Group Vice President, World Bank David Pitt- Watson Co-Chair UNEPFI Atiur Rahman Governor, Central Bank of Bangladesh Murilo Portugal President, Brazilian Bankers Federation Neeraj Sahaj President, S&P Rating Services Rick Samans Managing Director WEF Maria Kiwanuka Minister of Finance, Government of Uganda Andrew Sheng President, Fung Global Institute Naina Kidwai Group General Manager & Country Head, HSBC India Mallam Sanusi Former Governor, Central Bank of Nigeria Lord Adair Turner Former Chair, Financial Services Authority, UK Kuandyk Bishimb ayev Chairman, Baiterek Development Bank Jean-Pierre Landau Former Deputy Governor, Banque de France John Lipsky Former Deputy Managing Director, IMF 6
  6. 6. A growing strategic focus on finance 5 Intergovernmenta l Committee on Sustainable Development Financing Momentum For Change
  7. 7. A system undergoing profound change 11 Real Economy Real Ecology Financial Economy Big data, internet of everything, new materials, nanotechnology, 3D Printing, robotisationTechnology innovation Population growth, rapid urbanisation, aging InequalitySocial pressures Intra-country inequality, reduction in wage differentials, ‘the end of cheap’, impact of automation on labour markets Economic shifts Increased volatility, water stress, climate change, biodiversityEnvironmental impacts Financial system change Private currencies, peer-to-peer finance, crowd funding, disintermediation, policy driven institutions, impact of data on risk pooling.
  8. 8. The structural disconnect 8 Too much of this Not enough of this US$7trn/year environmental externalities; 7mn premature air pollution deaths/year alone; escalating inequalities Current flows a fraction of the US$ 6trn/year needed for low- carbon to 2030 – and does not include access to key resources
  9. 9. From incremental cost to a system approach -8 -6 -4 -2 0 2 4 6 8 “The clean trillion” – annual $0.7 trn $5 trn $7.3 trn Underlying annual infrastructure investment need Cost of environmental capital destruction and negative environmental externalities Climate finance: $100 billion/year Financial trading volumes Financial assets Non- financial, and publicly held assets $225 trillion Total green infra $6 tr/year Greening infra: $0.7 tr/year Climate finance: $0.1 tr/year 10
  10. 10. Financial regulation for a green economy? 10 “Financial regulators need to lead. Sooner rather than later, they must address the systemic risk associated with carbon-intensive activities in their economies. The so-called "long-term investors" must recognize their fiduciary responsibility to future pension holders who will be affected by decisions made today. Jim Kim, World Bank, 2014
  11. 11. Innovative policy practice so far Insurance Securities & disclosure Pensions • Green Credit Guidelines spreading across key developing countries: Bangladesh, Brazil, China, Indonesia, Nigeria • Environmental, social and governance factors included as part of investors’ fiduciary duty: South Africa • Insurance regulators incorporating climate change into disclosure and risk assessments: USA • Mandatory corporate disclosure of sustainability: China, EU, India, South Africa, UK, USA. Investor disclosure: France 12
  12. 12. Rationale for intervention: Council views Systematic Bias Real economy objectives Coherence “Everyone is working off a model. The models don’t incorporate environmental change factors, but just extrapolates out from the past.” “None of the reforms such as Basel III have considered the nature of environmental risk for the sustainability of the system. Instead it prices out investment for long-term infrastructure.” “As a central bank we are working to engrain socially responsible investing into the financing structure itself. It is explicit…Our mandate is to support the growth objectives of the government. The governments goals are pro-environment and inclusive.” 12 But not every problem or opportunity, even where finance is involved, can or should be addressed through interventions in the financial system…
  13. 13. 13 Cons and pros of financial system intervention Systematic bias Policy coherence Real economy objectives Unintended consequences Impact avoidance Preventing interventions Policy intervention in the financial economy could be warranted to support efficient markets, system resilience and real economy policy objectives
  14. 14. Disclosure and reporting Long-term duties Tax breaks, incentives 9 Inquiry scope: rules of the game & arena Green credit guidelines Capital requirements Green bond markets Disaster risk reduction Solvency requirements Extending access Interest rate effects Quantitative easing Central bank mandates Investment Banking Insurance Monetary Financial Policy Financial Regulation Private Standards Financial Sector Fiscal Measures
  15. 15. System purpose and performance System governance Financial institutions Tomorrow’s Economy: scenarios Sound, Supportive, Sustainable Mandates Principles Assessment ResponsibilitiesIncentivesInformation An emerging framework 13
  16. 16. 16 Thematic research & engagement e.g. Time horizons, systemic risk, institutional governance, regulator mandates, incentives, information Country engagement e.g. Bangladesh, Brazil, China, EU, India, Indonesia, South Africa, Uganda, UK, USA 1 2 3 Design foundations e.g. Scenarios, Principles, Assessment Framework Three pillars for the next phase of the Inquiry
  17. 17. A work in progress: findings so far • Financial system reforms are part of the solution to rapidly scaling capital for the green economy agenda • Such interventions are complements, rather than substitutes for smart action in the real economy. • Examples of financial policy innovation are growing globally, yet remain fragmented • The time is ripe to reflect on updating the mandates of financial rule-setters to capture forward-looking green economy challenges. 12
  18. 18. Contact Simon Zadek Co-Director Nick Robins Co-director Mahenau Agha Head of Outreach 15
  19. 19.