Every year, 5-7 trillion US$ or Japan’s entire GDP is needed for fulfilling SDGs
Developing and emerging economies are leading a quiet revolution to forge robust and sustainable financial systems for 21st century needs but who will foot the SDG bill?
The first ever report on sustainable financial systems The Financial System we Need was released by the United Nations Environment Programme (UNEP) Inquiry. The report attempts to suggest a roadmap to improve the effectiveness of financial system in supporting sustainable development. The report highlighted the current problems that dominate the global finances and investments and based on examples, it suggest radical measures to break the current cycle and release money for supporting vital life systems.
The new report released on 8th October in Lima says that a historic opportunity to shape a financial system has come that can more effectively finance development of an inclusive, green economy based on innovations. Central banks, financial regulators and standard setters, are incorporating sustainability factors into the rules that govern the financial system.
“UNEP’s Inquiry has for the first time compiled and analysed inspiring initiatives from across the world that seek to better align the financial system with sustainable development, showing that there is much to be learnt from the developing world.
Achim Steiner, UN Under-Secretary-General and Executive Director of UNEP
The report cautions that developing countries face an annual investment gap of US$2.5 trillion, while on current trends major economies face a longterm investment deficit of US$10 trillion annually by 2020. This can erode global natural wealth by over 10% by 2030, causing considerable human harm, and threatening development models. Natural capital is already declining in 116 out of 140 countries. It also warned that billions of people and millions of small businesses lack access to financial services.
On the other hand, the report suggest that investments need to be scaled back elsewhere like in high polluting energy development and power generation. It is estimated that about US$ 6 trillion by 2030 needs to be reduced in pollution energy.
The UNEP Inquiry has looked in-depth at practice in more than 15 countries as well as across key segments of the financial system, such as banking, bond and equity markets, institutional investment, insurance as well as monetary policy. To reach its findings, the Inquiry has worked with central banks, environment ministries, international financial institutions as well as major banks, stock exchanges, pension funds and insurance companies.
For the first time, the Inquiry has mapped the many innovations around the world seeking to ensure that the financial systems serves its purpose of financing inclusive, green development.
Atiur Rahman, Governor of the Bangladesh Bank
As the green economy mantra gains momentum, there are numerous innovations that this report tried to capture, mostly from the emerging and developing economies. Financial institutions in many of these countries have been undertaking measures that challenges traditional investments in highly polluting resources like coal. The report states that technology disruption across the financial system is challenging incumbent practices across the world of financial intermediaries, opening new avenues for inclusion and connectivity.
Stock exchanges, credit agencies and banks have undertaken measures to enhance sustainability especially focused on social, environmental and climate change transition:
- Johannesburg Stock Exchange (JSE) and Brazil’s BOVESPA stock exchange were two of the earliest innovators in requiring sustainability disclosures.
- Standard & Poor’s Ratings Services identified climate change as a key mega-trend effecting sovereign bonds.
- The Central Bank of Brazil’s focus on socio-environmental risk management flows from its core functions as a prudential bank regulator.
- Bangladesh Bank argues that its support for rural enterprises and green finance contributes to financial and monetary stability.
- The Bank of England’s prudential review of climate risks to the UK’s insurance sector is based on a connection between its core prudential duties and the UK Climate Change Act.
Apart from measures from financial institutions, many countries are also taking steps towards a greener economy.
- China, a portfolio of 14 distinct recommendations advance China`s green financial system, covering information, legal, institutional and fiscal measures.
- France, new disclosure requirements on climate change have been introduced for institutional investors as part of the country’s energy transition legislation.
- Kenya, has advanced financial inclusion through scaling of mobile based payment services, which is now also supporting green financing.
- Peru, new due diligence requirements have been introduced for banks to help reduce social and environmental externalities.
- USA, emphasizes fiscal measures to accelerate green finance, and had made significant advances in disclosure and investor action.
- Dutch bankers pledge values-based financing balancing the interests of all stakeholders.
The growing influence of emerging economies in international financial affairs bonds financial market and national development priorities centrally in the policy debate. The report urges that for financing sustainable development, capital flows have to be redirected towards critical priorities away from assets that deplete natural capital.
An actionable framework
The report shares a framework that includes a toolbox of nearly 40 different measures, a set of five policy packages across banking, bond and equity markets, institutional investors and insurance, and a prioritized set of 10 next steps to promote international financial cooperation. It has identified five types of measures that are being introduced by financial rule-makers. Within these five areas, some of the focus is on better disclosure, clearer responsibilities, and harnessing the public balance sheet.
The report highlights that tough public finance is critical to closing the financing gap, but due to the significant gap, finance from private capital has to be scaled. The banking sector alone manages financial assets of almost US$140 trillion and institutional investors, notably pension funds, managing over US$100 trillion, and capital markets, including bond and equities, exceeding US$100 trillion and US$73 trillion respectively.
The Roadmap is a potentially powerful device for mobilizing public and private actors behind the development and implementation of forward-looking plans.
UNEP Inquirer 2015
An Inquiry website which is being set up for knowledge and research materials from the work of the past 20 months and will provide a one stop shop to all the research materials including a dedicated portal for countries.
Inconsistencies between UN reports
Three days after the release of this report, on the 11th of October, another UN body- United Nations Conference on Trade and Development (UNCTAD) released the Trade and Development Report for 2015. This report warns that the private public model especially for financing infrastructure development is draining government finances.
Private sector investment in many case, did not create additional finances but increased obligations for governments.
UNCTAD Trade and Development Report 2015
The UNCTAD report also warns that ongoing financial instability due to malfunctioning of international monetary system may hit the sustainable development goals (SDGs). To tide over the situation it stresses on development banks need to step in as they can have long-term economic and social returns. It wants greater South-South cooperation, which is considered more equitable, and the UNEP report also pointed towards innovations in the southern countries. It suggests tapping into sovereign wealth funds where 6 trillion US$ is held by developing countries and can boost long-term financing.
Footing the SDG bill
One of the most controversial issues around the SDGs is where the finance will come from to implement them. A blog on SDG politics Why Green Economy asks some key questions — Should funding come from public and/or private sources? Which countries will end up funding the SDGs? How will this affect what the SDGs prioritise and who benefits from their implementation?
At the Addis Abba UN Financing for Development conference held in September 2015, countries recommitted to achieve the target of 0.7% of gross national income for official development assistance. Developed countries stated that they will reverse the decline in aid to poorest countries and jointly mobilize US$100 billion per year by 2020 from a wide variety of sources to address needs of developing countries. Looking at the estimation of the UNEP report, it seems its a long way before adequate financial resources can be mobilized.