Designing a global financial system fit for (sustainable) purpose



Anti-globalists could have a field day with the new “Roadmap for a Sustainable Financial System” from the World Bank and UN Environment. The bankers and bureaucrats are aiming at nothing than a makeover of the global financial system, sustainably.

Undercutting criticism of the heavy hand of global government, however, is the extent to which capital markets themselves have led the global rotation of capital toward social and environmental value.

The audacious goal: a financial system that integrates sustainability into decision-making, fully accounts for both positive and negative externalities, and allocates resources toward inclusive and sustainable initiatives.

“Mainstreaming the alignment of the global financial system with sustainable development has to move beyond marginal innovations and shape the system’s underlying architecture,” says Simon Zadek, who co-directed the “inquiry” into the new financial architecture under the UN Environment Program. The roadmap, the third in a series of reports, was introduced at the COP23 climate conference in Bonn.

Market drivers

To skeptics of government intervention, the authors point out that free markets themselves have led the transformation toward sustainable finance. “The initial stage of transformation toward sustainable finance has been driven by a virtuous cycle of financial innovation that has facilitated the allocation of capital to real sector activities aligned with sustainability considerations,” the report said. For green bonds, for example, institutional investors and international financial institutions created green bond markets to meet the real sector’s increased demand for sustainable finance products.

Universal Ownership: The supertankers of global finance are shifting course

The roadmap was accompanied by additional reports sketching the ambitions to become green climate hubs of Singapore, China and southeast Asia more broadly. The UN Environment inquiry is working with 11 global financial centers that have joined forces to promote sustainable finance. The key sectors of just 21 developing countries that represent nearly half of all global greenhouse gas emissions, the inquiry found, represent an investment opportunity $22.6 trillion through 2030.

“The financial system has enormous transformative power, and has the potential to serve as an engine for the global economy’s transition to sustainable development,” said Erik Solheim, the head of UN Environment.

The report’s authors are not averse to government intervention. Policy and regulatory measures promoting sustainability, they proclaim, have increased 20% per year since 2010. “The multiplicity of market failures that constitute barriers to sustainable finance require governments to kick-start, sustain, and accelerate its development through the use of fiscal resources and public policy measures,” the report says.

Next steps

The report calls for the private sector and market-led initiatives to make progress in four areas: addressing disclosure and methodology gaps, harnessing the power of financial technology, improving the capacity of investors to use sustainability data, as well as a call for investors to make sustainability central to their strategy, as opposed to a sideshow. At a national level, the report calls for the end of fossil fuels subsidies.

Over the next two years, the organizers will try to forge consensus around a set of global principles for sustainable finance. The goal is agreement on sustainability considerations that will strengthen the global financial system; criteria to align financial instruments and specific transactions with sustainability objectives; and ways to “price sustainability impacts, risks, and opportunities and incorporate them into financial institutions’ strategies, governance, and business decision-making processes.”

“Sustainable growth must be the only growth option for the planet and will require sustainable financial systems that are inclusive, deep, and sound,” said the World Bank’s Hartwig Schafer.

You might also like...