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BUILDING A FINANCIAL SYSTEM THAT INVESTS IN SUSTAINABLE DEVELOPMENT

By Scott Vaughan
President International Institute for Sustainable Development

BUILDING A FINANCIAL SYSTEM

We are seeing a new generation of micro-credit systems, crowd funding and peer-to-peer lending that can scale up the development and deployment of green technologies.

Sustainable development is an investment challenge. A coal fi red power plant or renewable energy? Light rail transit or a six-lane highway? These are investment decisions, made daily around the world, that set humanity on a trajectory that is either sustainable, or not.

The 2030 Agenda for Sustainable Development sets out to transform our world. The trillions of dollars spent daily to power our economies are the means to move us to a new generation of clean, low-carbon and innovative solutions. Today, green financial products are a small, boutique segment of major markets. We need to scale up action, so that high-carbon investments become the market exception, precisely because of their poor return on investments.

From Wall Street to Avenida Paulista—

Getting Finance Aligned with the SDGs The good news is that we now have a clear, unambiguous and universal understanding of what needs to be done to move to a climate smart and sustainable development world: all countries adopted the Sustainable Development Goals and the Paris climate change agreement in 2015.

Among the most exciting source of innovation comes from the financial system, clustered under the umbrella of ‘green finance’. Certainly public finance has a critical role you play, both in setting broad objectives and leveraging and de-risking deals. However, the world needs the innovation of private markets and investors to put us on a low-carbon pathway. One of the breakthrough signals from both the 2015 Paris climate change agreement and the Sustainable Development Goals is the need for blended finance, whereby private and public finance move in tandem towards scaling up sustainable development.

Progress to bridge financial markets with the climate and sustainability agendas is accelerating quickly. The United Nations Environment Programme (UNEP) has championed green finance for more than two decades. Yet it is only in the past two to three years that a “quiet revolution” has gotten underway in financial markets. UNEP’s Inquiry into the Design of a Sustainable Financial System’s flagship report last year took a deep dive into emerging practices, showcasing hundreds of examples of deals or supporting policies, ether focused on particular asset pools and managers, or broader governance structures.

A key mover in greening financial markets is China. As the co-chair of the G20 green finance working group, China is the world’s largest issuer of green bonds, is advancing environmental risk across financial sectors and has, since 2014, required the inclusion of green criteria within total financial liquidity.

International Cooperation and Domestic Sustainable Development Strategies

Under China’s presidency, the G20 has also integrated green finance into its formal work program, in the form of the G20 Green Finance Study Group which has a mandate to examine institutional and market barriers to green finance.
Moving forward, the G20 should elevate the study group to become a more permanent Working Group. At this critical moment following the Paris climate change agreement, it is important to ensure alignment and harmonization of a range of domestic actions, notably around what is meant by ‘green’, some standardization of green bond screening, third-party certification system to strengthen market-confidence, as well as enhanced disclosure.

At a country level, removing incentives that skewer investment decisions in the wrong direction is a first order of business. For the past decade, my organization has shone a light on the hundreds of billions of dollars that governments spend each year on subsidies for fossil fuels, a significant portion of which incentivize the oil and gas industry to extract more fossil energy from the ground. These and other perverse incentives need to go, and the public balance sheet leveraged in ways that improve risk adjusted returns for investments that benefit sustainable development.

This is a unique moment, one in which for the first time the global environmental agenda is universal, ambitious and explicitly supportive of the private sector to advance solutions. Examples of innovation are springing up daily. In Kenya, smart-phones are replacing the older vision of a national banking system, and whole off-grid solar panels are leap-frogging the need for a national electricity grid. We are seeing a new generation of micro-credit systems, crowd funding and peer-to-peer lending that can scale up the development and deployment of green technologies.
Our challenge is certainly not a lack of innovative, transformative ideas. It is a matter of time. Climate science makes it abundantly, urgently clear that we cannot delay action.

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