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G20 shifts into a green gear on finance

Tim Nixon  Managing Editor, Sustainability at Thomson Reuters

Tim Nixon  Managing Editor, Sustainability at Thomson Reuters

Tim Nixon, managing editor Thomson Reuters sustainability, interviews Simon Zadek, lead for the UNEP-hosted Secretariat of the Green Finance Study Group to the G20 meeting in China, and Co-Director of UNEP’s Inquiry into the Design of a Sustainable Financial System. Mr. Zadek explains a fundamental change in the G20’s approach to finance, and why it matters for the sustainability of the planet.

“Green finance is one of the very few ideas that, if effectively implemented, can benefit the vast majority of the population in the world, and can help improve the sustainability of the global economy.”  Zhou Xiaochuan, Governor of the People’s Bank of China.

What is new about the G20’s thinking on “green” investment?

The single most important breakthrough is that the world’s leading finance ministers and central bank governors have embraced the stunning thought that ‘green finance’, that is, financing that takes environmental effects more fully into account, is their business. The idea that green finance is a legitimate lens through which to shape financial market reforms and development, unthinkable beyond the margin until recently, is now firmly established as a ‘new truth’ of the 21st century.

Why is it becoming more important?

No one seriously doubts that the world urgently needs to transition to a low-carbon, climate resilient, inclusive economy – the open question is how to get there, fast. In this transition, financial markets need to get a lot smarter in assessing environmental risks and green opportunities, until now a niche competency. For central banks and regulators concerned with financial stability, green finance has become a new currency of analysis and intervention. Systematic underpricing of environmental risks create financial stability concerns, a fact highlighted by a growing number of central banks, including the Bank of England and the European Central Bank, as well as their Dutch and Swedish counterparts.

What are some of the most important specific changes under consideration?

The first year has involved a lot of stock taking – mapping what people are doing, particularly across the G20. But we have set out some options for action by countries and market players, often working together. There has been a focus on low hanging fruit, so improved market efficiencies through better information, more effective financial markets through the development of capabilities, and market innovations such as measures to accelerate the issuance of green bonds. Mobilizing green finance also need some of the basics to be put in place, clearer definitions to reduce search costs and reduce risks, improved metrics for policy makers and market players, and more substantive impact assessments.

Can these changes matter in time to reverse the trends like climate change, deforestation, biodiversity loss?

They are necessary but not sufficient. Without such measures, finance will continue to fund unsustainable development, and with these and other measures, the financial system will move into alignment with the needs of sustainable development. That said, there are other actions needed, notably policies in the real economy, and smart fiscal measures.

Is part of the challenge that it still is easier to generate better financial returns by ignoring “green” rather than caring?

In some instances yes, but in part because of a mis-measurement of environmental risks. Short-termism in financial markets is also part of the problem, by which I mean leaving value unharvested because of perverse incentives that bias finance towards short term returns. Green investments are often capex intensive in return for reduced opex, but this seems unattractive to folks focused on the next quarter, day or even millisecond.

Who can make the most difference in the shortest amount of time to help green our financial system and investment decisions?

There is no single ‘white knight’ that can save us from ourselves. The world, and finance in particular, is way to complex for that. But leadership does count. President Xi Jingping and the State Council’s formal embrace of the aim to green China’s financial system, announced last week, is a case in point, a powerful policy signal that can be emulated elsewhere from Washington and London, and from Nairobi and Jakarta. Investors, banks and insurers are of course the substance of change in that their behaviour ultimately redeploys capital. And yes, the bigger the better of course, but small counts too. Looking back in a decade, we may well point to the actions of fintech companies, today’s start-ups and tomorrow’s financial DNA, as making a huge difference.

Can we even measure our progress adequately?

We could measure what counts, but in the main we do not. Only three countries measure green finance flows systematically, interestingly Bangladesh, Brazil and China, not the countries you might think of as green, such as Germany or Singapore. We know the level of issuance of labelled green bonds, roughly US$120 billion, but we do not know the environmental features of the the US$100 trillion of bonds worldwide. We know that quantitative easing involving the purchase of asset backed securities does not consider green, but we do not know the impact of QE on climate. We know that Basel 3 places onerous capital requirements on longer term investments, but the BIS has no mandate to assess the impact of B3 on green investment. UNEP has developed an initial performance framework for seeking to measure some of these wider effects, and from this we see the potential and the need, but also how much more has to be done.

What gives you hope on days when we don’t seem to be making progress?

Hope is a daily decision, not a condition, at least for me. But facts count. What I see is a quiet revolution in how we understand the purpose of finance and our willingness to reshape a financial system that has seemed untouchable until recently. In fact, the revolution is not so quiet anymore. We see a new truth, as I highlighted above, and this truth speaks to those with power of the need for change, and to those without of the potential for change.

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