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Greening global finance

UN Environment Programme Executive Director Achim Steiner discusses how our environmental security is dependent on the future of finance, just as financial security is increasingly linked to our natural environment.

The financial crisis of 2008 was the catalyst that took the G20 to centre stage globally. Effectively providing a platform for orchestrating a coordinated short-term response to the crisis, it helped to overcome the dangers of nationally focused policy actions that otherwise could have led to protectionism and, ultimately, the conditions for a damaging fragmentation of the global economy. At the same time, the G20’s creation of the Financial Stability Board, which provides a mechanism for connecting the world’s leading central banks to the G20 as an international policy process, has provided a longer-term vehicle to strengthen the governance of the international financial system.

Last year’s G20 annual meeting, which took place in Brisbane, Australia, headlined the commitment to raise the G20’s economic growth rate by 2 percentage points above its current trajectory over the next five years. It also addressed other topics, from energy to anticorruption and tax, to infrastructure and international development, even climate figured in the final communiqué. The forthcoming G20, hosted by Turkey, is planned to again include financial market reform, and indeed the climate challenge, which of course takes place in the context of the global climate negotiations reaching a critical point in late 2015 in Paris. It is once again envisaged that these two topics will be addressed separately, as if they can be solved independently.

The facts, however, and the potential, are very different. Our collective environmental security is dependent on the future of finance, just as financial security is increasingly linked to our natural environment.

The most obvious example of this codependence is the public finance needed to safeguard our environmental commons — from the water we drink and the air we breathe to the stewardship of vulnerable biodiversity essential to our circular economy. Climate is another case in point, with the ongoing international negotiations placing considerable emphasis on the question of how much developed countries will finance developing countries’ mitigation efforts to reduce carbon emissions, and the costs of adaptation to climate change.

Yet public finance is just one part of the nexus between money and the environment. Private finance, and specifically the use of some US$273 trillion of private capital worldwide, has considerable implications for the environment. Investment in clean technology such as renewable energy makes a difference to environmental outcomes. Indeed, the G20’s focus this year on the challenge of financing long-term infrastructure needs of an estimated US$5 trillion annually worldwide has profound environmental dimensions. Building energy-efficient and climate-resilient cities will be a defining feature of their future utility. Likewise, investing in agricultural systems that can remain productive in the face of a changing climate will be the basis for securing adequate, affordable, healthy food for tomorrow’s growing global population.

The welcome launch of a new global infrastructure initiative at the recent meeting of the G20 finance ministers and central bankers in Cairns, Australia, is an opportunity to ensure that such a bold initiative would minimize pollutants and deliver climate-resilient infrastructure.

Environment is not just a matter for environment ministers and environmental policies. Growing numbers of financial regulators and central bankers are responding to the simple fact that the working of the financial system has environmental impacts, and that the state of the natural environment impacts the health and — ultimately — the stability of the financial system.

Brazil’s central bank has a host of environmental regulations, and the China Banking Regulatory Commission’s Green Credit Guidelines provide increasingly stringent directions regarding environmental risk management.

Whilst most central banks today remain ambivalent that climate represents a systemic risk to the financial system, the Bank of England has recently commenced a review of the relationship between insurance regulation and climate change. Governor Mark Carney signaled his growing conviction that the future of the financial system and our management of climate are closely interwoven at the recent IMF/World Bank Annual Meeting in Washington, D.C., declaring that the “vast majority of [fossil fuel] reserves are unburnable,” and, by implication, of less value than markets currently think, if global temperature increases are to be contained to two degrees as recommended by the world’s leading scientists. The USA’s Securities and Exchange Commission provides guidance to investors in assessing and reporting on climate risks. Indeed, the UN Conference on Trade and Development-hosted Sustainable Stock Exchanges initiative currently has 14 stock exchange members, including London and New York, all of which are advancing new sustainability-focused disclosure requirements and, in some cases, indexes.

These and many other examples have surfaced during the initial phases of the Inquiry into Design Options for a Sustainable Financial System, established by the United Nations Environment Programme in early 2014. The Inquiry, due to run for two years, is exploring which rules governing today’s financial system, including financial and monetary policies, financial regulation and private standards such as credit ratings and accounting standards, could be adjusted to ensure that lending and investment decisions take greater account of environmental and also social outcomes. As the examples above illustrate, the Inquiry’s approach is to identify and assess the broader potential of existing innovations. Its work is guided by an Advisory Council made up of financial regulators, central bankers and leaders from key private and international financial institutions.

The G20 offers the promise of increased, international policy coherence, and, notably, for advancing an improved alignment of the financial system with the long-term needs of the real economy. Given the importance of this year in establishing the post-2015 development agenda, setting new sustainable development goals and in reaching a climate agreement in Paris, the G20 have an historic opportunity to make a stepwise change in advancing policy coherence through improved alignment of the financial system with sustainable development aspirations and objectives.

Building on the G20 in Australia, investing in the G20 in Turkey this year, and looking forward to the hosting of the G20 by China, the G20 could leverage the work of the UNEP Inquiry and many others who see the potential in addressing this nexus. Building such an alignment would take time, but is more than a worthy agenda, going beyond that of recent years in mitigating a far smaller crisis of our own making, and yet one whose resolution had little upside. Here the prize is an accelerated transition from our global economy to one that offers more secure livelihood opportunities, reduced natural catastrophes and improved means of dealing with the ones that do happen, and ultimately sustained prosperity for all.

The G20 could take three practical steps to help progress such a development. The first could be to request the Financial Stability Board (FSB) to consider for the first time environmental aspects of financial stability. Given the milestone climate negotiations in late 2015, a suitable initial focus might be for the FSB to consider the impact of climate change on financial stability. Second could be to encourage the environmental stress testing of key financial market policies. A starting point here might be to ask the Bank for International Settlements to consider the environmental impacts of the Basel III banking rules. Third could be to explore the potential for greening the use of central banks’ now US$24 trillion balance sheets.

A healthy financial system is a keystone of an inclusive and sustainable global economy. Such a system must nurture and invest in the key drivers of its economy, which crucially include a supportive natural environment. The G20 is well placed to focus on this nexus, and in so doing to further its mandate of securing a sustainable financial system.

About the author

Achim SteinerAchim Steiner was elected Executive Director of the United Nations Environment Programme in 2006 and is currently serving a second term. Steiner earned a B.A. from the University of Oxford and an M.A. from the University of London with specialization in development economics and policy. He also studied at the German Development Institute and Harvard Business School. He has worked at the grassroots level and the highest levels of international policy-making to address the interface between environmental sustainability, social equity and economic development.

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