How can the financial system serve a green and inclusive economy? May 2014

A new area of green policy innovation is emerging

Inquiry to identify policy options in 2015

First milestone reached – Council meeting in DC

Priorities for next phase

o Foundation analysis to map the agenda

o Country convenings to learn real world lessons

o Thematic research for cross-cutting priorities

Inquiry: work in progress 2

Advance policy options that would deliver a step change in the financial system’s effectiveness in mobilising capital towards a green and inclusive economy.

This means aligning the rules of the game that govern the financial system with the long-term health & sustainability of the real economy

Objective of the Inquiry 3

Policy options Financial system

effectiveness

Green economy

Inquiry timeline

Dec 2015 Jan 2014

Map current practice

Learning across the system

Establish analytical frameworks

Opportunities for innovation

Conduct thematic analysis

Options for policy design

Engage with key stakeholders

Catalyse leadership and action

4

Inquiry guidance from Advisory Council

Rachel

Kyte

Group Vice

President,

World Bank

David Pitt-

Watson

Co-Chair UNEPFI

Atiur Rahman

Governor, Central

Bank of

Bangladesh

Murilo

Portugal

President, Brazilian

Bankers Federation

Neeraj

Sahaj

President, S&P

Rating Services

Rick

Samans

Managing Director

WEF

Maria

Kiwanuka

Minister of

Finance,

Government of

Uganda

Andrew

Sheng

President,

Fung Global Institute

Naina

Kidwai

Group General

Manager &

Country Head,

HSBC India

Mallam

Sanusi

Former Governor,

Central Bank of

Nigeria

Lord Adair

Turner

Former Chair,

Financial Services

Authority, UK

Kuandyk

Bishimb

ayev

Chairman,

Baiterek

Development

Bank

Jean-Pierre

Landau

Former Deputy

Governor, Banque

de France

John

Lipsky

Former Deputy

Managing Director,

IMF

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A growing strategic focus on finance 5

Intergovernmental Committee on Sustainable Development Financing

Momentum For Change

A system undergoing profound change 11

Real Economy

Real Ecology

Financial Economy

Big data, internet of everything, new materials, nanotechnology, 3D Printing, robotisation Technology

innovation

Population growth, rapid urbanisation, aging Inequality Social pressures

Intra-country inequality, reduction in wage differentials, ‘the end of cheap’, impact of automation on labour markets

Economic shifts

Increased volatility, water stress, climate change, biodiversity Environmental

impacts

Financial system change

Private currencies, peer-to-peer finance, crowd funding, disintermediation, policy driven institutions, impact of data on risk pooling.

The structural disconnect 8

Too much of this Not enough of this

US$7trn/year environmental

externalities; 7mn premature air

pollution deaths/year alone;

escalating inequalities

Current flows a fraction of the

US$ 6trn/year needed for low-

carbon to 2030 – and does not

include access to key resources

From incremental cost to a system approach

-8

-6

-4

-2

0

2

4

6

8

“The clean trillion” – annual

$0.7 trn

$5 trn

$7.3 trn

Underlying annual infrastructure investment need

Cost of environmental capital destruction and negative environmental externalities

Climate finance: $100 billion/year

Financial trading volumes

Financial assets

Non-financial,

and publicly held assets

$225 trillion

Total green infra $6 tr/year

Greening infra: $0.7 tr/year

Climate finance: $0.1 tr/year

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Financial regulation for a green economy? 10

“Financial regulators need to lead. Sooner rather than later, they must address the systemic risk associated with carbon-intensive activities in their economies. The so-called "long-term investors" must recognize their fiduciary responsibility to future pension holders who will be affected by decisions made today.

Jim Kim, World Bank, 2014

Innovative policy practice so far

Insurance

Securities & disclosure

Pensions

• Green Credit Guidelines spreading across key developing

countries: Bangladesh, Brazil, China, Indonesia, Nigeria

• Environmental, social and governance factors included as

part of investors’ fiduciary duty: South Africa

• Insurance regulators incorporating climate change into

disclosure and risk assessments: USA

• Mandatory corporate disclosure of sustainability: China, EU,

India, South Africa, UK, USA. Investor disclosure: France

12

Rationale for intervention: Council views

Systematic Bias

Real economy objectives

Coherence

“Everyone is working off a model. The models don’t incorporate environmental change factors, but just extrapolates out from the past.”

“None of the reforms such as Basel III have considered the nature of environmental risk for the sustainability of the system. Instead it prices out investment for long-term infrastructure.”

“As a central bank we are working to engrain socially responsible investing into the financing structure itself. It is explicit…Our mandate is to support the growth objectives of the government. The governments goals are pro-environment and inclusive.”

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But not every problem or opportunity, even where finance is involved, can or should be addressed through interventions in the financial system…

13 Cons and pros of financial system intervention

Systematic bias Policy coherence Real economy

objectives

Unintended consequences

Impact avoidance

Preventing interventions

Policy intervention in the financial economy could be warranted to support efficient markets, system resilience and real economy policy objectives

Disclosure and reporting

Long-term duties

Tax breaks, incentives

9 Inquiry scope: rules of the game & arena

Green credit guidelines

Capital requirements

Green bond markets

Disaster risk reduction

Solvency requirements

Extending access

Interest rate effects

Quantitative easing

Central bank mandates

Investment Banking Insurance Monetary

Financial Policy

Financial Regulation

Private Standards

Financial

Sector

Fiscal Measures

System purpose and performance

System governance

Financial institutions

Tomorrow’s Economy: scenarios

Sound, Supportive, Sustainable

Mandates Principles Assessment

Responsibilities Incentives Information

An emerging framework 13

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Thematic research & engagement e.g. Time horizons, systemic risk,

institutional governance, regulator mandates,

incentives, information

Country engagement e.g. Bangladesh, Brazil, China, EU,

India, Indonesia, South Africa, Uganda, UK, USA

1

2 3

Design foundations e.g. Scenarios,

Principles, Assessment Framework

Three pillars for the next phase of the Inquiry

A work in progress: findings so far

• Financial system reforms are part of the solution to

rapidly scaling capital for the green economy agenda

• Such interventions are complements, rather than

substitutes for smart action in the real economy.

• Examples of financial policy innovation are growing

globally, yet remain fragmented

• The time is ripe to reflect on updating the mandates of

financial rule-setters to capture forward-looking green

economy challenges.

12

Contact

Simon Zadek

Co-Director

Nick Robins

Co-director

Mahenau Agha

Head of Outreach

Nick.robins@unep.org Simon.zadek@unep.org Mahenau.agha@unep.org

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inquiry@unep.org