A new report released today by the United Nations Environment Programme (UNEP) identifies critical innovations in the US$300+ trillion global financial system, which, if brought to scale, could help close the widening sustainable development investment gap. The report is being launched at the World Economic Forum at Davos – at the outset of what promises to be a momentous year for sustainable development.
Following the financial crisis, increasing focus is being placed on how the financial system can fulfill its underlying purpose to serve the long-term health of the global economy. The new publication, Pathways to Scale, is the 3rd progress report from the UNEP Inquiry into the Design of a Sustainable Financial System and draws on work across 12 countries and a range of critical sectors such as banking, insurance, investment and securities. A key problem is that financial markets still do not effectively price environmental resources, with the result that the value of natural capital stocks such as clean air, productive soils and abundant water is falling in 116 out of 140 countries across the world.
The Inquiry’s high potential innovations include three major asset pools:
- Banking: Banks hold the largest pool of global financial assets (US$139 trillion), and leadership by developing countries such as Bangladesh, Brazil and China in ‘green credit’ regulations points to a new phase in international baking standards.
- Bond markets: The largest capital market (US$100 trillion assets) and fastest moving theme, with a tripling of ‘green bonds’ issuance in 2014 and the prize of incorporating sustainability factors such as climate risk into routine credit ratings.
- Institutional investment: With US$93 trillion in assets under management in pensions, insurance and sovereign wealth funds, new investment structures, changes to investor governance and reform of incentives (such as remuneration) could underpin the next generation of sustainable investment.
In addition, the Inquiry has identified growing interest in two cross-cutting policy tools
- Central banks’ monetary decisions, including balance sheet policies, could also have potential for marrying stability and sustainability – for example, through ‘green quantitative easing’ – although some measures remain controversial.
- ‘Environmental stress tests’ could help both financial institutions and financial regulators understand the financial implications of disruptive environmental threats such as natural disasters, chronic air pollution, water insecurity and climate change.
UN Under-Secretary-General and UNEP Executive Director, Achim Steiner, said
“if we are to generate truly inclusive wealth then we need a financial system that can efficiently invest in the human, productive and natural capital on which we all depend. What is heartening is the increasing evidence that central bank governors, finance ministries and major investment funds recognize that new ‘rules of the game’ are not just necessary and possible, but can deliver real benefits.”
For Anne Staussboll, CEO of leading US pension fund, CalPERS and member of the Inquiry’s international Advisory Council “investing for the long-term requires strategies that create sustainable value, mitigate multifaceted risks, and strengthen both local and global economies. The common denominator in being able to do all of that effectively is having a stable and forward-thinking policy foundation”
Another Advisory Council member, Naina Lal Kidwai, country head of HSBC India, added “For too long, a myth has been allowed to take root in India that sustainability and finance are at odds – that taking account of environmental, social and governance (ESG) factors raises costs, reduces returns and impedes development. Actual practice suggests the reverse”.
Central banks are also starting to take action to integrate social and environmental factors into core policies, and for Aloisio Tupinamba at the Central Bank of Brazil, “sustainability is a positive asset for financial and monetary stability”.
Notes to Editors:
The UNEP Inquiry is a two-year initiative launched in January 2014. It is guided by a high level Advisory Council of financial regulators, leading financial market actors and experts, and is also informed by a growing international network of partners in central banks, international institutions, the financial sector and civil society.
For more information please contact:
UNEP Inquiry into the Design of a Sustainable Financial System, Email: firstname.lastname@example.org
Mahenau Agha, UNEP Advisor, Email: email@example.com, Mobile: +4179-773-1864