The world has, for some time now, been keenly aware of the challenges that poor environmental management poses to our common future – threatening human health, peaceful societies, and long-term economic sustainability.
2016 was the hottest year on record due to man-made climate change. Smog has increasingly blighted many cities and an estimated 18,000 people die every day from air pollution. Some estimates say erosion and pollution have claimed a third of the world’s arable land over the past 40 years, while demand for food soars as populations grow. And these are just some of the various distressing statistics around the topic.
The good news is that the Paris Agreement on Climate Change, the 2030 Agenda for Sustainable Development and many other international processes show we are now tackling these issues head on. However, for these processes —and many other actions at city, regional and national level— to work, we need to fund them.
According to a recent report from the OECD, commissioned by the German government, we need to invest $6.9 trillion in infrastructure every year between now and 2030 to hit the 2°C global warming target agreed to in Paris. In Latin America alone, climate investment needs have been estimated at $75-80 billion per year, almost three times its current volume of such investment.
This is the gap that green finance, a growing global movement, can fill. Broadly speaking, green finance includes the financing of environmentally friendly investments, as well as practices that embed sustainability more broadly across the industry. The G7 recognized that this financing is “fundamental” to achieving environmental and climate goals. Encouragingly, we are seeing huge progress across all fronts.
More measures related to green finance have been introduced since June 2016 compared to any other one-year period since 2000. As a result, green finance flows have increased, most notably in the issuance of green bonds, which grew by around 100% to US$81 billion in 2016. A comprehensive review looking beyond green finance to assess sustainable finance more broadly indicates that global sustainable investment assets under management have increased by 25% since 2014.
The actions that have brought us here are too numerous to list, but country examples include Brazil, where the Central Bank issued guidelines on integrated risk management including environmental risk in March 2017. In the US, the California State Insurance Commissioner launched the Climate Risk Carbon Initiative online database in January 2017 to provide information on high-carbon investments of large insurance companies.
A rapid expansion in partnerships related to green finance has also been evident across banking, insurance and investment. For example, the Principles for Responsible Investment (PRI) has added over 185 members from 30 countries since June 2016, and now represents over 50% of global assets under management.
The UN Environment Inquiry into the Design of a Sustainable Financial System’s Green Finance Progress Report, a just-released contribution to the G20’s Green Finance Study Group, uncovered dozens of encouraging policies and financial product developments.
Meanwhile, the Inter-American Development Bank has set a goal to increase financing for climate change to 30% of approvals by 2020. This will be achieved through a combination of innovative instruments such as green bonds, as well as traditional financial products including loans, grants, guarantees and equity investments.
These steps are hugely encouraging. Now, with global carbon emissions stalling and clean tech costs plummeting, the task ahead is to step up the pace. Below, some practical steps stand out to shift the trillions of private capital required:
- Roll out sustainable finance roadmaps at the national level, which is happening in countries from Argentina to Italy.
- Target public effort where market forces cannot reach —for example by using temporary and targeted incentives (such as feed-in tariffs) to overcome investor concerns about new sectors and themes, such as energy efficiency and climate adaptation.
- Encourage a real convergence at the international level in terms of the “rules of the game” that shape financial markets, such as market standards and financial regulations.
The financial system is reshaping itself to align with the sustainable development imperatives of the 21st century. But we all need to nudge it along.
UNEP Inquiry: Design of a Sustainable Financial System is a leading international platform for advancing national and international efforts to shift the trillions required for delivering an inclusive, green economy through the transformation of the global financial system.