The financial sector’s role in facilitating progress towards sustainable development has evolved considerably since the concept first received global attention at the UN Conference of Environment and Development in Rio de Janeiro in 1992. The intervening years have seen significant
developments, and the PRI8 ranging from successful
partnership initiatives such as the UNEP Finance Initiative7
to the integration of ESG factors
in asset ownership and significant growth in private sector flows to niche asset classes such as microfinance, clean technology and sustainable energy. Investors are increasingly moving from responsible investment (do no harm) to sustainable investment (investment in solutions to sustainability challenges).
A global transition towards a green economy will require substantial redirection of investment to increase the current level of public and private sector flows to key priority areas, the bulk of which will need to be mobilised through financial markets. Analysis and modelling conducted for the Green Economy Report suggests that the level of additional investment needed is between 1 to 2.5 per cent of global GDP per year from 2010 to 2050. Currently, green economy investment is well below 1 per cent of global GDP.
The vast majority of the investment that needs to be re- directed to the green economy will need to come from the private financial sector if key sustainable development goals are to be achieved in the necessary time scales. National and international public sector resources are significantly smaller than those of the global financial market. Following the 2008 to 2009 financial crisis, the BIS has projected a high debt/GDP ratio for many major economies for the next twenty years. As a consequence, public funds available for a shift to a green economy are likely to be far below the level required. Developing countries, with the exception of the most vibrant emerging economies, will have limited fiscal options to support a green economy.
If a robust business case can be created and properly demonstrated, for example, by governments fully implementing the “polluter pays” and “user pays”
7. In 2010, 200 banks, insurers and investment organizations were
signatories to the United Nations Environment Programme Finance Initiative. http://www.unepfi.org
8. A further 900 investment organizations, including service organizations, support the UN-backed Principles for Responsible Investment. http://www. unpri.org/principles
principles agreed by OECD countries, then arguably some of this re-deployment of capital will occur naturally as investors pursuing enlightened self-interest shift their assets from less attractive brown economy (based on fossil fuels) activities. Opportunities for scaling up green finance exist across the market, especially in sectors such as renewable energy or green property, and in mainstream finance through the growing trend towards consideration of ESG issues and accounting for environmental externalities. However, less mature and nascent segments of green economy finance – such as REDD+ or sustainable energy services for the poor – will require patient and wise incubation.
However, public financing is essential for the transition to a green economy and more than justified by the positive externalities that would be generated. The role of public finance in supporting a green economy was demonstrated by the green components of the massive fiscal stimulus packages launched by G20 countries in responding to the financial and economic crisis, which broke out in 2008. Out of the US$ 3 trillion of the stimulus funds, more than 15 per cent was allocated to green sectors or to greening brown sectors.
Public financing for green investments is not confined to short-term responses to the financial and economic crisis. The Republic of Korea, for example, has included public funds for green investments in the country’s five-year development plan. In many least developed countries, however, public financing covering tax revenues and governments’ ability to borrow directly
from capital
markets is seriously constrained. In these countries, international and regional development banks should explore how they can increase development finance that supports agreed priorities for green investment.
Green stimulus packages and agile financial markets alone are unlikely to unlock the scale of private finance needed for the transition to a green economy. Sound public polices and enabling regulatory frameworks are also indispensable. Although an increasing number of financial institutions are becoming interested in a green economy, the majority of market players remain wedded to the traditional, brown economy. This is largely due to inadequate policy and regulatory frameworks that fail to provide a level playing field. The risk/reward equation still works unfavourably for would-be green investors.
Governments should involve the private sector in establishing stable and coherent policy and regulatory