Towards a green economy

for the period 2011 to 2050 based on the 2 per cent of GDP green economy scenario is nearly US$ 1.35 trillion on average. For the nine sectors covered, excluding fisheries, the estimate for the lower range for annual investment 2011 to 2050 is almost US$ 1.2 trillion per year. This estimate rises to over US$ 3.4 trillion per year, a high-end estimate that applies to later decades, when global GDP is presumably much higher.

The table clearly demonstrates very significant overall investment needs to transition the green economy as well as the considerable range for some key sectors, such as energy, to move towards a more sustainable basis for economic growth. It shows in particular the large volumes of resources required to expand and transform the inventory of built capital, in the form of energy supply, public transport, and energy and resource-efficient buildings. The table also shows the resources required to change to a sustainable way of managing natural capital assets such as forests, fisheries and agricultural lands.

It is estimated that more than 80 per cent of the capital needed to address climate change issues in future decades will come from the private sector (Parry et al. 2009), highlighting the significant role of the private sector in the transition to a green economy. The message for both policy makers and the financial services sector is clear: to achieve this transition by 2050, substantial financial resources, including public, private, hybrid and new blended approaches, will have to be mobilised. In addition, private resources and capital markets will have to play an instrumental role in providing the required finance and investment. This will require appropriate regulatory frameworks comprising a rich policy mix to stimulate demand for these funds, together with targeted flanking policies to protect households below the poverty line from possible unintended consequences on the costs of basic goods and services.

Tracking new trends in finance and investment flows The roles of lending, investment, insurance and public finance all remain critical in greening different economic sectors and establishing more resource efficient societies. While global ODA often processed by government-owned agencies dropped (United Nations 2008) DFIs was estimated to be around US$ 108 billion in 2010. website), annual private finance goes into the

trillions (TheCityUK 2011). The critical role for public finance lies in being a catalyst, early stage investment provider, co-sharer of risk and guarantor of public infrastructure and services. As far as private finance is concerned, the relative size of lending, investment and insurance as well as their commitment to sustainability is provided in Table 2.

The tracking and precise quantification of financial and investment flows to greening and social responsibility, across asset classes, geographies and sources (public, private, public-private, and hybrid) is a work in progress. Some asset classes, notably cleaner energy technologies, already have sophisticated and globally recognised methods in place to accurately capture annual global flows. These are highlighted later in this chapter. The following section provides a snapshot of how investment capital from the world’s largest institutional investors is starting to flow to the green economy, but is not comprehensive in its coverage given the information, data, and methodological challenges for what, in many cases, are nascent green economy-related asset classes.

At the global level, the quantification of how ESG considerations are integrated into various asset classes; for example, listed equity (developed and developing markets), fixed income (sovereign), fixed income (corporate), private equity, real estate and property (listed and non-listed), hedge funds and infrastructure, only commenced systematically in 2008, thanks to the United Nations-backed Principles for Responsible Investment (PRI) . In 2009, it was estimated that the global market size for overall actively and passively managed assets2

was

just over US$ 121 trillion, up from nearly US$ 99 trillion in 2008 (PRI 2010). Of these assets, controlled by a broad range of large institutional investors (such as pension funds, sovereign wealth funds, insurance companies, and foundations), the internally actively managed component of the investable universe, some 4 per cent (US$ 3.578 trillion) in 2008, rising to 7 per cent (US$ 6.766 trillion) in 2009, were subject to integration of ESG considerations (see Table 3 for a complete breakdown)

2. Active management of assets refers to a strategy where a portfolio manager makes specific investments with the aim to outperform an investment benchmark index. Passive management refers to a strategy where a portfolio manager makes investments in line with a pre-determined investment strategy.

594