The United Nations Environment Programme recently announced that “Actions to Green the Financial System Have Doubled – But Further Transformation Still Needed”. We sat down with one of their senior leaders, Simon Zadek, co-director of the UNEP Inquiry into Design Options for a Sustainable Financial System, to unpack this very loaded headline.
3 October 2016
Sustainability: It’s recommended that we “embed sustainability into long-term national plans for financial reform”. What is a concrete best practice of where this is happening? Can it reasonably be scaled to other places in a time frame which is acceptable?
Mr. Zadek: The most comprehensive approach was adopted by the Chinese State Council on 30th August, comprising thirty five planned interventions including policy measures, standards and regulations, fiscal incentives, judicial action and institutional innovations. Prior to this, Indonesia’s integrated financial regulator has adopted a ten year road map for Sustainable Finance, mainly focused on the banking sector. Some plans have focused on specific aspects of sustainable development. South Africa’s financial sector charter is geared to advancing black economic empowerment, for example, whereas Brazil has focused on environmental security, particularly in the Amazon.
Sustainability: How can financial start up firms specifically help with sustainability? What is an exciting example we can scale for impact?
Mr. Zadek: Kenya has the world’s highest penetration of mobile-based payment services, which has enabled a dramatic increase in financial inclusion of previously excluded, poorer and more isolated communities. Building on this success, a start-up called M-KOPA is now offering a financial service enabling consumers with too low an income to get credit to pay ‘as you go’ for distributed solar energy. Fintech, in combination with other technological developments such as artificial intelligence and the internet of things will revolutionize the potential for finance to be aligned to sustainable development outcomes.
Sustainability: When you suggest using public finance for “direct impact and to pioneer new markets, rules and practices”, how and where is this happening with a measurable return on investment to the public coffer? Can it be replicated elsewhere and under what conditions?
Mr. Zadek: Well of course it is Silicon Valley’s open secret that it has been built on the back of publicly-funded technologies, which has generated the world’s leading companies in a multi-trillion dollar market. China’s active public support to its renewables industry has driven down costs and made it possible for countries around the world to ramp up the deployment of renewables. Bangladesh’s central bank has offered concessionary refinancing for domestic banks for lending to support green energy and rural development.
Sustainability: You suggest that policymakers must understand the “imperatives” but is this a normative ideal, or is it something much more tangible which is likely to move markets and investor flows in the short term?
Mr. Zadek: There are many tangible policy measures that can and do move markets, as the previous examples have already illustrated. US tax credits have driven clean tech investment, just as France’s Energy Transition Law will over time drive climate risk into financial decision-making. Directionally we are gaining positive momentum, the real challenge is speed and scale of effects. Improved disclosure for example, will help but not enough to rapidly redeploy many trillions of dollars towards cleaner, more climate-resilient investments.
Sustainability: On common approaches to measuring progress, what are you most excited about as a scalable play with global institutions rallying behind it? What are the timeframes?
Mr. Zadek: Measuring risks related to unsustainable development at the enterprise and prudential levels is essential, and there is progress being made, but it will take time. Measurement can also impact in other ways. Credit ratings that take account of climate and other sustainable development effects on solvency could have a major effect on the cost of capital for sovereigns as well as corporates and local authorities. Offering lower capital requirements for green lending and investment through, for example, variations in Basle 3 and Solvency 2, requires new measures to demonstrate lower risk profiles for green financing. The Financial Sector Assessment Program, the world’s single most important financial sector evaluation tool implemented by the IMF and the World Bank, will spell out different performance findings if environmental and broader sustainable development effects are taken fully into account.
Sustainability: How should global corporations, as consumers of financial services, help with your efforts?
Mr. Zadek: Clearly the single most important need is for non-financial corporations to shape natural resource-light, climate resilient business strategies and practices. Secondly, is to measure and disclose material information in ways that signal the role that such sustainability considerations play in their business success. Beyond this, leaders across the corporate community have a unique responsibility to speak out about the shortfalls in the financial industries, notably their unwillingness to fund long term strategies in favour of short-term, sub-optimal financial returns. It is overwhelmingly in their interests to shape a financial community that is incentivised and capable of financing for the long term.
Sustainability: How should consumers understand and help with the Inquiry in a practical sense?
Mr. Zadek: People can make a difference in reshaping the global financial system in ways that the Inquiry can point to but cannot do alone. The financial sector is a mystery to most people, and understandably so. Yet citizens around the world have understood that finance is a keystone of the global economy and its behaviour has a major effect on their local economy and livelihoods. Individuals can make a difference, as voters, savers, pension and insurance holders and the buyers of many financial services. With the fintech developments alluded to above, individuals will be able to make ever more specific financial decisions. Chinese savers, for example, can now invest as little as RMB1, or about 15 US cents, in a green fund, and around the world people can allocate savings directly to small businesses or select green and sustainability-aligned funds.
Sustainability: What needs to happen next in advancing this agenda?
UNEP has just released the second edition of its global progress report, “The Financial System We Need”, timed to coincide with the IMF/World Bank Annual Meetings this week in Washington DC. It sets out an agenda for action in leveraging current momentum to achieve a more rapid speed-to-scale in driving environmental considerations into the financial system. There is urgency, but we need nevertheless to build from the base, building on both market innovations such as green bonds and fintech enabled innovations, and national (regional in some cases such as the EU) actions integrated into the core of financial market development plans. Every country will drive this agenda using their preferred instruments, but international harmonisation will be needed, and the report highlights roles for key international institutions in their standard setting and performance assessment.
Edited by Timothy Nixon, Managing Editor, Thomson Reuters Sustainability