Promoting a Sustainable Financial System
Nick Robins, 1 September 2015, Paris
2
INSIGHTS
Financing for sustainable development can be delivered through measures focused on the financial system, as well as the real economy.
A growing number of policy innovations have been introduced by both developing and developed countries, demonstrating how the financial system can be better aligned with sustainable development.
Systematic national action can now be taken to shape a sustainable financial system, informed by current trends and complemented by international cooperation. [Source Inquiry, 2015]
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CHALLENGE: aligning the financial system to sustainable development US$ tn
Estimates of scale: investment flows, and needs and externalities
17
FLOWS
PROVIDERS OF FUNDS
FINANCING
USERS OF FUNDS
Annual global investment – all needs to be green and resilient
Intermediaries Sources Households, business and government
Banks Insurance Investment Instruments Equities Bonds Retained capital
Investment
5-7
Buildings, infrastructure, plant & equipment, R&D, knowledge & training Impacts from & to environment
7
[Source Inquiry, 2015 drawing on G30, World Bank, UN ICESDF, Trucost and BIS]
Environmental Externalities – need to be be internalised
Working capital Cash
312 STOCKS OF FINANCIAL ASSETS & LIABILITIES
Annual investment needed in key sectors for sustainable development goals
Overall stock of financial assets vulnerable to environmental and related policy risks
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WHAT WOULD SUCCESS LOOK LIKE? Financial impacts aligned with sustainable development Financial development ďƒ economic, social and environmental impacts
Measuring success Financial system characteristics Effectiveness: Factoring sustainability into asset pricing
Impact
Social
Efficiency: Reduce the cost of capital for sustainable finance
Economic
Resilience: Reduced susceptibility to disruptions
Environment Financial developm ent Early stage
Developing
Focus on creating enabling financial foundations for development
Finance develops with alignment to social progress, green industries and safeguards
[Source Inquiry, 2015]
Developed Invest in assets that improve social and environmental outcomes, in home country and internationally
Financial system outcomes Deployment of capital to meet sustainable development needs Reduction of capital for unsustainable assets and uses Provision of critical financial services
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THE INQUIRY: A practice based approach Mandate Identify policy options for aligning financial system with sustainable development - focused on environment
Country-based exploration Framework for analysis. Assessment of policy innovations in action – in 16+ countries
International leadership
Crystallizing options Global Report (October 2015) – including toolkit, policy packages & recommended next steps [Source Inquiry, 2015]
High level advisory group of financial policy experts, and broader knowledge networks of research partners
A NETWORK OF PARTNERS UK Bank of England, Oxford University, PRI France 2 Degrees Initiative, France Strategie, CDC Climat
Selected partners
Switzerland Federal Office of Environment, SwissRe Netherlands Ministry of Environment, Utrecht Sustainable Finance Lab China: People’s Bank of China, Development Research Centre, IISD Bangladesh: Bangladesh Bank, Centre for Economic Policies
USA CalPERS, SAIS, World Bank
India: Federation of Indian Chambers of Commerce, NIPFP
Colombia: IFC Ministry of Finance Brazil Febraban, Fundação Getulio Vargas
South Africa: Bankers Association, Global Green Growth Initiative, JSX, WWF [Source Inquiry, 2015]
Kenya: Bankers Association, Kenya Central Bank, IFC
Indonesia: Financial Services Authority (OJK), IFC, ASRIA
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FINDINGS: A QUIET REVOLUTION Diverse starting points
Approaches in practice
Air pollution
Tax breaks for clean energy bonds
Access to energy
New climate reporting requirements
Climate change
Prudential review of insurance
Economic development
Environmental risk in banking regulation
Clusters of common practice Enhancing market based practice
Leveraging public finance Legal liabilities and policy direction
Cultural transformation Financial inclusion, greening industry
Coordinated roadmap of policies led by financial regulator Upgrading governance
Post-crisis rebuilding of trust in financial system
Financial sector compact
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FRAMEWORK FOR ACTION: Tools, policies and processes Tools Enhancing market based practice – disclosure, responsibilities,product criteria Harnessing public finance - fiscal incentives, public institutions & central banks Directing finance through policy – priority sectors, regulatory calibration, liability frameworks Cultural transformationcapacity building, financial behaviour, market structure
Policy packages Banking: Extend risk based governance, improve access, enhance culture Bonds: Green bonds, infrastructure vehicles, greening credit analysis
Principles for a sustainable financial system Compacts and pathways
Equities: transparency, greening analysis, green IPOs, yieldcos
Policy and legal frameworks
Investment: Pensions governance, transparency and incentives
Regulatory mandates
Insurance: Access, prudential governance & investment role Valuing financial system externalities Managing systemic risk Promoting innovation
[Source Inquiry, 2015]
Processes
Ensuring policy coherence
Performance measurement
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NEXT STEPS: Acting nationally and internationally System developments
National compacts and action plans
Global banking standards
Principles for a sustainable financial system Sustainability stress test methodology
Performance diagnostic
Implement and learn
Code on investor duties Assess opportunities
Fiscal measures optimisation Performance framework for a sustainable financial system
[Source Inquiry, 2015]
Sector developments
Design pathway
Build coalition
Sustainability disclosure convergence Coalition for greening debt markets
Guidance for insurance regulators