United Nations Environment Programme environment for development

Publications

The Financial System We Need

The global report of the UNEP Inquiry argues that there is now a historic opportunity to shape a financial system that can more effectively finance the development of an inclusive, green economy. This opportunity is based on a growing trend in policy innovation from central banks, financial regulators and standard setters, who are incorporating sustainability factors into the rules that govern the financial system.

The report draws together practical examples of policy changes in banking, capital markets, insurance and institutional investment, drawing on detailed work in countries such as Bangladesh, Brazil, China, Colombia, France, India, Indonesia, Kenya, South Africa, the UK and the USA.

It offers a Framework for Action that shows how a systematic approach can now be taken at both the national and international levels.

Full report             [AR] | [CH] | [EN] | [ES] | [FR] | [PT] | [RU]

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Green Finance for Developing Countries: Needs, Concerns and Innovations

This report outlines key concerns and needs of developing countries in relation to green finance, particularly focusing on developing countries that are not members of the G20. It also highlights emerging innovations, drawing in particular from engagement with practitioners and regulators from Bangladesh, Colombia, Egypt, Honduras, Jordan, Kenya, Mauritius, Mongolia, Morocco, Nigeria, the Philippines, Thailand and Viet Nam, and the findings from the UNEP Inquiry’s country studies.

Green finance is a strategy for financial sector and broader sustainable development that is relevant around the world. But the context differs considerably for different countries. Developing countries, notably those with underdeveloped financial systems, face particular challenges in financing national development priorities.

Broadly, concern and action to align financing to sustainable development is concentrated in three areas:

  • Preventing the financing of illicit practices or profiting from weak enforcement.
  • Unlocking opportunities for green investment.
  • Exploring solutions to dilemmas and trade-offs.
Green Finance – A Growing Imperative

The Paulson Institute, together with the China’s Green Finance Committee, Securities Industry and Financial Markets Association (SIFMA), the United Nations Environment Programme (UNEP) and Bloomberg Philanthropies, co-hosted an event on 16th April at the Bank of America in Washington DC to explore the implications of the greening of the financial system for financial market actors and policymakers.

Key messages are:

  • Transforming the financial system is key to promoting the green transformation of our economies, alongside environmental regulations, pricing reforms, and fiscal policies.
  • Needed urgently is the scaled “industrialization” of green finance, which in turn requires international harmonization of definitions, products and standards.
  • Market-based innovations are supporting the development of green finance, including green bonds and associated principles, definitions and standards, and enhanced risk analysis and disclosure.
  • Public-private collaboration is needed to support the smart design and effective scaling of market innovations and policy measures to advance green finance.
  • G20 has an important, continued role to play in policy signalling, converging definitions and standards, and exemplifying good practice.
Designing for Disruption

Tomorrow’s financial system will not look like today’s. Possibilities will be shaped by new entrants and technologies and by shifts in the global economy’s centre of gravity. Crises and innovation may present unpredictable and alternative pathways of change.

The Inquiry, with support from the OECD, therefore developed a set of scenarios to frame discussions of the possible future policy contexts within which a sustainable financial system needs to evolve. Each of the four scenarios (Global Nudges, Emerging Accords, State Patchworks and Technology Edges) reflects a potential future in which the financial system is aligned with sustainable development, albeit in different ways.

Designing a Sustainable Financial System for India

An India Advisory Council of the UNEP India Inquiry was convened by the Federation of Indian Chambers of Commerce and Industry (FICCI). This report highlights key proposals emerging from their discussions for aligning the Indian financial system with sustainability.

In the Indian context, they call for development of a more robust and resilient ‘sustainability-oriented market framework’ focused on banking, institutional investment, public finance institutions and foreign direct investment. They called for policy and regulatory innovation in five areas:

  • Development of incentives such as equity tax credit and  production tax credits.
  • Strengthening existing institution such as Indian Renewable Energy Development Agency to become the green development financing institution.
  • Deregulation to increase external commercial borrowing funding of green projects by exempting withholding tax, replacement of construction finance and refinancing and innovative solutions for hedging.
  • Inclusion of renewable energy sector within the Priority Sector Lending (PSL) category requirements.
  • Sharpening of the operation of the National Clean Energy Fund

They also called for key areas of market innovation in terms of green credit ratings, green bonds and yieldcos.

Final report | Interim report

Lenders and Investors Environmental Liability

This working paper presents an overview of Lender Environmental Liability (LEL) and Investor Environmental Liability (IEL) regimes and issues. Environmental harm and degradation is often irreparable. Therefore, our assumption is that precaution is the main objective of any international and domestic environmental legal regime. The paper explores the conditions under which LEL/IEL can be effective tool to promote precaution. To illustrate our premise, we created a model based on Nash’s game theory in an attempt to universalize some basic concepts in the design of these systems. By using Nash’s game theory we aim to answer the question presented in the title of our paper: how much is too much environmental liability for a financial institution to bear?
We argue that full environmental liability (where financial institutions bear unlimited liability) may have the perverse effect of incentivising them to internalize any duty of care, in case they bear full liability.

How Paris Became the Capital of Climate Finance

This working paper traces the evolution of the ‘networked solution’ to finance that came together at the COP21 in Paris, linking the formal negotiations with a broader set of actions by financial regulators, by financial institutions and also by civil society. It explores the creative dynamic between France’s efforts to stimulate action within its own domestic financial system, and the international steps harnessing the financial system for climate security. It closes with reflections on how this new approach can be deepened in the year ahead.

Building a Sustainable Financial System in the European Union

This report presents a stock-take of actions under way at the European Union level and in selected Member States to align the rules governing the financial system with environmental sustainability.

Looking across the range of innovations across the EU, five broad policy priorities emerge. The central challenge of financing sustainable development in the EU is one of capital reallocation. Enhancing frameworks for risk management, clarifying the core responsibilities of financial institutions and improving reporting and disclosure across these dimensions will be necessary to fully unlock flows of sustainable finance. A growing number of Member States are delivering on individual aspects of these priorities, and others are acting within given asset classes. The debate is now advancing to the system level and the need for a strategic reset, seeking to link previously unconnected initiatives and to enhance the capacity of the financial system to support renewed economic competitiveness and improved sustainability performance.

Full report | Executive Summary (French)

Imagining a Sustainable Financial System

Imagining a sustainable financial system allows us to move beyond conventional wisdoms. This paper sets out that a sustainable financial system would be one that serves the long term needs of a healthy real economy, an economy that provides decent, productive and rewarding livelihoods for all, and ensures that the natural environment on which we all depend remains intact, and so able to support the needs of this and future generations.

It offers a framework for considering the performance of a sustainable financial based on two axes, its impact on social and environmental systems ‘sustainability impacts’) and its own sustainability in the face of exogenous shocks induced by these factors.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Sustainable Finance?

This paper seeks to assess how the international banking community is building sustainability into corporate strategies; how effectively these strategies are being implemented; how sustainability is being embedded into key business processes and decisions; and how sustainability principles are reflected in reporting. It presents an assessment of the sustainability performance of banks using a range of frequently used indicators, while also scrutinizing the indicators by examining the extent to which they effectively measure the performance and commitments of banks. While many banks achieve high scores on these indicators, there is evidence that there are significant flaws which are not adequately addressed.

It is argued that flaws that contributed to the global financial crisis – misaligned incentives, information asymmetry, financial innovation and levels of risk – also pose risks from a broader environmental, social and governance perspective. A schism exists between symbolic and substantive efforts towards sustainability, which is indicative of sustainability not being integrated in overarching business strategies.

The research concludes by arguing in favour of increased convergence of corporate social responsibility and corporate governance, which would embed sustainability into authoritative frameworks, make environmental, social and governance matters more enforceable, and firms increasingly accountable. Yet, these advantages will likely only manifest when self-regulation is reinforced by mandatory regulation in critical areas.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Making the Jump

This paper outlines the dynamics behind the financial regulatory paradigm shift that began in 2008-2009. It seeks to identify parallels with and differences from the slower moving, even more consequential, global climate change crisis, and the fitful, still under way, policy paradigm shift that the United Nations Environment Programme (UNEP) and other stakeholders are trying to support and facilitate linking economic sustainability, financial regulation, markets, and climate change. The following ten observations are developed in this paper:

  1. Crises matter for financial system design and reform
  2. Crises can enable leaps from one policy narrative to another
  3. The abandonment of prior policy norms is possible
  4. Not all policies are equally strong within a paradigm shift
  5. Dominant expert communities matter to paradigm shifts and policy outcomes
  6. The creation of policy consensus between communities also matters
  7. Paradigm shift is not a smooth process, but a lumpy one
  8. Using soft-law mechanisms is a viable second option
  9. There are multiple pressure points for change
  10. Emerging countries are important to the paradigm shift.

Some of the lessons from the financial crisis response and policy shift are potentially useful and positive. Others are more mixed. Some are negative. Nonetheless, these observations from the financial crisis have utility as policymakers and actors consider how to impact the speed at which broad new policy approaches can be adopted, and can begin to integrate climate change risks within financial decision-making and policies.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

The Equator Principles

The Equator Principles are a voluntary code of conduct and a risk management framework for determining, assessing and managing environmental and social risks in projects, such as energy or infrastructure projects. Since their foundation in 2003, they were lauded for integrating social and environmental assessment practices into project assessments. Critics reason, however, that without fundamental implementation efforts and enforcement, the Equator Principles will not contribute to any change with respect to effects of projects on sustainable development. To analyse their effects, a literature analysis, interviews with project financiers and stakeholders, and an analysis of Equator Principles signatories’ reports were conducted. The results suggest that the Equator Principles are mainly adopted because of reputational benefits and risk management and that they do not create significant changes in project financing institutions. Our conclusions are that criteria should be implemented that define sustainability thresholds for projects to be financed and that enforcement mechanisms are needed to guarantee the compliance of the signatories with the principles.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

The State of Sustainable Finance in the United States

While US financial institutions have at times enjoyed a reputation of being something of a laggard on sustainability issues versus their European counterparts, significant changes and innovations are under way which are beginning to drive meaningful change.

Record levels of awareness on sustainability issues in the US, including from millennials, are accelerating activities such as:

  • Increased levels of sustainable and responsible investing.
  • An increased focus from the largest US banks and other financial institutions on sustainability risks, lending practices and related opportunities.
  • US insurance companies and related regulators are also developing and evolving sustainability risk frameworks.
  • Federal and State policies are accelerating the ongoing US low carbon energy transition.
  • Financial innovation is driving meaningful change in many investment sectors while social innovation and culture development also continue to evolve.

With energy costs curves seen as changing for the long term, levelling the playing field for lower carbon energy production, and interest in having a positive impact with investment dollars from millennials on the rise, a top-down, bottom-up race is under way which has created an important new dynamic leading to these actions.

Accelerating these trends further can help make the US a leader on both designing and enabling sustainable financial systems.

Human Rights and Sustainable Finance: Exploring the Relationship

Designing and building a sustainable financial system requires a broad focus on what sustainability requires in all its aspects and how finance can help deliver on that important objective. This task includes not only delivering financing for sustainable environmental outcomes and addressing climate change, but it also includes attention to the needs of a sustainable society. Societies in which segments of the population suffer extreme poverty, marginalisation and discrimination, lack access to basic healthcare and education, or lack the rule of law or freedom of speech, or must cope with dysfunctional, corrupt or unaccountable public institutions, create social pressures which, in turn, strain environmental and economic resources. It is difficult if not impossible to address the needs of a sustainable planet without taking account of the critical role that a sustainable society plays. It follows that a sustainable future for all requires a coherent vision of how the layers of society, economy, environment, and finance interact, and the role of the financial system in facilitating sustainable livelihoods and societies.

This working paper developed for the Inquiry by the Institute for Human Rights and Business aims to contribute to this debate through considering the role of human rights in delivering a sustainable finance system. It considers three levels of interaction between the financial system and human rights:

(i) the systemic level – how can regulatory actors and key regulatory leverage points incorporate human rights

(ii) the client level – how can financial institutions address the identifiable human rights impacts of their sovereign and corporate clients’ activities

(iii) the consumer level – how can financial institutions address the human rights impacts of their products and services directly on consumers and promote human rights enjoyment through new products and services.

By looking at these three levels, the Paper seeks to highlight the multi-faceted roles and contribution that human rights can make to a more sustainable and more ethical financial system.

The United Kingdom: Global Hub, Local Dynamics

This paper looks at the steps that the UK has taken towards a sustainable financial system shaped by its role as a global financial centre and a distinctive dynamic between social entrepreneurs and civil society organisations, market innovation and policy frameworks.The City of London is not only home to some of the world’s largest financial markets, but also to a range of sustainable finance initiatives that are setting the agenda both domestically and internationally.

Following the financial crisis there has been a shift in the way in which sustainability is being pursued, moving from institutional to a systemic approach. Looking across the system, five key avenues of change within the UK can be identified, all of which have direct or indirect implications for the rules that govern the financial system: Ethical and impact finance; Institutional stewardship; Enhancing capital markets; Prudential governance; and Public balance sheet.

The paper goes on to make recommendations on enhancing the UK’s leadership on sustainability.

Stock Exchanges and Sustainability

Stock exchanges have historically played an important role in economic growth and development through enabling effective capital allocation. However, exchanges and markets more broadly have changed over time, in structure, inter-connectedness and rate of activity. This has happened against a backdrop of growing recognition of the unsustainability of the current economic growth path in both social and environmental terms. Sustainability advocates and others have identified stock exchanges and evolving market structure as both contributors to the problem and a potential partner in the solution.

Given that it is increasingly clear that environmental and social issues have an impact on corporate performance, exchanges (or the relevant securities regulators) must require disclosure in the same way that financial disclosure is required. Exchanges also have a role to play in developing sustainability indices, ratings and associated products that are useful to investors as they seek to shift to more sustainable investment. More fundamentally, it is necessary to address some of the challenges posed by new market structures.

Reforming Electronic Markets and Trading

Electronic markets and high-frequency trading (HFT) now comprise over half of all securities trading on both public “lit” exchanges and “unlit” dark pools and electronic platforms.This paper documents the proceedings of an expert seminar, chaired by Hazel Henderson. It includes contributions from: Hazel Henderson (Ethical Markets Media), John Ramsay (IEX), Dave Lauer (KOR Trading), Robert Zevin (Zevin Asset Management), Joe Saluzzi (Themis Trading), Stuart Valentine (Centerpoint Investment Strategies), Katherine Collins (Honeybee Capital), Dennis Bushnell (NASA), Michaela Walsh (Women’s World Banking) and Simon Zadek (UNEP Inquiry into the Design of a Sustainable Financial System).

The Value of Everything

The purpose of this paper is to begin the process of clarifying global asset value especially as may be affected by the sustainability (or lack thereof) of financial systems, and not just that which is represented by institutional assets under management. This paper, therefore, will answer this question of what is the actual total value of all global asset classes individually and in aggregate, towards helping inform money flows as they relate to this overall global stock, and how do they or can they influence total value, as well as how should these stocks and flows shift to enable the financial system to become truly sustainable and how to measure for that.

Scaling Green Bond Markets for Sustainable Development

This guide to practical options for policy makers to scale up green bond markets for sustainable development is the first result of a partnership between the Climate Bond Initiative, the UNEP Inquiry and the World Bank Group.

The green bond market - bonds whose proceeds are used for green projects, most commonly climate mitigation and adaptation projects - is growing rapidly, with outstanding issuance at US$66bn in June 2015. This growth needs to be accelerated to keep pace with the climate challenge.

The full guide and the executive briefing are available here.

France’s Financial (Eco)system

This report highlights experience from France in improving the integration of sustainability issues into financial decision-making.

A key area of focus has been on improving information and market analysis. Environmental, social and governance (ESG) reporting requirements were first introduced in the New Economics Regulation law of 2001, and strengthened by the 2010 ‘Grenelle II’ law and 2015 the Law on Energy Transition for Green Growth (EETG).

France has also practiced direct public interventions to mobilize capital and enable new markets and expertise to develop. Public financial institutions such as the Caisse des Dépôts and Bpifrance are able to leverage regulated savings accounts and other sources of capital to provide financing in line with sustainability mandates. They committed to mobilize €15 billion towards low-carbon transition by 2017. French institutions have also played a leading role in the development of the green bonds market.

The paper looks at the approach and experience to date, and the next steps for France for implementing and building on the EETG law.

Full report | Executive Summary

Effects of Financial System Size and Structure on the Real Economy

This paper provides an overview of the findings in the empirical economics and finance literature on the effects that various financial system characteristics have on real economic outcomes. Although the empirical evidence on various relationships is mixed, there appears to be relatively robust empirical evidence that: financial deepening promotes economic development only up to a certain size of financial systems relative to GDP and that ‘too much finance’ may actually harm economies; that smaller banks tend to have more stable lender-borrower relationships than large banks and that smaller banking institutions extend more credit to SMEs; that market-based banking provides less financing to the real economy than traditional banking while being more prone to financial crisis; and that more concentrated banking markets are less cost efficient.

Aligning Kenya’s Financial System with Inclusive Green Investment

This report, led by the International Finance Corporation and the UNEP Inquiry into the Design of a Sustainable Financial System, aims to promote inclusive green investment in Kenya. It focuses on policy, structural, and investment innovations across the economy and financial sector that would increase capital flows that support sustainable development.

It looks at the main barriers to inclusive green investment and suggests options to promote inclusive green investment in Kenya, which include: developing cohesive, market-wide policy and regulation; effective enforcement of the market-led Sustainable Finance Principles in the banking; consolidating the pension and insurance sectors; providing structured market support to develop institutional investment vehicles; addressing gaps in existing environmental and social regulation; aligning foreign direct investment (FDI) objectives with the green growth agenda.

Full Report | Executive Summary

Design of a Sustainable Financial System: Netherlands Input to the UNEP Inquiry

This note summarizes the input provided to the Inquiry at a meeting with representatives from the Dutch financial sector ranging from public policymakers and regulators to the largest banks, asset managers, insurance companies and sustainable frontrunners. The policy recommendations include best practices, financial market policy and regulatory innovations to help bring about the green economy and a sustainable financial sector.

Creating a Sustainable Financial System: A Role for Finance Ministries

This paper investigates various roles that finance ministries can assume to promote those policies, regulations and standards which help to create a sustainable financial system. Finance ministries typically interact with the financial sector in many ways, from regulator and supervisory mandate setters to tax authority and sovereign debt issuers. All of these points of leverage empower them to play a key role in making financial systems sustainable.

Sustainability is not often regarded to be part of a finance ministry’s policy mandate. Therefore, this paper looks at cases where finance ministries use their mandates to bring about innovation in the space: Uganda, the Netherlands, the UK, South Africa, France and Germany. In conclusion, under the current mandates of finance ministries, much has already been done to begin creating significant openings that stimulate sustainability in the financial sector.

Designing a Sustainable Financial System in Bangladesh: Summary Report

Innovations in policies, regulations and norms to shape a greener and more inclusive financial system are emerging in many places, but particularly in developing and emerging economies. Bangladesh has been a leader in this regard, as part of a sustained drive to ingrain a socially responsible institutional ethos in the financial sector. This paper provides initial ideas towards a national roadmap which could be developed with leadership and involvement not only of the Bangladesh Bank but also other financial regulators, financial institutions, the microcredit industry, civil society, stock exchanges, credit ratings and private standard setters.

Towards a Theory of Sustainable Finance

The paper presents a theoretical model of a different and more sustainable role for financial agents and markets that is justified by systematic philosophical arguments and reasoning. It is normative rather than descriptive, and does not review how the financial system currently functions, but rather how it ought to function in the future. The goal is to identify a new direction for finance which the majority of commentators will recognize as both desirable and achievable

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Greening China's Financial System

The aim of this book is to develop specific proposals for greening China’s financial system, based on an analysis of current practice in China and an exchange of experience with international experts. It is based on an 18-month project carried out by the International Institute for Sustainable Development (IISD) and the Finance Research Institute (FRI), Development Research Center (DRC) of the State Council, in association with the UNEP Inquiry, and with support from the Fridtjof Nansen Institute.

Exploring Financial Policy and Regulatory Barriers to Private Climate Finance in South-East Asia

Focusing on financial policy and regulatory developments in Indonesia, Vietnam, the Philippines, Cambodia and Malaysia, this reports explores the different barriers that exist to private climate finance flows in the region and concludes that capital is hindered from moving towards low-carbon infrastructure because of a number of policy and regulatory barriers, including a lack of policy consistency and alignment, potential liquidity issues in the banking sector, and structural barriers to climate finance innovation in financial markets.

This report was developed by the Association for Sustainable & Responsible Investment in Asia (ASrIA) in partnership with the UNEP Inquiry and the International Finance Corporation (IFC), with the support of GIZ on behalf of the German Ministry for Economic Cooperation and Development.

Financial Reform, Institutional Investors and Sustainable Development

This study seeks to provide new perspectives and proposals on the relationship between institutional investors and sustainable development in the context of a more sustainable financial system. The report’s key messages advocate for systemic and dynamic policy reform that better aligns institutional investors with policy goals for sustainable development. Seven critical policy objectives that hold the strongest potential for positive change are explored in the report together with fourteen policy tools to get us there.

Fiduciary Duty in the 21st Century

Fiduciary duty in the 21st century looks at fiduciary duty across eight markets (US, Canada, UK, Germany, Brazil, Australia, Japan and South Africa) through a series of events, interviews, case studies and a legal review. The report finds that fiduciary duty is not an obstacle to asset owner action on environmental, social and governance (ESG) factors and recommends that all of the players in the investment process take specific actions in order for ESG to be implemented on a truly global scale in order to move towards a sustainable financial and economic system.

This report is published by the PRI, with UNEP FI, UNEP Inquiry and the UN Global Compact.

Banking & Sustainability: Time for Convergence

In 2014, the UNEP Finance Initiative (UNEP FI) and the University of Cambridge Institute for Sustainability Leadership (CISL) commissioned a study entitled Stability and Sustainability in Banking Reform – Are Environmental Risks Missing in Basel III?, in recognition of the growing number of banking regulators around the world that have started to act on environmental and social issues, and aimed to assess the role that supranational banking regulation might play in this domain. The resulting report pointed to the material links between financial stability and environmental (and social) risks.

This briefing provides a synthesis of the current state of thinking on the topic. It is intended as a means of sharing key findings with policymakers and of engaging them on the matter.

The Role of Policy-Driven Institutions in Developing National Financial Systems for Long-Term Growth

Policy-driven institutions such as national development banks (NDBs) and national green funds (NGFs) attract a growing interest to provide grants, credit-enhancement instruments or lend directly to project proponents in specific green sectors, with billions of dollars allocated by governments to support these interventions. As part of ongoing efforts to better understand their comparative effectiveness to deepen national financial systems, the paper discusses the role of NGFs in catalysing institutional innovations and facilitating access to long-term affordable finance for green, low carbon and climate resilient investment. It argues that the key added value of NGFs might rest in their capacity to foster institutional innovations and partner with other financial and regulatory institutions to increase the diversity and depth of local financial markets in order to enhance the domestic supply of green finance.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Design Options for a Sustainable Financial Sector

Over 200 years ago, Adam Smith put forward the notion that individuals seeking to benefit themselves through trade were led as if by an invisible hand to a situation in which society as a whole could benefit. It can be argued, however, that social objectives such as sustainability and inclusiveness, do not emerge spontaneously through market forces. Such outcomes have to be designed through legal structures and institutions. In other words, for the invisible hand to operate, there needs to be a visible hand behind it. The financial inclusion experiment in South Africa provides lessons for the design of the type of financial sector required for the transition from greed to green.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Towards a Stock-Flow Consistent Ecological Macroeconomics

This paper describes the challenge of modelling combined economic, ecological and financial systems and sets out a series of objectives for modelling the socio-economic transition towards sustainability. It highlights the modelling needs in relation to full employment, financial stability, and social equity under conditions of constrained resource consumption and ecological limits. It outlines the development of a dedicated system-dynamics model for describing Financial Assets and Liabilities in a Stock-Flow consistent Framework (FALSTAFF) and presents some hypothetical results calibrated for the Canadian economy. The selected scenarios illustrate the complex relationships between real and financial aspects of the macroeconomy and allow some initial tests on the financial viability of green investment.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Values Based Banking

Banks play an important role in the economy intermediating between savers and borrowers, and can profoundly contribute to or undermine sustainable development. Values based banking is a diverse movement drawing in community banks, ethical, green and socially oriented banks and including cooperatives, credit unions, privately owned banks, B Corporations and public companies that is purposively oriented towards the development of a sustainable economy. The paper identifies four values that need to be at the heart of a sustainable, or values based financial system – sustainability, transparency, diversity/fairness and inclusion – and highlights key channels for scaling up the impact of values based banking.

Monetary Policy And Sustainability: The Case of Bangladesh

Central banks have wide ranging effects on the economy and society as a whole. Their decisions on monetary policy and sustainability are closely intertwined but the links between the mandates, objectives and instruments of central banks and a broad sustainability agenda are rarely reflected in policy debates. This report focuses on monetary policy and its sustainability impacts in Bangladesh. It lays out areas for exploration and provides initial insights into Bangladesh’s economic development, its sustainability priorities as well as its financial system, and the relationship between these aspects and the country’s monetary policy. It also reviews the mandate, objectives, targets, and instruments of the country’s central bank, as well as the effectiveness of the transmission channels at its disposal. At the same time, it highlights that knowledge gaps on the topic remain significant.

How Does the Development of the Financial Industry Advance Renewable Energy?

This paper investigates how the development of the financial industry connects with renewable energy. The authors analyze 198 countries over three decades in various model settings (fixed effects, random effects, dynamic panel). They use a wide range of proxies for the development of the financial industry and establish that in general this development has a positive impact on renewable energy capacity. Especially, the relative size of the commercial banking industry as well as of private credit and the size of the financial industry play a crucial role in advancing renewable energy investments.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Financial Risk and the Transition to a Low-Carbon Economy: Towards a Carbon Stress Testing Framework

Climate change creates two types of potential risks for financial institutions: physical climate risks leading to physical damage to assets, and carbon risks altering the financial viability of a part of the capital stock and business models. The report looks at how to integrate these two risks into financial risk and valuation models.

New Rules for New Horizons: Report of the High Level Symposium on Reshaping Finance for Sustainability

On July 3rd 2015, the UNEP Inquiry into the Design of a Sustainable Financial System and AXA co-hosted a high-level symposium in Paris to explore the nexus between the long-term challenge of mobilizing finance for sustainable development, and impact of the post-2008 financial reforms. Two further drivers of major change to the financial system were also discussed: the innovative disruption being unleashed by new technologies and business models, and the growing importance of major developing countries in the shaping of the international financial system. Over two hundred participants, including officials from international institutions, central banks and financial regulators, and private sector representatives and academics, debated the current state of the financial system, its purpose for society and the potential and challenges for reshaping it towards sustainability.

This report highlights the themes of the debates and their main conclusions, as well as potential avenues for action.

Aligning Colombia's Financial System with Sustainable Development

This paper, commissioned by the IFC and the UNEP Inquiry, explores the state of green finance in Colombia within the wider economic and financial sector context, and identifies challenges and potential solutions that would enhance the application of environmental, social, and governance (ESG) criteria in the financial sector decision-making process and mobilize more investments for the transition toward a green economy.

Full Report

Executive Summary: [EN] | [ES]

Equity markets, benchmark indices, and the transition to a low-carbon economy

Equity markets have a significant share in financial markets, with institutional investors and market-capitalization weighted indices playing a substantial role. Today’s landscape of market-capitalization weighted indices favours high-carbon sectors and creates biases against green, low-carbon technologies. As a result, institutional investors have lower exposure to the green economy, which, in the context of the transition to a low-carbon economy, may imply capital misallocation creating financial risk.

The research presented in this report on financial products and tools suggests these products are not fully transparent for institutional and retail investors. Policies can play a key role in increasing transparency in financial markets, notably with regard to the diversification of benchmark indices. Potential sub-optimal diversification delivered by the current landscape of mainstream financial products may be a challenge to questions around fiduciary duty. Diversification of indices plays a key role in EC regulation around capital reserve requirements. Finally, more active policymakers may seek to explore incentives around more climate-friendly financial products.

Insurance 2030 - Harnessing Insurance for Sustainable Development

This report presents a suite of options that could strengthen the alignment between the insurance industry and sustainable development through to 2030. Insurance firms and regulators have identified a set of interlocking priorities for insurance looking forward to 2030, such as natural disasters, access to insurance, climate change, socio-economic disruptions and long-term investment.

Across the world, there is a growing range of innovations by insurance companies, multi-stakeholder initiatives and policymakers that better harness insurance for sustainable development, across the dimensions of risk, access and investment.

The Coming Financial Climate: The Inquiry’s 4th Progress Report

Across the world, a growing number of governments, regulators, standard-setters and market actors are starting to incorporate sustainability factors into the rules that govern the financial system. The Inquiry was established in January 2014 to understand this fast-moving trend and to produce a set of policy options to advance good practice. Our work with a range of partners including central banks, financial institutions and international organisations has highlighted a diversity of catalysts and approaches across banking, capital markets, insurance and investment.

Full Report

Executive Summary: [AR] | [CH] | [EN] | [ES] | [FR] | [PT] | [RU]

Green SMEs and Access to Finance

The paper focuses on the role of banking diversity on access to finance for SMEs in the green economy. It demonstrates the relationship between the green economy and SMEs, and argues that access to finance is not just a function of broader macroeconomic factors but also the structure of the banking system. Specifically, it demonstrates that different types of banks, as a result of differences in balance sheets, lending horizons, and local presence, were equipped differently to service SMEs financing needs. In particular, the analysis highlights the role of non‐commercial banks in a diverse banking sector to provide SME lending. Banking diversity contributed to a better servicing of the different financing needs in the economy and ensures a larger stability in lending to SMES during financial instability.

Design of a Sustainable Financial System: Swiss Team Input into the UNEP Inquiry

The UNEP Inquiry into the Design of a Sustainable Financial System identifies financing as one of the greatest challenges in advancing sustainable development. Switzerland is strongly committed to environmental issues. In combination with its advanced financial sector, Switzerland is in a unique position to present an opportunity for the transition to a green and inclusive economy. The Swiss team for the UNEP Inquiry gathers representatives of the financial sector, NGOs and academia along with government representatives to reflect on the Inquiry’s questions regarding a financial system aligned to sustainable development. The recommendations and ideas presented within this report is the outcome of the Swiss Team’s thought process, and it has to be acknowledged that more work is needed to validate some of them and formulate plans for action

Towards a Sustainable Financial System in Indonesia

Placing Indonesia’s economy onto a green and sustainable development pathway, as envisaged in the National Long Term Development Plan, will require a large mobilization of investment. Estimates of the annual investment needed are in the order of US$300‐530 billion, with a large portion of this investment needed in critical infrastructure, as well as environmentally sensitive areas such as agriculture, forestry, energy, mining and waste. In addition, financing for SMEs and industry is critical for creating jobs and boosting productivity.

Aligning the Financial Systems in the Asia Pacific Region to Sustainable Development

Adequate, appropriate finance is crucial for sustainable development in the Asia-Pacific region. The United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) estimates that the region needs to invest around US$2.5 trillion a year between 2013 and 2030 to achieve key sustainable development goals. The region’s developing financial and capital markets provide a unique opportunity for innovative financial and capital market policies, regulations and standards that can align private capital flows to the financing needs of sustainable development. Notably, the region’s savings, US$8.4 trillion in 2012, represents more than half of the world’s total savings, the channeling of which will make a significant difference to regional and international progress towards sustainable development.

What Role for Financial Supervisors in Addressing Systemic Environmental Risks?

Since the global financial crisis, financial supervisors have developed a new macroprudential policy framework: mechanisms to identify systemic financial imbalances and instruments to address these. At the same time, a literature is rapidly developing on financial shocks that may originate from ecological imbalances, triggered by either intensified environmental policies to protect ecological boundaries or due to the economic costs of crossing these. However, financial supervisors have so far given little attention to this ecological dimension. This allows systemic financial imbalances resulting from ecological pressures to build up and concentrate in financial institutions and markets. This paper sketches the ecological dimension of the macroprudential policy framework and illustrates the working for the case of carbon emissions.

A preliminary version of this paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

Establishing China’s Green Financial System: Final Report of the Green Finance Task Force

In 2014 the Research Bureau of the People’s Bank of China convened a Green Finance Task Force made up of 40 experts from ministries, financial regulators, academics, banks and other financial institutions, complemented by international experts brought together by the UNEP Inquiry to consider the steps that China could take to establish a green financial system. This report is the outcome of this process, and in it the Research Bureau of the People’s Bank of China presents an ambitious framework of recommendations.
The main report is complemented by a bilingual summary, as well as detailed background reports on the theoretical framework, lessons from international experience and on each of the fourteen recommendations. All the documents are available here.

Aligning Africa’s Financial System with Sustainable Development

Adequate, appropriate finance is crucial for Africa’s sustainable development. Its availability depends on African countries developing financial systems that can effectively draw on and deploy to best use domestic and international, private and public sources. With the growing importance, in particular,of both domestic sources of finance, and private investment (both domestic and international), it is critically important that Africa’s financial and capital markets develop in ways that will promote sustainable development on the continent.

Aligning the financial system with sustainable development: Pathways to Scale

Pathways to Scale, the Inquiry's third progress report, explores how innovative ideas and practices can be made more effective, adopted more widely, and taken to scale—and as a result move the trillions that are required. Scaling-up proven but limited innovations, is a common development challenge, requiring the adept handling of inevitable technical and institutional barriers, and the creation of viable pathways which can overcome outdated but often resilient conventional wisdoms.

The Case for Investor Engagement in Public Policy

Public policy sets the rules of the game. Public policy critically affects the ability of long-term investors to generate sustainable returns and create value. Public policy also affects the sustainability and stability of financial markets, as well as social, environmental and economic systems. Based on interviews with an international group of investors and policymakers, this report provides the first analysis of the “why, what and how” of policy engagement by investors to build a sustainable financial system. It offers practical, effective recommendations, proposing a five-step approach, the 5C’s, to improve the integration of investor perspectives on environmental, social and governance (ESG) factors in the public policymaking process.

This report is produced by the PRI with the UNEP Inquiry.

Aligning the Financial System with Sustainable Development: Insights from Practice

Achieving sustainable development depends on mobilising sufficient capital to finance the long-term health of the real economy. Concerns are mounting that recovery and growth are being held back not only by the current debt overhang and reduced risk appetite but also by structural factors (including within the financial system).

The Environmental Risk Disclosure Regime: Navigating Complexity in Global Financial Markets

In recent years, a plurality of different governance initiatives has emerged that are designed to expand the disclosure of environmental risk within financial markets. Unfortunately, environmental risk disclosure has yet to be assessed as a field of governance activity in addition to its potential effectiveness in improving disclosure within financial markets. This paper addresses this gap by describing environmental risk disclosure as a “regime complex,” defined by a field of fragmented but related governance initiatives that lacks an overarching hierarchy.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014.

The Brazilian Financial System and the Green Economy: Alignment with Sustainable Development

Report released by the Center for Sustainability Studies at Getulio Vargas Foundation (GVCES/FGV/EAESP) - prepared for UNEP and FEBRABAN in the framework of Inquiry into the Design of a Sustainable Financial System

Financial System Impact of Disruptive Innovation

This report examines disruptive innovations and their implications for the design of a green and inclusive financial system – innovations driven by top-down, centralised innovation in policy and regulation or by bottom-up, decentralised financial market innovation; innovations stimulated by long-terms shifts in environmental and social factors or technological innovations. The scale of the challenge of the transition to such a system calls for flexibility and experimentation with a diverse set of policy approaches.

Financial Dynamics of the Environment Risks, Impacts, and Barriers to Resilience

This Working Paper summarizes the underlying logic for why the financial sector should care about the state of the environment and environment-related risks; it reviews the main structural barriers that could prevent the financial system from managing such issues; it also identifies the main researchers and organizations undertaking work on these topics internationally. The paper should be a useful initial reference guide to those concerned with both how environment-related risks could affect the financial sector and what financial institutions can do to manage such risks.

Central Banks Can and Should Do Their Part in Funding Sustainability

Central banks, when purchasing financial assets, should consider selecting assets that will promote sustainability, including climate change mitigation and adaptation. During the 2008 financial crisis, central banks deployed unconventional means to rescue failing banks and insulate economies from depression. Their asset purchases have had strong social impacts, but traditionally, central banks have not explicitly factored social objectives into their decisions or evaluated their impacts beyond the narrow monetary domain.

This paper was presented at the UNEP Inquiry/CIGI Research Convening which took place in Waterloo (Canada) on 2-3 December 2014. 

Aligning the Financial System with Sustainable Development: An Invitation

'Aligning the Financial System with Sustainable Development: An Invitation' seeks to frame the challenge as an opportunity to accelerate the transition to a green inclusive economic pathway, and a challenge that has to be addressed if that transition is to take place in a timely manner. The Invitation makes clear that there are already many moves to reshape financial markets such that they are better aligned to sustainability outcomes - the challenge is not so much to invent something new than to crystallize, amplify and accelerate emerging policy innovations.