Greener Finance

We must harness the financial system to channel flows to enterprises that are in tune with sustainable development.
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One of the Inquiry’s most striking findings was that emerging and developing countries are often leading this quiet revolution.
One promising innovation is the rapid growth of the “green bond” market, where global issuance grew to $42 billion in 2015.

The Paris Agreement has sent clear signals to markets and to the financial sector that more than 190 countries are going to vigorously pursue the transition to a low-carbon economy that’s resilient to mounting climate change. It is no longer a question of if this transition will happen, but of how fast. Some of the key changes required lie outside the financial sector, such as changing relative prices of harmful goods and services vis-à-vis those that benefit the environment and the development of new technologies to facilitate changes in consumption patterns. Finance, however, has an important role to play.

As with all major changes, the transition to a low-carbon economy poses challenges and opportunities. One opportunity lies in harnessing the innovative capacity of the financial system to channel a larger share of the world’s saving flows to wealth-creating enterprises that are in tune with sustainable development. Some of the financial tools that need to be deployed have been identified in the UNEP´s Inquiry report, The Financial System We Need. I was delighted to serve on the Inquiry’s Advisory Council, scrutinizing the diversity of innovations in market practice and policy action that are growing around the world.

One of the Inquiry’s most striking findings was that emerging and developing countries are often leading this quiet revolution. I believe Brazil to be one of those leaders, fostering an ecosystem of sustainable finance, blending public and private initiatives. As far back as 2007, the BOVESPA stock exchange introduced its Corporate Sustainability Index, part of the wider global movement of Sustainable Stock Exchanges.

More recently, in 2014, the Central Bank of Brazil introduced requirements for all banks to establish socio-environmental policies and risk systems as a routine part of bank governance. Alongside these efforts, FEBRABAN, the Brazilian Federation of Banks, has also introduced a self-regulation framework for its members.

These actions give Brazil firm foundations to build on – and we can do more by focusing particularly on three key priorities.

The first is to find new ways to mobilize capital for the green economy. One promising innovation is the rapid growth of the “green bond” market, where global issuance grew to US$42 billion in 2015. This is still a tiny fraction of the US$100 trillion global bond market, but market players and financial authorities in such emerging economies as China and India are taking steps to move it to the next stage.

In Brazil, Febraban has carried out initial research with Getúlio Vargas Foundation, a leading Brazilian think tank, to scope the market potential, looking at opportunities in the key agri-business area, as well as in clean energy. This year offers the chance for key stakeholders in Brazil to come together to design a green bond roadmap for the country.

A second priority is to better understand how environmental factors can affect the financial risks faced by banks and other institutions. The changing climate – and resource stress such as drought or extreme weather events – can potentially have serious implications not just for the clients of banks, but also for the resilience of their own operations.

More and better information on those risks can help practitioners assess their portfolios and use scenarios analysis to improve their understanding of the implications of a shifting exposure to environmental factors, including low-probability but high-impact tail risks. International cooperation to develop disclosure standards and common methodologies and tools would be a useful next step.

Finally, without clear indicators, we will not be able to measure progress towards a sustainable financial system. It is hard to manage what is not measured. Currently, however, we lack a shared set of metrics at the international level. To tackle this in Brazil, Febraban and Getulio Vargas Foundation have undertaken the first assessment of the amount of financial resources that are currently allocated by the main banks in the country towards the green economy.

The first results indicate that the total amount of “green finance” allocated to corporate clients was US$45 billion in 2014, or 9.6 per cent of total corporate lending.

The largest segment was sustainable transport, followed by agriculture and renewable energy. Again, international collaboration is essential here to develop common methods to enable aggregation of data worldwide and comparison across countries.

Global cooperation is now intensifying, building on action at the national level. One example is the recent launch of a new task force on Climate Change Disclosure by the Financial Stability Board. Another is China’s decision to establish a new green finance study group as part of its presidency of the G20 group of nations in 2016. These initiatives present opportunities to mainstream sustainability into the world’s largest financial systems.

If we bring together the best of private action with smart policy frameworks at both the national and international levels, we can make 2016 a greener year for finance.