Annual Overview 2017

The Inquiry's annual overview provides a summary of our work on aligning the financial system with sustainable development during 2017, divided in four themes:

  • Country engagement
  • International collaboration
  • Cross-cutting themes: GreenInvest and Green Digital Finance Alliance
  • Selected events
Establishing China’s Green Financial System: Progress Report

The report finds that China – which put green finance on the G20 agenda during its 2016 presidency – is following through on its political commitment to boost the financing required to do this. The report looks particularly at progress since the State Council in August 2016 approved a set of recommendations for action on greening China’s financial system.

The report identifies many specific advances, including:

  • China has become a new growth driver in the global green bonds market. In the first half of 2017, China issued 36 green bonds worth RMB77.67 billion (US$11.7 billion). Of these bonds, the number and size of bonds grew 278 per cent and 28 per cent respectively compared with 2016.
  • Many provinces and cities have established regional green development funds. By the end of 2016, 265 green funds were registered with the Asset Management Association of China, of which 215 were green industry funds. Some 121 of these were established in 2016.
  • By the end of June 2017, 7,826 green and low-carbon projects, with a total investment of RMB6.4 trillion (US$0.96 trillion), were included in the national public-private partnerships projects catalogue, accounting for 57.7 per cent of the projects and 39.3 per cent of the investments in that catalogue.
  • China established five distinct green finance pilot zones to explore different development models for the local green financial system against different backgrounds.
  • The Chinese government and the business community have started to attach great importance to developing a green industry chain for outbound investment. With the Guidelines on Promoting Green Belt and Road, the APEC Green Supply Chain Network, and the Initiative on Environmental Risk Management for China’s Outbound Investment, China is going global in its green investment practices.

Summary (English) | Summary (Chinese)

Collaborative Initiative for Green Finance in Singapore

This Report aims to mainstream and socialise the idea and opportunities associated with Green Finance, as well as to explore how Singapore as a financial hub can offer Green Finance as additional expertise to better serve the needs of the ASEAN and Asia region. Besides the members of the financial community, the Report hopes to reach out to those in the public and corporate sectors to start thinking about the possibilities and opportunities associated with Green Finance. The financial system is complex and involves many actors, and the Government and Singapore’s corporations are key stakeholders that the Collaborative Initiative for Green Finance in Singapore hopes to engage with and push to action.

Green Finance Opportunities in ASEAN

This report lays out ways in which the ASEAN region can unlock this investment and protect its people, environment and economies. It provides an analysis of green investment opportunities in the region from 2016 to 2030, assesses the characteristics of those opportunities, and estimates current green finance flows. Based on a literature review and expert interviews, it also lays out some of the barriers to scaling up ASEAN green finance and how to address them.

Drawing on both top-down and bottom-up analysis, the report finds that the demand for additional ASEAN green investment from 2016 to 2030 is an estimated US$3 trillion. This opportunity represents a new ASEAN green investment market 37 times the size of the global 2016 green bond market. This investment is spread across four sectors: infrastructure (US$1,800 billion), renewable energy (US$400 billion), energy efficiency (US$400 billion) and food, agriculture and land use (US$400 billion).

Roadmap for a Sustainable Financial System

The objective of this Roadmap is to propose an integrated approach that can be used by all financial sector stakeholders—both public and private—to accelerate the transformation toward a sustainable financial system. This approach can bring policy cohesiveness across ministries, central banks, financial regulators, and private financial sector participants to focus efforts.

The ultimate vision that the Roadmap seeks to reach is one of a financial system that integrates sustainability considerations into its operations, including the full costing of positive and negative externalities that sustainability implies, leading to a reorientation of the flow of resources toward more inclusive and sustainable activities.

Full report | Executive summary | Interim summary

Greening the Financial System: Exploring the Ways Forward

This briefing summarises the discussions held during the “Greening the Financial System: Exploring the Ways Forward” event in Washington, D.C. on 12 October 2017. The goal of this convening, the fourth in the series, was to examine lessons from developing and implementing green finance initiatives over the last few years and to highlight successful examples and opportunities, particularly from China and of green digital finance.

The key messages are:

  • Strong governance is critical in driving progress in green finance. Demonstrated leadership in developing domestic green policy guidelines and markets have resulted in the increase in demand and issuance of green finance products and can further support green finance growth and harmonization.
  • The definition of green finance is evolving. From the financing of investments that provide environmental benefits in climate change mitigation and adaptation, ”green finance” is evolving to include sustainable natural resource management, inclusive finance, education and other sustainable development criteria identified by the Sustainable Development Goals (SDGs) in the 2030 Agenda.
  • Financial technology can reshape business opportunities and provide green innovators new ways to access capital, to alter
    consumer behaviour and to scale green digital finance. The development of more cooperative platforms, such as the Green
    Digital Finance Alliance (GDFA), will further facilitate the scaling of green digital finance.
  • China recognizes the strategic imperative of green finance and has emerged as a prominent leader in promoting and implementing it. The Belt and Road Initiative is an opportunity for China to further incorporate green finance and climate risk policies, while sharing successful experiences, and encourage adoption of green finance by emerging economies.

The previous briefings in the series are available here and here.

Green Foreign Direct Investment in Developing Countries

This paper focuses on the actual and potential role of foreign direct investment (FDI) in achieving the transition to a low-carbon, just and sustainable world and, more specifically, FDI flows into developing countries.

The particular implications of FDI on the environment – both potentially positive and negative – have given rise to an interest in the concept of “green FDI”. In short, “green FDI” can be thought of as FDI that advances progress on environmental and climate goals, protection and resilience, and avoids negative impacts on the environment or climate. But beyond that broad notion, there is no clear agreement about what “green FDI” actually is or should be. Various public and private sector actors have taken steps to define green FDI, calculate present flows and stocks, and assess funding gaps that must be filled in order to meet the challenges as defined in the Sustainabe Developmet Goals, the Paris Climate Agreement, and other environmental treaties and initiatives.

There is reason to be hopeful about the potential contributions of green FDI; but real progress requires a more accurate and robust definition of “green FDI”, and stronger commitments across different layers of government and by private sector actors to ensure FDI helps address modern environmental challenges. This paper attempts to aid the effort by taking stock of where we are and highlighting potential ways forward.

Sustainable Insurance: The Emerging Agenda for Supervisors and Regulators

Key sustainability factors are now recognized as potentially significant for the success, safety and soundness of the insurance sector – inspiring reactions by supervisors and regulators. In its role as risk manager, risk carrier and investor, the global insurance sector plays a cornerstone role in the management of sustainability-related risks and opportunities. The risk transfer tools of insurance along with the deployment of its long-term capital base are highly relevant for many of the 17 Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change.

The goal of the Sustainable Insurance Forum (SIF) is to strengthen insurance supervisors’ and regulators’ understanding of and responses to sustainability challenges for the business of insurance. Convened by UN Environment, the SIF provides a global platform for knowledge sharing, policy dialogue, international collaboration, and identification of best practices.

Green Finance Progress Report

The G20 Green Finance Synthesis Report adopted at the G20 Leaders Summit in Hangzhou in September 2016 set out seven options identified by the G20 Green Finance Study Group (GFSG) to accelerate the mobilization of green finance. This paper highlights some of the progress made against these seven options in G20 members and internationally since June 2016. Progress described is illustrative and non-exhaustive, drawing on voluntary contributions from GFSG members and a broader review of global trends. While not comprehensive, it provides a useful summary of many of the key developments and the overall progress made to mobilize private capital for green investment.

Progress observed and reported in this paper indicates that momentum is growing in mainstreaming green finance into the architecture and practice of financial and capital markets. This momentum has directly resulted in an increased mobilization of green finance. UN Environment tracks a range of green finance measures including, for example, green financing mobilized, policies, regulations, standards, guidelines, principles and fiscal incentives. This report shows that more measures related to green finance have been introduced since June 2016 compared with any other one-year period since 2000.

Shifting Perceptions: ESG, Credit Risk and Ratings – part 1: the State of Play

This report looks at why ESG factors matter in credit risk analysis, what investors and credit-rating agencies (CRAs) are currently doing on this front, and what their expectations are.

The report highlights several disconnects between investors and CRAs, particularly regarding views on which time horizons to consider. It also raises questions related to the role of regulators, products that complement traditional credit rating tools, and how credit analysts can be incentivised to incorporate ESG factors more systematically in their analysis.

Highlights from the report include:

  • Investors and CRAs are ramping up efforts to consider ESG factors in credit risk analysis. Resource allocation is clearly increasing with research mostly focused on environmental issues. However, ESG integration is not yet systematic.
  • Investors’ and CRAs’ views on the visibility and materiality of ESG factors vary, partly because they look at credit risk from different perspectives.
  • CRAs already consider many ESG factors in credit rating analysis, but must communicate this better. Expertise in this field is improving but it is still hard to demonstrate that ESG consideration is prompting changes to credit rating outcomes; while some evidence is emerging, it is still patchy.
  • On the investor side, ESG analysis is not consistently taken into account in credit risk assessment; often it is advisory in nature and securing internal investment buy-in for ESG consideration is still a work in progress.
Mobilizing Sustainable Finance for Small and Medium Sized Enterprises

Small- and medium-sized enterprises (SMEs) contribute significantly to growth, employment, innovation and social cohesion across the G7. They are also a major driver of innovation for sustainable development. In order to accelerate the sustainability transition, further attention should be given to the financial needs of SMEs. To address this opportunity, Italy’s Ministry of Environment included the issue of how to improve access by SMEs to green and sustainable finance as part of its 2017 G7 programme. This report takes stock of existing activities in G7 countries, identifies a range of emerging lessons and suggests possible next steps for action by G7 countries. This report focuses on green and sustainable finance – in other words finance that delivers environmental benefits, within the context of the wider shift to sustainable development.

Financial Centres for Sustainability

This report has been prepared as part of Italy’s G7 Environment programme to explore how financial centres can contribute to the delivery of the Sustainable Development Goals (SDGs) and the Paris Climate Agreement. It takes stock of the sustainability agenda that is emerging for financial centres, reviews current practice across leading centres in G7 countries and suggests priorities for further action. This report focuses on green and sustainable finance – in other words finance that delivers environmental benefits within the context of the wider transition to sustainable development.

The report finds that G7 and other countries could encourage their financial centres to develop strategies that scale up green and sustainable finance – including through international cooperation that would create “a race to the top”.

Scaling Citizen Action on Climate: ANT Financial’s Efforts Towards a Digital Finance Solution

This report shows that almost half of Ant Financial Services Group’s 450 million users signed up to Ant Forest, an app that gamifies carbon footprint tracking – cutting greenhouse gas emissions and demonstrating the massive potential of Fintech (financial technology) for supporting sustainable development. By the end of January 2017, the approach had avoided 150,000 tonnes of carbon dioxide emissions, thanks to the accumulation of small behavior changes, with much more to come.

Report (English) | Report (Chinese)FAQ

Greening the Financial System: Enhancing Competitiveness Through Economic Development

This briefing summarises the discussions held during a roundtable for market and policy leaders in Washington, D.C. on 20 April 2017. The goal of the event was to explore pathways to scale and speed up green finance and to harness its benefits for long-term sustainable growth and competitiveness.

The key messages are:

  • Green finance made substantial progress and gained prominence as an important asset class. New green financial products are facilitating investment in green and resilient businesses and infrastructure.
  • The Task Force on Climate-related Financial Disclosures (TCFD) recommendations can alter market practice by boosting environmental risk visibility, assisting investment and lending decision-making. Early evidence points to promising impacts on innovation, strategy shifts and cultural change.
  • Effective public and private action is needed for a step change in the speed and scale of green finance, keeping in mind the broader effects on competitiveness, risk management and sustainable development.
  • Smart use of public money, such as using blended finance to lower risks that private investors avoid, is critical to maximize the leverage of private capital.
  • Development banks and financial institutions play a key role in catalysing private finance through balance sheets as well as standard setting power.
  • The rapid development and disrupting potential of financial technology (fintech) holds great opportunities to broaden the investor base and unlock new business models for green finance.

This briefing is the second in the series; the first one is available here.

Financing the Transition

This paper presents a fictional Fast Track scenario, suggesting the key features of how a rapid transition to a low-carbon, resilient economy could play out in the financial system in terms of impacts on assets as well as on financial policy. This scenario helps to challenge some of today’s assumptions, notably that climate disruption is distant in time, largely driven by developed countries, has limited implications for financial authorities and is set apart from questions of financial culture and conduct.

This paper was presented at the Future Horizons conference, which was held in April 2017. The conference report and all the expert papers presented are available here.

A Review of International Financial Standards as They Relate to Sustainable Development

The report, a companion to the second edition of "The Financial System We Need", examines how the international financial standards currently relate to the goals of sustainable development and explores opportunities for better alignment as a way to promote greater stability, resilience and fairness to the financial system.

The key messages are:

  • Financial standards have a significant impact on achieving sustainable development.
  • Financial standards currently relate to sustainable development issues in a fragmented way.
  • Unrealized synergies between financial standards and sustainable development could be built upon.
  • Climate change is only recently gaining traction within the standard-setting community.
  • Intergrating financial inclusion into financial standards could be built upon for the broader consideration of social and environmental factors.
  • Financial standards can be used to transform the culture and values of the financial sector.
On the Role of Central Banks in Enhancing Green Finance

The paper examines the role of central banks in ‘greening’ financial systems. Given the enormous investments needed to bring about a green transformation, the financial sector will have to play a central role in allocating resources towards a sustainable and green economy – and stop financing activities that harm the environment. Against this backdrop, the paper examines the extent to which environmental factors impinge on central banks’ conventional goals and provides a theoretical analysis of the cases for and against central banks to respond to environmental and sustainability challenges. Moreover, the paper explores the ways in which central banks (as well as financial regulatory authorities) can impact investment decisions and the creation and allocation of credit through monetary as well as micro- and macroprudential policies, including disclosure requirements, climate-related stress testing and differentiation of reserve or capital requirements according to environmental impact. Although theoretical in nature, the paper is enriched by real-world examples. While making the case for a pro-active, ‘sustainable development role’ of central banks, the paper also discusses the risks of overstretching central banks’ mandates and vesting too much power in unaccountable institutions as well as the division of labour between central banks and other institutions.

Financing the Future

Italy’s Ministry of Environment, Land and Sea, in partnership with UN Environment, launched the National Dialogue on Sustainable Finance in February 2016 to identify practical market and policy options to mobilize Italy’s financial system for sustainable development and climate action.

The conclusions of the paper are:

  • Italy faces a strategic opportunity to harness its financial system to support the transition to a low-carbon, inclusive and sustainable model of development.
  • The National Dialogue on Sustainable Finance was established to identify options that would improve the integration of sustainability factors across Italy’s financial sector.
  • The dialogue identified a growing awareness and increased actions by financial institutions across the banking, capital markets, institutional investment and insurance sectors.
  • The dialogue also recognized the barriers that prevent the scaling up of this good practice, including mispricing, short-termism, and low levels of awareness and capability.
  • The dialogue identified 18 specific options, grouped in four areas: policy frameworks; financial innovation; market infrastructure; and knowledge building

Summary: English | Italian

Full report: English

Fintech and Sustainable Devlopment - Assessing the Implications

The report, a companion to the second edition of “The Financial System We Need”, assesses how the financial system’s core functions are likely to be disrupted by financial technology (“fintech”) innovations and how they could help – or hinder – efforts to align financing with sustainable development. It considers ways to:

  • Unlock greater financial inclusion by reducing the costs for payments and providing better access to capital domestically and internationally;
  • Mobilize domestic savings at a scale that will enable long-term investment directed at the long-term sustainability of the real economy;
  • Disrupt the provision of financial protection, risk management, risk transfer and risk diversification for vulnerable and exposed communities, real economy assets and infrastructures, and nature’s ecosystems;
  • Collect, analyze and distribute information on the financial system and the real economy for better economic decision-making, regulation and risk management;
  • Provide financial markets with the level playing field and market integrity needed for long-term real economy investments aligned with the sustainable development agenda.

The report also presents an innovative analysis of how advances in three digital technologies – blockchain, machine learning and artificial intelligence (MLAI) and the Internet of Things (IoT) – could lead to revolutionary innovations for building trust, transparency and traceability for financial transactions and make tomorrow’s financial system far more efficient in mobilizing green finance.

Action is needed now to shape the emerging direction of fintech. The report therefore includes some key steps for the ‘fintech for sustainable development’ journey, such as:

  • Ensuring that fintech is an integral part of financial system development plans, particularly at the national level, and especially for developing countries.
  • Establishing a platform of leading fintech companies to influence the right enabling businesses, policies and standards to connect fintech with sustainable development.
  • Incentivizing fintech alignment with sustainable development by, for example, supporting venture capital and social impact funds to fund start-ups with sustainable development ambitions.
  • Creating a challenge fund to create a global community of purpose that can pilot and create replicable solutions over time.

Full Report | Executive Summary

Towards a Performance Framework for a Sustainable Financial System

This paper is intended to serve as a window on the Inquiry’s analytical approach, providing a deeper understanding of the unifying criteria for evaluation of multiple market designs for financial systems in a variety of economic, political and social settings. It is also intended to provide a foundation for investors and corporate management and policymakers, including central bankers, finance ministry professionals, market regulators as well as legislators, regulatory and executive officials, to shape consideration of the sustainability of their financial systems. Finally, it is hoped that this paper will inspire and inform further inquiry into the relationships between market designs and sustainability and inclusiveness by academics and other researchers. In short, this paper is intended to provide structure to an entirely new convention for understanding the relationships between financial systems and sustainability and inclusiveness.

Financing the Transition – How Financial System Reform Can Serve Sustainable Development

This report is focused on understanding how the growing number of policy and regulatory measures taken in the financial system can support a real economy in transition, seeking to answer the question: ‘what measures are most needed to deliver efficiency, effectiveness and resilience in ways that the financial system can contribute to specific sustainability priorities in the real economy?’

Financing the Transition – How Financial System Reform Can Serve Sustainable Development

This report is focused on understanding how the growing number of policy and regulatory measures taken in the financial system can support a real economy in transition, seeking to answer the question: ‘what measures are most needed to deliver efficiency, effectiveness and resilience in ways that the financial system can contribute to specific sustainability priorities in the real economy?’

The Financial System We Need: Form Momentum to Transformation

Download the policy summary: [AR] [CH] [EN] [ES] [FR] [PT] [RU]

Our follow-up annual report reveals a doubling in policy actions over the past five years to align the global financial system with sustainable development. Policy and regulatory measures by finance ministries, central banks and financial regulators to promote sustainable finance have risen to 217 and now exist in nearly 60 countries. The report calls for more effort to turn this momentum into genuine global transformation and makes a series of recommendations to help accelerate this process.

Financing Sustainable Development: Moving from Momentum to Transformation in a Time of Turmoil

English | French

The 2030 Agenda for Sustainable Development and the Paris Agreement represent the most ambitious multilateral goals ever set. These goals require an unprecedented mobilization of both public and private finance – some US$90 trillion over the next 15 years.

Momentum is also growing to align at a more fundamental level the financial system with sustainable development. Despite this positive momentum, progress remains inadequate, with an accelerating decline in all major ecosystems, and growing economic inequality and social challenges.

Five steps are proposed to embed financing for sustainable development at the heart of tomorrow’s global financial system and deliver the much-needed transformation.
1. National financial market reform and development plans to embrace consideration of the Sustainable Development Goals and Paris climate commitments, and vice versa.
2. Financial technology mobilized to support the accelerated alignment of the financial system with sustainable development, particularly for developing countries.
3. Public finance to undergo a disciplined analysis and, as required, redeployment to align to the Sustainable Development Goals and Paris
climate commitments.
4. Investing in awareness-raising and building key capabilities, so that the financial community can effectively implement new approaches and plans.
5. Development of common methods, tools and standards to enable sustainable development priorities to be measured and incorporated into financial practice.

Definitions and Concepts: Background Note

This short paper provides an initial mapping of existing practice in G20 and other countries and, where relevant internationally, highlights areas of convergence and difference, as well as distinctions between green, climate, and sustainable finance. It covers:
1. Definitions of ‘green finance’ that countries adopted
2. Thematic typologies of green investment in particular industries
3. Clarification of the scope of ‘green finance’ in comparison with other related concepts such as climate finance and sustainable finance

Greening the Banking System

This paper takes stock of G20 experience with green banking, focusing on market practice. It assesses the evolving green banking agenda, focusing on mainstreaming and mobilization, drivers of progress, and key barriers. It concludes with a set of options for consideration by the G20.

This input paper has been prepared by the authors as a contribution to the G20 Green Finance Study Group (GFSG) but has not been endorsed by it nor does it represent the official views or position of the GFSG or any of its members.

Government Subsidies to the Global Financial System

The primary goal of the present study is to understand the character and to estimate the total value of subsidies, both direct and implicit, from governments to the private sector institutions that make up the global financial system.
A secondary objective of this analysis is to deepen the understanding of the extent to which the existing suite of subsidies to the private financial sector tends to advance or obstruct the global effort to achieve the United Nations Sustainable Development Goals (SDGs).

Although the full impact of many of the policies that create subsidies to the global private financial sector cannot be estimated today with a high degree of confidence, the study offers a conservative estimate to promote a broader and more detailed discussion of these issues and to stimulate further investigations at the national level by others.

A preliminary agenda for action in this area could consider the following research priorities: 1) Expand the scope of analysis, as a better understanding of subsidies to the demand-side of finance is needed, and 2) Expand the geographic range of coverage, as the analysis has highlighted significant gaps in the geographic coverage of relevant data on subsidies to different asset classes in the global financial system.

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.

Full report | Summary

Experience and Lessons from South Africa: An Initial Review

This paper provides an outline of South Africa’s financial sector, the environmental and social issues it faces, the response of government and financial regulators and the extent to which has resulted in measurable sustainable investment flows.

In South Africa environmental, social and governance (ESG) considerations appear on the agenda of strategic discussions and are part of the financial sector’s mindset. Key initiatives include the Financial Sector Charter,JSE Integrated Reporting requirements, JSE Social Responsibility Index; United Nations Principles for Responsible Investments (PRI), Code of Responsible Investment for South Africa (CRISA), and the Pension Fund Act (Regulation 28).

The Experience of Governance Innovations in South Africa

This paper explores whether the extent to which Regulation 28, CRISA and JSE Integrated Reporting Standards (referred to as governance policy innovations) have influenced the level of investment that integrates Environmental, Social and Governance (ESG) in its decision making process.

It finds that while governance innovations have increased actors’ awareness about interrelationship between ESG factors and financial performance it has not resulted in the  systematic integration of ESG issues into the entire investment processes and into value-creation models.

Sustainable Infrastructure and Finance

Infrastructure is often referred to as the backbone of the global economy and plays a fundamental role in societies by enhancing the quality of life and increasing productivity. In addition to its effects on society and the economy, infrastructure can have significant impacts on the environment, depending on the choice of infrastructure.

Approximately 75% of the infrastructure that will be in place in 2050 does not exist today. Getting such a scale of infrastructure development right will be critical to whether or not the world locks into a high- or low-carbon growth path. Therefore, if the world wants to meet the Sustainable Development Goals (SDGs), adequate infrastructure development is part of the answer.

To foster the development of sustainable and resilient infrastructure, a clear standard to help integrating sustainability and resilience criteria in infrastructure projects is crucial. Such a standard for sustainable and resilient infrastructure projects would lead to benefits for both projects developers and financiers, and help address the current infrastructure investment barriers.

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)

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.

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.

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.

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.

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.

Aligning the Financial System with Sustainable Development in the United States of America

The US financial system is undoubtedly among the largest, most innovative and most sophisticated in the world. It is also clear that this is both a benefit and an impediment to non-governmental investment in sustainability and inclusiveness. To date, the actual investment in infrastructure and sustainability does not meet current needs, especially those related to maintaining climate change to within manageable bounds.

The paper examines the decision process embedded in the US financial markets that determines what endeavours are funded by capital investment and suggests areas that can be addressed to improve results.

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 (English) | Full report (French)Executive Summary (English)

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.

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]

Policy summary  [AR] | [CH] | [EN] | [ES] | [FR] | [PT] | [RU]


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.

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.

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]

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

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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.