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Finance Sector Reform is at the Heart of the Sustainability Challenge

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By Mark Halle, October 9, 2015

The second half of 2015 carries a growing sense of anticipation.

In late September, the UN member States adopted a development agenda covering the 15 years to 2030, including 17 Sustainable Development Goals (SDGs) and 169 associated targets. We now, formally, know where we want to go.

On the trade front, the Trans-Pacific Partnership (TPP)—the largest regional trade agreement in history—has been agreed. With the World Trade Organization in paralysis, the TPP at least gives a sense that trade cooperation has not gone into reverse. Sights have now been set on the Climate Change Conference in Paris (COP 21) at the end of the year and, while the voices of optimism and pessimism continue to compete for attention, there is a sense that Paris may be a watershed. It is unlikely to be the game-changer we need, but it is no longer possible for governments to sweep the climate challenge under the carpet. We are moving into a new era where—led by China and the US—countries are focused on what they can do, rather than why they can’t do what is needed.

So we are busy building vehicles that will carry us to our agreed destination, but we are short of the fuel needed to fill their tanks and batteries. Without it, we will not go very far. That fuel is finance, and for our new green vehicles, it is green finance.

Of course, the question of finance is not ignored. On the contrary, it has become the central topic of discussion in almost all areas of sustainable development. The SDGs are all well and good, but how will we mobilize the “means of implementation” that will enable countries to honour their commitments? The climate discussion has substantially moved on from the science, and even from the considerations of equity and justice and is now centered very clearly on the challenge of mobilizing the finance needed for resolute climate action. Figures in the billions and trillions are bandied about with a sense of despair. How on earth will that level of funding be mobilized? The simple answer is that they will not be mobilized, or at least not in the manner we are accustomed to expect.

But thinking in this way is seriously out of date. We should no longer think in terms of governments filling a common pot from which the funding will be drawn to cover the costs of implementing SDG or climate obligations. We all understand that this is now unrealistic and in all likelihood will remain that way for the foreseeable future. What is not only necessary but entirely possible is to move, quickly, towards and alignment of the trillions managed by the financial community with the requirements of sustainable development as laid out in the SDGs, the national climate change commitments, and elsewhere.

Today, the UNEP Inquiry into the Design of a Sustainable Financial System concluded its work and launched its final report, The Financial System We Need that looks in some detail at how that alignment might take place. Unusually for a major report developed by UNEP, the principal audience is not the environment ministers or even the wider environment community. It is addressed to the financial community broadly speaking, from central banks and financial market regulators, through institutional investors like sovereign wealth funds or pension funds and capital market players, banks and investors.

Very deliberately, the Inquiry report was launched not at the UN, not at COP 21, nor even at the World Economic Forum in Davos, but at the Annual Meetings, in Lima, of the World Bank and IMF—the single most important meeting on the calendar of Central Banks and Finance Ministers.

So has UNEP walked rashly into the lion’s den, exposing itself to great danger? With all the financial crises that beset the planet, is green finance seen as an unwelcome distraction?

On the contrary, it seems very much as if UNEP has been storming an undefended castle, or beating down open doors. Here in Lima, the need for a rapid green transition is essentially a given; indeed, it is widely regarded as well underway and gaining momentum. The question is no longer whether the financial system needs to play its part, but what are the best ways and what reforms are needed to make it possible. Happily, the Inquiry report offers a robust framework for thinking about reform and an exciting agenda of possible reforms across the spectrum of financial market organization.

Exciting examples come from many countries, in all continents, rich and poor. China, where IISD has played a role in seeding green finance reform, is a clear leader, signaling that reforms to the finance sector are a key to the transition to its goal of “Eco-Civilization”. Indeed, this is clearly signaled in its recently-published strategy on how to get there. Bangladesh, a least developed country where IISD assisted the Inquiry in developing a national contribution has linked green financing to its strong movement towards financial inclusion.

Many other countries—Brazil, the UK, Indonesia, Kenya and more—are innovating, experimenting, and achieving results which have the potential to inspire others and move to scale. And the response from private sector players has been overwhelmingly positive. We have lots of money chasing green projects, and not enough projects to meet the appetite. Governments need to build multiple new pathways to enable investors to find green opportunities that meet their needs.

Our world will move to sustainable development if the finance sector drives us there. We should make it easier for them to do so.