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PARIS: Financial and government experts meeting in Paris, Friday, just months ahead of the convening of the UN Climate Conference, called for better alignment between the financial system and the needs of a sustainable, resource efficient, low carbon economy. The event, entitled ‘New Rules for New Horizons: Reshaping Finance for Sustainability’ was organized by the UN Environment Programme’s Inquiry into the Design of a Sustainable Financial System and insurance giant, AXA.
The work of UNEP’s Inquiry in over 15 countries, so far, reveals the need to speed the transition to an inclusive sustainable economy, which requires the channelling of trillions of dollars annually into green investment and many more trillions away from pollutant and natural resource intensive investment. Meeting this challenge requires the mobilisation of large amounts of private capital.China, for example, with one of the world’s strongest fiscal positions, estimates that less than 20 per cent of its incremental green financing needs of US $350 billion dollars annually can be met through the use of public revenues. Yet today’s financial systems, including the banks and pension funds, are increasingly financing environmentally damaging investments and inadequate green investments.
Achim Steiner, UN Under-Secretary-General and Executive Director of the UN Environment Programme, said: “As we look towards the convening of the Climate Change Conference in Paris this December, we are reminded that our ability to invest in new, resource efficient technologies and infrastructure will require enormous investments that go beyond public finance. That is why UNEP initiated an inquiry into the design of sustainable financial systems to examine how best to align financial systems to sustainable development needs.”
“The AXA-UNEP high level symposium in Paris is, therefore, a milestone along the path of discovering where opportunities lie and where innovations are already making a difference towards the transition to an inclusive, resource-efficient global economy,” he added.
The Inquiry’s analytic work and engagement has focused on actions taken by central bankers, financial regulators and ministries of finance at the country level, as well as the actions of market actors, such as bankers or institutional investors. The Inquiry has analysed the financial systems of Bangladesh, Colombia, Indonesia and Kenya, as well as Brazil, China, India and South Africa, and leading countries across the OECD, including those with major financial centres, such as the UK and the US.
Henri de Castries, Chairman and CEO of AXA, said: “We are convinced that the ‘systemic risk’ of carbon has to be embedded into regulatory frameworks, through efficient ‘carbon pricing’ mechanisms and, more broadly, a favorable treatment of longer-term investments that are necessary to limit climate risks. This would indeed increase the number of industry players contributing to the transition of a low carbon economy, and hence the necessary scale would be reached for a successful transition.”
In a marked break with the past, the initial findings of the Inquiry highlight the leading role played by developing nations in this crucial reshaping of the world’s financial systems, notably those with major economies and rapidly developing financial and capital markets, for example:
Brazil’s Central Bank has established environmental risk management requirements for banks, and is working with market actors in establishing how environmental lender liability might improve both environmental outcomes to Brazil and financial returns to banks;
China’s People’s Bank of China has established a green finance task force, co-convened with the UNEP Inquiry, and has collaborated with dozens of public agencies and market actors to develop 14 sets of proposals for enhancing green financing through policy, regulatory and market innovations;
Indonesia’s Financial Services Authority (OJK) has delivered the world’s first ten year roadmap for sustainable finance;
South Africa’s stock exchange has led globally in requiring listed companies to report on their sustainability performance and the country’s pension fund legislation has led the way in requiring pension fund trustees to take sustainability factors into account while making investment decisions on behalf of intended beneficiaries.
Kenya has the world’s highest penetration of bankless payment transactions, which has allowed it to achieve the most rapid increase of financial inclusion ever recorded, globally.
Luiz Awazu Pereira da Silva, Deputy Governor of the Central Bank of Brazil, said “Brazil has focused its efforts on delivering better access to financial services, especially to those with a low level of income, by means of financial education in order to limit excess debt. The country also included environmental criteria in the distribution of loans in regions ecologically at risk. All these efforts aim at better linking credit supply and social responsibility as well as promoting financial stability”.
Experts participating in the symposium recommended that financial risk and risk pricing should take into account environmental risk, including climate change. The UK’s Bank of England, for example, is the first central bank to initiate a prudential review to explore whether climate change poses a systemic risk to parts of the UK’s financial sector.
“Potential long-term investors are increasingly constrained in their ability to provide long-term financing. Pension funds, sovereign wealth funds and insurance companies are ideal candidates to provide long‑term financing. Policy makers need to address regulatory barriers and restrictions on portfolio allocations that currently limit the ability of these key long-term investors to provide the finance economies will need in the future”, said Jean-Claude Trichet, Chairman, Group of Thirty, Former President, ECB, Honorary Governor, Banque de France.
At the event, discussions revolved around five key issues impacting the financial system’s ability to support a sustainable and inclusive economic development model:
A sense of fragile financial stability, stemming from the continuous creation of unchecked pockets of risks despite progress in regulation and supervision across markets and jurisdictions.
A perceived lack of control, despite numerous new standards aimed at increasing reporting and transparency discipline across the finance industry.
Inefficient liquidity, as ultra-abundant liquidity on all financial markets and extremely low interest rates are not boosting public and private long-term investment.
Cornered emerging economies, with less access to global capital flows and attractive funding sources.
Time inconsistency, with greater collective needs for long-term and very diverse investments, and yet financial regulations that favour liquid, short-term and homogeneous investments.
The Inquiry is expected to launch a comprehensive report next October that provides an analysis of its findings across 60 countries and thematic areas.
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