Har­ness­ing dis­rup­tion for sus­tain­abil­ity

Financial Mirror (Cyprus) - - FRONT PAGE -

Af­ter decades of re­luc­tance on the part of world lead­ers, a rapid, smooth, and pur­pose­ful tran­si­tion to­ward sus­tain­able devel­op­ment seems un­likely. In­deed, through­out hu­man his­tory, such ma­jor changes have more of­ten been forced upon the world by cir­cum­stances, with lead­ers fo­cus­ing on shorter-term con­cerns like po­lit­i­cal tur­moil or eco­nomic stag­na­tion un­til se­ri­ous dis­rup­tions to their economies and so­ci­eties arise.

But this need not be the case. Pol­i­cy­mak­ers can de­velop so­lu­tions that lever­age im­me­di­ate chal­lenges to guide the shift to­ward a more sus­tain­able, in­clu­sive fu­ture.

This year, which has been dubbed “the year of sus­tain­able devel­op­ment,” pro­vides an ideal op­por­tu­nity in this re­gard. At high-level meet­ings in Sendai, Ja­pan, in March and in Ad­dis Ababa, Ethiopia, in July, world lead­ers will pur­sue closer col­lab­o­ra­tion on dis­as­ter­risk re­duc­tion and on mo­bil­is­ing fi­nance for devel­op­ment, re­spec­tively. In Septem­ber, the United Na­tions will launch its Sus­tain­able Devel­op­ment Goals, to serve as the frame­work for global devel­op­ment ef­forts un­til 2030.

More­over, global cli­mate ne­go­ti­a­tions will reach a crit­i­cal point in De­cem­ber, when world lead­ers meet for the United Na­tions Cli­mate Change Con­fer­ence in Paris. And the agen­das of the forth­com­ing G-7 and G-20 sum­mits will both fea­ture mea­sures to com­bat cli­mate change.

Such mul­ti­lat­eral frame­works catal­yse progress. In­deed, agree­ments like last year’s deal be­tween China and the United States to re­duce car­bon-diox­ide emis­sions – not to men­tion ini­tia­tives to mo­bilise busi­ness, such as We Mean Busi­ness – are un­likely to hap­pen with­out them. Nonethe­less, as Man­cur Olson fa­mously ob­served, it is the in­di­vid­ual in­ter­ests of the par­ties that drive col­lec­tive suc­cess.

For ex­am­ple, China’s re­cent em­brace of sus­tain­able devel­op­ment, which will serve the planet’s long-term in­ter­ests, is driven by the do­mes­tic chal­lenges posed by air, wa­ter, and land pol­lu­tion. Rather than ago­nise over grow­ing dis­rup­tions, China’s gov­ern­ment has de­cided to has­ten the shift to­ward a dy­namic green econ­omy, even if it means strand­ing as­sets and al­low­ing busi­nesses that do not suit China’s shift­ing needs to fail – an ap­proach that will de­liver a long-term com­pet­i­tive ad­van­tage. The rest of the world should recog­nise the benefits of al­low­ing short-term dis­rup­tions to drive, not dis­tract from, the sus­tain­abil­ity agenda.

One area where such an op­por­tu­nity is al­ready ap­par­ent is fi­nan­cial re­form. To­day’s his­tor­i­cally low in­ter­est rates should en­cour­age long-term in­vest­ment, as they lower the cur­rent cost of cap­i­tal. But new fi­nan­cial reg­u­la­tory frame­works – such as Basel III, which aims to re­duce risk in the bank­ing sec­tor, and Sol­vency II, the Euro­pean Union’s equiv­a­lent for in­sur­ance com­pa­nies – are in­ad­ver­tently dis­cour­ag­ing such in­vest­ment. This un­der­mines both short-term ef­forts to boost em­ploy­ment and the longterm ob­jec­tive of sus­tain­able growth.

It does not have to be this way. As the UN En­vi­ron­ment Pro­gramme em­pha­sised in a brief­ing at the World Eco­nomic Fo­rum in Davos, sav­ing the fi­nan­cial sec­tor from it­self can ac­cel­er­ate the tran­si­tion to sus­tain­able devel­op­ment. For ex­am­ple, ef­fec­tive risk man­age­ment and longer-term pol­icy ob­jec­tives would be bet­ter aligned if reg­u­la­tors re­duced cap­i­tal re­quire­ments for banks that ex­tend loans for cli­mate-re­silient and en­vi­ron­men­tally friendly in­vest­ments. Sim­i­larly, cen­tral banks’ in­flated bal­ance sheets – the re­sult of short-term cri­sis­re­sponse mea­sures – could, through re­fi­nanc­ing ar­range­ments, be used to boost green in­vest­ment. Fur­ther quan­ti­ta­tive eas­ing, such as by the Euro­pean Cen­tral Bank, could be di­rected to­ward greener as­set-backed se­cu­ri­ties.

Even per­verse sig­nals can be mit­i­gated and lever­aged. In­stead of al­low­ing low oil prices to en­cour­age con­sump­tion, gov­ern­ments could take the op­por­tu­nity to im­pose a small, po­lit­i­cally ac­cept­able en­ergy or car­bonequiv­a­lent tax – an ap­proach ad­vo­cated by many econ­o­mists and devel­op­ment spe­cial­ists, in­clud­ing Jef­frey Sachs, Lawrence Sum­mers, and Ke­mal Derv­ifl. Such a tax would not only sus­tain the price sig­nals needed to steer so­ci­eties onto a more sus­tain­able en­ergy path; it would also pro­vide rev­enues that could be chan­neled to­ward em­ploy­ment cre­ation and long-term green in­vest­ments, thereby lever­ag­ing pri­vate cap­i­tal.

Bank of Eng­land Gover­nor Mark Car­ney has taken the lead in ini­ti­at­ing a pru­den­tial re­view of the im­pact of cli­mate change on the United King­dom’s in­sur­ance sec­tor. Other in­sti­tu­tions – in­clud­ing mul­ti­lat­eral bod­ies like the Bank of In­ter­na­tional Set­tle­ments, the Fi­nan­cial Sta­bil­ity Board, and the G-20 – should fol­low suit.

What the world needs now are lead­ers who are will­ing to bridge the gap be­tween daunt­ing short-term de­mands and de­sir­able long-term out­comes. In­stead of re­main­ing pre­oc­cu­pied with the present, world lead­ers should view 2015 as an op­por­tu­nity to en­sure that to­day’s dis­rup­tive crises pro­vide the foun­da­tion for to­mor­row’s sus­tain­able pros­per­ity.

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