Earth call­ing the fi­nan­cial sec­tor

Financial Mirror (Cyprus) - - FRONT PAGE -

Fi­nan­cial mar­kets serve two cru­cial pur­poses: to chan­nel sav­ings to­ward pro­duc­tive in­vest­ments, and to en­able in­di­vid­u­als and busi­nesses to man­age risks through di­ver­si­fi­ca­tion and in­sur­ance. As a re­sult, the sec­tor is es­sen­tial to sus­tain­able devel­op­ment, which rep­re­sents un­prece­dented global-scale in­vest­ment op­por­tu­ni­ties and risk-man­age­ment chal­lenges.

That is why, when world lead­ers meet this July in Ad­dis Ababa, Ethiopia, at the Con­fer­ence on Fi­nanc­ing for Devel­op­ment, the fi­nan­cial in­dus­try should be ready to of­fer prac­ti­cal, global so­lu­tions to the chal­lenges as­so­ci­ated with fi­nanc­ing eco­nomic growth, poverty re­duc­tion, and en­vi­ron­men­tal sus­tain­abil­ity. We have now en­tered the Year of Sus­tain­able Devel­op­ment. At three back-to-back global sum­mits – the con­fer­ence in Ad­dis Ababa, Septem­ber’s meet­ing at the United Na­tions to adopt Sus­tain­able Devel­op­ment Goals (SDGs), and the UN Cli­mate Change Con­fer­ence in Paris in De­cem­ber – 193 gov­ern­ments will at­tempt to en­sure that global growth and poverty re­duc­tion con­tinue within a safe nat­u­ral en­vi­ron­ment.

It will be a close call. The global econ­omy, de­spite all of the huge bumps in the road, is de­liv­er­ing ag­gre­gate an­nual growth of 3-4%, lead­ing to a dou­bling of out­put ev­ery gen­er­a­tion. Yet the global econ­omy is not de­liv­er­ing sus­tain­able growth in two ba­sic senses. In many parts of the world, growth has been deeply skewed in favour of the rich; and it has been en­vi­ron­men­tally de­struc­tive – in­deed, life-threat­en­ing when viewed on a cen­tury-long time scale, rather than ac­cord­ing to quar­terly re­ports or two-year elec­tion cy­cles.

Cli­mate change is the great­est of th­ese en­vi­ron­men­tal threats (though by far not the only one). Given the cur­rent tra­jec­tory of global fos­sil-fuel use, the planet’s tem­per­a­ture is likely to rise by 4-6 de­grees Cel­sius above its pre-industrial level, an in­crease that would be cat­a­strophic for food pro­duc­tion, hu­man health, and bio­di­ver­sity; in­deed, in many parts of the world, it would threaten com­mu­ni­ties’ sur­vival. Gov­ern­ments have al­ready agreed to keep warm­ing be­low 2C but have yet to take de­ci­sive ac­tion to­ward cre­at­ing a low-car­bon en­ergy sys­tem. The fi­nan­cial in­dus­try has a cen­tral role to play in catalysing the global tran­si­tion to in­clu­sive, sus­tain­able growth. Af­ter all, ef­fec­tive fi­nan­cial mar­kets should con­vey ac­cu­rate long-term in­for­ma­tion to savers and in­vestors, thereby en­abling busi­nesses, pen­sion funds, in­sur­ance pools, sovereign wealth funds, and oth­ers to al­lo­cate their re­sources to projects that pro­vide solid long-term pay­offs, and pro­tect their sav­ings from fi­nan­cial calami­ties. Given cli­mate change, that means ac­count­ing for whether, say, en­tire low-ly­ing coastal ar­eas or agri­cul­tural re­gions will be able to cope.

Ef­fec­tive fi­nan­cial mar­kets should also chan­nel far more global sav­ing from high­in­come coun­tries with rel­a­tively weak long-term growth prospects to low-in­come re­gions with rel­a­tively strong growth prospects, ow­ing to new op­por­tu­ni­ties to leapfrog devel­op­ment with smart, in­for­ma­tion-based in­fra­struc­ture. Just a decade ago, hun­dreds of mil­lions of ru­ral Africans lived out­side of the flow of global in­for­ma­tion. Now, with the rapid spread of broad­band, once-iso­lated vil­lages ben­e­fit from on­line bank­ing, trans­port ser­vices, and ICT-en­abled agribusi­ness and health and ed­u­ca­tion pro­grammes.

To seize the benefits of th­ese new tech­nolo­gies at scale, and to avoid in­vest­ments that ag­gra­vate cas­cad­ing en­vi­ron­men­tal crises, the fi­nance in­dus­try will need to un­der­stand how the SDGs will re­shape the in­vest­ment land­scape. The time has come to em­brace the con­cept of true long-term in­vest­ing, which re­quires mar­shal­ing the ca­pac­ity of in­sti­tu­tion­ally mo­bilised cap­i­tal to sup­port in­vest­ment op­por­tu­ni­ties that will se­cure a sus­tain­able fu­ture for all.

We know that enor­mous public and pri­vate in­vest­ment is re­quired for the tran­si­tion to­ward a low-car­bon econ­omy, to win the global fight against poverty and dis­ease, and to pro­vide high-qual­ity ed­u­ca­tion and phys­i­cal in­fra­struc­ture world­wide. To­day’s savvy in­vestors, and the fi­nan­cial in­dus­try as a whole, need to look ahead, be­yond to­day’s mar­ket prices and poli­cies to the mar­ket prices and poli­cies of the fu­ture.

For ex­am­ple, to­day there is no global price on car­bon to shift en­ergy in­vest­ment from fos­sil fu­els to re­new­able sources; but we know that, in or­der to keep global warm­ing be­low the 2C limit, such a price is com­ing soon. As ste­wards of long-term cap­i­tal, to­day’s in­vestors can­not ig­nore the com­ing car­bon price and the shift to­ward low-car­bon en­ergy sources. That means de­vis­ing prac­ti­cal ways to fi­nance and en­cour­age the re­quired shift.

We be­lieve that fi­nan­cial lead­ers want their in­dus­try to play its vi­tal role in sus­tain­able devel­op­ment, and we urge them to con­trib­ute ac­tively to the unique op­por­tu­nity that this year rep­re­sents. To­day’s fi­nanciers can choose to be re­mem­bered ei­ther for the 2008 cri­sis, over which they presided, or for their cre­ative and re­source­ful ef­forts to en­cour­age long-term sus­tain­abil­ity.

As­sum­ing that they choose the lat­ter, the fi­nan­cial in­dus­try should work with gov­ern­ments to cre­ate a global in­vest­ment frame­work that in­cludes ap­pro­pri­ate in­cen­tives to take on the chal­lenges of sus­tain­able growth. This im­plies the con­tin­ued glob­al­i­sa­tion of fi­nance, which will be es­sen­tial to al­lo­cate money from cap­i­tal-rich re­gions to their poor, cap­i­tal-scarce coun­ter­parts, as well as to de­velop lo­cal cap­i­tal mar­kets that can fa­cil­i­tate cap­i­tal for­ma­tion and pro­tect coun­tries from the va­garies of global sen­ti­ment.

Fi­nan­cial lead­ers should also in­volve cit­i­zens (the savers) in the jour­ney to a fairer and more sus­tain­able global econ­omy. That means en­cour­ag­ing re­spon­si­ble in­vest­ing by adopt­ing ever higher stan­dards of stew­ard­ship – for ex­am­ple, by re­quir­ing com­pa­nies’ port­fo­lios to meet cer­tain sus­tain­abil­ity tar­gets. It also means con­tribut­ing to a new frame­work for global in­fra­struc­ture in­vest­ment that steers re­sources away from en­vi­ron­men­tally de­struc­tive projects and re­duces the wastage of­ten as­so­ci­ated with po­lit­i­cal pa­tron­age.

Since the Industrial Revo­lu­tion, fi­nance has been a pow­er­ful en­abler of hu­man progress. The great task of this gen­er­a­tion’s fi­nan­cial lead­ers is to mo­bilise in­vest­ment in the skills, in­fra­struc­ture, and sus­tain­able tech­nolo­gies that can end poverty, spread pros­per­ity, and pro­tect the planet. Those who act first will be the wiser – and wealth­ier – for it.

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