Global fi­nance and global warm­ing

Financial Mirror (Cyprus) - - FRONT PAGE -

Since 2008, when the global fi­nan­cial cri­sis nearly brought down the world econ­omy, fi­nan­cial re­form has been among the top items on pol­i­cy­mak­ers’ agen­das. But, as lead­ers move from fix­ing the prob­lems of the past to po­si­tion­ing the fi­nan­cial sys­tem for the fu­ture, they must also grap­ple with new threats to its sta­bil­ity, par­tic­u­larly those stem­ming from cli­mate change.

That is why a grow­ing num­ber of gov­ern­ments, reg­u­la­tors, stan­dard-set­ters, and mar­ket ac­tors are start­ing to in­cor­po­rate rules con­cern­ing sus­tain­abil­ity into the fi­nan­cial sys­tem. In Brazil, the cen­tral bank views the in­te­gra­tion of en­vi­ron­men­tal and so­cial fac­tors into risk man­age­ment as a way to strengthen re­silience. And in coun­tries like Sin­ga­pore and South Africa, com­pa­nies listed on the stock mar­ket are ob­li­gated to dis­close their en­vi­ron­men­tal and so­cial per­for­mance, a re­quire­ment that in­vestors and reg­u­la­tors in­creas­ingly view as es­sen­tial to the ef­fi­cient func­tion­ing of fi­nan­cial mar­kets.

Ini­tia­tives like th­ese might once have been re­garded as part of a pe­riph­eral “green” niche. To­day, they are con­sid­ered cen­tral to the op­er­a­tion of the fi­nan­cial sys­tem. In Bangladesh, the cen­tral bank’s ef­forts to sup­port eco­nomic devel­op­ment in­clude low-cost re­fi­nanc­ing for banks lend­ing to projects that meet goals for re­new­ables, en­ergy ef­fi­ciency, or waste man­age­ment. In the United King­dom, the Bank of Eng­land is cur­rently eval­u­at­ing the im­pli­ca­tions of cli­mate change for the in­sur­ance sec­tor as part of its core man­date to over­see the safety and sound­ness of fi­nan­cial in­sti­tu­tions.

In China, an­nual in­vest­ment in green in­dus­try could reach $320 bln in the next five years, with the gov­ern­ment able to pro­vide only 10-15% of the to­tal. In or­der to pre­vent a fund­ing short­fall, the Peo­ple’s Bank of China has re­cently pro­duced a re­port with the United Na­tions En­vi­ron­ment Pro­gramme (UNEP) set­ting out a com­pre­hen­sive set of rec­om­men­da­tions for es­tab­lish­ing China’s “green fi­nan­cial sys­tem.”

In In­dia, the Fed­er­a­tion of In­dian Cham­bers of Com­merce and In­dus­try has es­tab­lished a new “green bond” work­ing group to ex­plore how the coun­try’s debt mar­kets can re­spond to the chal­lenge of fi­nanc­ing smart in­fra­struc­ture. And re­cent reg­u­la­tory changes hold out con­sid­er­able po­ten­tial for listed in­vest­ment trusts to deploy cap­i­tal for clean en­ergy.

So far, such mea­sures af­fect only a small frac­tion of the $305 trln in as­sets held by banks, in­vestors, fi­nan­cial in­sti­tu­tions, and in­di­vid­u­als in the global fi­nan­cial sys­tem. But they are set to be ap­plied more broadly as fi­nanciers and reg­u­la­tors alike recog­nise the full con­se­quences of en­vi­ron­men­tal dis­lo­ca­tion.

Those con­se­quences al­ready are se­vere. In 116 of 140 coun­tries as­sessed by UNEP, the stock of nat­u­ral cap­i­tal that un­der­pins value cre­ation is in decline. The hu­man and eco­nomic costs of con­tin­ued high-car­bon growth in­clude se­vere health im­pacts, grow­ing dis­rup­tion to in­fra­struc­ture, and wa­ter and food se­cu­rity, as well as in­creas­ing mar­ket volatil­ity, most no­tably in de­vel­op­ing coun­tries. This dam­age will be­come worse, with risks be­com­ing un­man­age­able if emis­sions of green­house gases are not re­duced to net zero lev­els be­tween 2055 and 2070.

As the threat from cli­mate change be­comes more ev­i­dent, fi­nanc­ing the re­sponse to its im­pact will be­come in­creas­ingly im­por­tant. De­vel­oped coun­tries have com­mit­ted to mo­bi­lize $100 bln in an­nual fi­nan­cial flows to de­vel­op­ing coun­tries by 2020, but much more is needed.

Above all, it is es­sen­tial to place the fi­nanc­ing chal­lenge posed by cli­mate change within the broader con­text of the green econ­omy and sus­tain­able devel­op­ment. The task for those charged with gov­ern­ing the fi­nan­cial sys­tem is to en­able the or­derly tran­si­tion from high- to low-car­bon in­vest­ments and from vul­ner­a­ble to re­silient as­sets. Ac­cord­ing to the New Cli­mate Econ­omy ini­tia­tive, $89 trln will be spent on global in­fra­struc­ture in­vest­ment by 2030 – with an ad­di­tional $4.1 trln needed to make it low-car­bon and re­silient.

To mo­bilise the re­quired cap­i­tal, pol­i­cy­mak­ers will need to har­ness the power of the fi­nan­cial sys­tem. The scope of risk man­age­ment will need to be ex­panded, so that long-term sus­tain­abil­ity and risks from cli­mate change are in­cluded in pru­den­tial rules for bank­ing, in­sur­ance, and in­vest­ment. New “green banks” can help to bring in fund­ing from debt and eq­uity mar­kets. Trans­parency will have to be im­proved, through bet­ter cor­po­rate re­port­ing and en­hanced dis­clo­sure from fi­nan­cial in­sti­tu­tions. And fi­nan­cial pro­fes­sion­als’ skills and in­cen­tives will have to be re­tooled and re­vised to re­flect th­ese new pri­or­i­ties.

Promis­ing av­enues for in­ter­na­tional co­op­er­a­tion are now open­ing up. For ex­am­ple, the G-20 fi­nance min­is­ters and cen­tral bank gov­er­nors have just asked the Fi­nan­cial Sta­bil­ity Board to ex­plore how the fi­nan­cial sec­tor could ad­dress cli­mate is­sues. Ac­tions such as th­ese will not only strengthen cli­mate se­cu­rity; they will also con­trib­ute to a more ef­fi­cient, ef­fec­tive, and re­silient fi­nan­cial sys­tem.

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