Financial reform & sustainable development - Nick Robins & Simon Zadek, February 2015

Financial reform & sustainable development - Nick Robins & Simon Zadek, February 2015

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  1 Building a SustainableFinancial Syste: Financial Reform to Mobilize Capital for a Financial reform & sustainable development Nick Robins & Simon Zadek, February 2015
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  Financial reform &sustainability • Reforms of the US$300trn financial system are part of the solution to mobilising capital for sustainable development • These interventions are needed to complement public finance and action in the real economy • The Inquiry has been established to advance policy options that enhance system effectiveness • Examples of financial policy innovation are growing globally, yet remain fragmented • 2015 could be the milestone year to bring convergence 1 “The central bank time horizon is relatively short - 1.5-2 years – but the real challenges to prosperity and economic resilience from climate change will manifest well beyond this. We face a 'tragedy of horizon’.” Mark Carney, Governor, Bank of England
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  2 “Advance policy optionsthat would deliver a step change in the financial system’s effectiveness in mobilising capital towards a green and inclusive economy” A 2 year mandate, reporting in late 2015 Inquiry’s aim and approach “Financial regulators need to lead. Sooner rather than later, they must address the systemic risk associated with carbon-intensive activities in their economies.” Jim Kim, President, World Bank WHY should rules governing the financial system be used in pursuit of green & inclusive outcomes ? WHAT rules governing the financial system have been, and might be deployed as effective instruments? HOW rules can be deployed given the complexities & competitiveness concerns of financial actors and nations ?
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  The Inquiry’s AdvisoryCouncil Rachel Kyte Group Vice President, World Bank David Pitt- Watson Co-Chair UNEPFI Atiur Rahman Governor, Central Bank of Bangladesh Murilo Portugal President, Brazilian Bankers Federation Neeraj Sahaj President, S&P Rating Services Rick Samans Managing Director WEF Maria Kiwanuka Minister of Finance, Government of Uganda Andrew Sheng President, Fung Global Institute Naina Kidwai Group General Manager & Country Head, HSBC India Lord Adair Turner Former Chair, Financial Services Authority, UK Kathy Bardswick President and CEO, The Co- Operators Jean-Pierre Landau Former Deputy Governor, Banque de France John Lipsky Former Deputy Managing Director, IMF 3 Anne Stausboll CEO Calpers Nicky Newton- King Chief Executive, Johannesburg Stock Exchange Bruno Oberle State Secretary & Director of Swiss Federal Office of the Environment
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  4 Working with theWorld Bank to shape the financial system aspects of their green economy review. Working with the IFC and CalPers to assess policy needs to unlock institutional investors green investment Working with the People’s Bank of China to identify and progress specific green finance proposals in China Working with Febraban and FGV to assess the Brazilian experience. Working with the Principles for Responsible Investment to explore investor engagement on financial policy & regulation Working with the Frankfurt School of Finance and Management to identify and assess good practice green financial policies Working with the Global Green Growth Initiative to assess the South Africa experience. Inquiry: a global network of partners Working with the Central Bank of Bangladesh to assess its sustainability-related monetary policy innovations
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  Why intervene inthe financial system? Systematic market failures Policy coherence Systemic risks 5 Enabling innovation • Overcoming asymmetric information, misaligned incentives, short-termism and associated accountability failures. • Ensuring that the market can respond effectively to a new set of environmental and social risks • Stimulating the standards and regulations required to catalyze productive financial innovation • Ensuring coherence between financial regulation and wider goals, such as employment, growth, financial inclusion or environmental security.
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  Banking • Brazil -Resolution No. 4.327 (2014) • Kenya – Sustainable Finance Initiative (2014) • China – Green Credit Guidelines (2012) Colombia - Green Protocol 2012 • Nigeria - Sustainable Banking Principles (2012) • Bangladesh – ERM Guidelines (2011) • Lebanon – Reduced reserve requirements for energy efficiency (2011) • Indonesia – Green Protocol (2009) • Peru & Mongolia – developing Guidelines Securities • Australia - Stock exchange reporting requirement (2014) • EU - Directive on Disclosure of non- financial information (2013) • France – Grenelle reporting Law (2012) • USA - SEC climate disclosure guidance (2009) Growing examples of policy innovation Insurance • UK – Prudential Regulatory Authority exploring climate change & insurance supervision (2014-5) • USA – NAIC climate reporting (2009) Investment • Malaysia – Investor Code (2014) • Japan – Principles for Financial Action towards a Sustainable Society (2012) • South Africa - Regulation 28 of the Pension Funds Act (2011) • UK – Pensions Act Reporting (1999) 6
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  7 Brazil: innovating forsustainability Mission directed finance: Banco do Brazil & BNDES have sustainable development as their goal, driving credit allocation & considering green bonds The Inquiry is working with Febraban and FGV to establish a baseline on financing for the green economy and identify priorities for further action across the Brazilian financial system Market disclosure: The BM&FBovespa stock exchange has promoted sustainability for a decade driving ESG disclosure across all listings. Sustainability Risk Regulation: Brazil’s Central Bank (BACEN) issued guidance (2011) on sustainability under Basel III and has mandated (April 2014) that all banks require environmental & social risk systems. Concerns remain on financial liability for environmental damage
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  8 China: steering thegreen transition System wide focus on green finance: Strategic intent to install policy framework to steer capital away from resource/pollution intensive sectors, and towards resource efficient innovation Green Credit Guidelines: The CBRC’s Green Credit Guidelines now assess the entire balance sheet of licensed entities. Currently c8.9% of China’s RMB60 trn lending is compliant; this is expected this to rise to 100%. Stranded assets: China`s resolve to rapidly reduce air pollution involves major investments, and enforced closure of iron and steel, cement and coal plants. Discussion of ‘environmental stress tests’ to identify assets at risk. The Inquiry is collaborating with the Peoples Bank of China and the Development Research Center of the State Council to identify green financial policies, regulations and standards relevant to China
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  9 UK: financial stewardship& sustainability Extending Responsibility: The UK has introduced the Stewardship Code and new guidance on fiduciary duty to promote long-term investment incorporating sustainability factors The Inquiry is working with UK investors, analysts and regulators to explore how to manage the long- term sustainability challenges for the UK financial system Stranded Assets: Investor concern about the potential threat of ‘unburnable carbon’ for fossil fuel’ is prompting demands for better disclosure of climate risks Insurance Regulation: The Prudential Regulatory Authority which regulates banks and insurers is exploring the links between climate change and insurance supervision
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  From system purposeto pathways10
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   Innovative regulatoryapproaches – Bangladesh, Brazil, China introducing a range of ‘green credit’ guidelines and requirements  Valuing natural capital – Incorporating externalities into capital requirements  Data & Models – Building methodologies to undertake quantitative assessment of sustainability factors & key risks Banking: largest pool of assets11 “By failing to address systemic environmental risks, Basel III is arguably overlooking an important source of risk to the financial system” Prof. Kern Alexander, CISL/UNEPFI How to better link national innovation in banking with the global financial policy architecture?
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   Growing materiality– Climate change is one of the two megatrends that will impact sovereign bonds in the 21st century  Rapid growth of green bonds – USD36bn issued so far in 2014 compared with USD11bn for the whole of 2013.  Catalysing scale – Expanding the market via principles, standards, credit enhancement, fiscal incentives Bonds: fastest moving theme12 “Worsening financial performance as a result of climate event risk can negatively impact both short-term liquidity and long-term debt financing, leading to an increase in credit risk.” Standard & Poor’s What are the key policy options to mainstream sustainability in the world’s largest asset class?
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   Capital allocation– Developing a tradeable asset class for investors to access green infrastructure and reviewing capital charges  Investor governance – Embedding sustainability in fiduciary duty, stewardship and transparency  Market incentives – Benchmarks, metrics and remuneration failing to reward efficient and sustainable value creation Institutional investors: deepest commitment13 “Investing for the long-term requires strategies that create sustainable value, mitigate risks and strengthen economies. The common denominator is having a stable and forward- thinking policy foundation.” Anne Stausboll, CEO, CalPERS How to align separate agendas around long-term financing and sustainable development?
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  Growing (and oftencontroversial) role of central banks following the financial crisis – and embryonic links to sustainability - Refinancing facilities - ‘Green QE’ - Environmental ‘stress testing’ Central banks: stability & sustainability14 “The central bank time horizon is relatively short - 1.5-2 years – but the real challenges to prosperity and economic resilience from climate change will manifest well beyond this. We face a 'tragedy of horizon’.” Mark Carney, Governor, Bank of England How to explore the emerging developmental role of central banks and how this relates to core goals of financial and monetary stability?
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  15 Emerging priorities • Banks(US$139trn): linking stability & sustainability in Basel rules; deepening green credit guidelines • Bond markets (US$100trn): incorporating sustainability into credit rating; scaling up local currency green bonds • Investors (US$93trn): improving investor governance; building a real infrastructure pipeline; reforming market incentives (remuneration, tax) • Equity markets (USD64trn): ensuring effective disclosure on stock markets; promoting green infrastructure investment trusts • Central Banks (US$24trn): refinancing for green economy; ‘environmental stress testing’ with the FSB Building the 2015 Pathway Financing (Addis), Global Development (SDGs) & Climate (Paris) “Investing for the long-term requires strategies that create sustainable value, mitigate multifaceted risks and strengthen both local and global economies. The common denominator is having a stable and forward-looking policy foundation”
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  Simon Zadek Co-Director Nick Robins Co-director MahenauAgha Head of Outreach [email protected] [email protected] [email protected] www.unep.org/greeneconomy/finan cialinquiry/ [email protected] @fininquiry