The Inquiry into Design Options for a Sustainable Financial System has passed its first milestone, and is alive and well. On 9th April, on the eve of the IMF/World Bank Spring, the World Bank hosted the Inquiry`s first Advisory Council meeting in Washington DC. The meeting, convened just 10 weeks into the Inquiry`s life, was designed to stress test and provide guidance on its fundamental scope and approach.
The UNEP-hosted Inquiry has been established to advance design options that better align the financial system with the needs of the long-term health of the real economy, that is, to catalyse the transition to a green and inclusive economy. The focus is on changes needed in the “rules of the game”, so financial policy and regulation, private standards (such as accounting standards and ratings), as well as financial sector-facing fiscal policies.
The core driver of the Inquiry is the urgent need to accelerate the transition, certainly in the light of scientific and impact evidence regarding climate, but more broadly given the massive investment needed to finance adequate, natural resource-light and climate resilient infrastructure from water to energy, and from agriculture and urban development. Moreover, the Inquiry has been created because of the painful truth that such finance has not been forthcoming at the scale needed, despite the explosion of work on many aspects of green finance.
Shifting the rules of the game governing the financial markets is a tricky affair, given the potential for unintended consequences, the dynamism and complexity of such markets, the competitiveness effects that creates resistance to change, and the simple fact that financial regulators and central bankers do not in the main (although with notable exceptions) see green economy or equity issues as their concern.
That said, research commissioned in advance of the Council meeting from the Frankfurt School for Finance, the New Economics Foundation and Oxford`s Smith School highlighted cases connecting financial system design with the broader sustainability agenda, particularly in emerging economies, including Brazil`s Green Protocol, China`s Green Credit Guidelines, Bangladesh`s priority lending approach, and South Africa`s extended interpretation of fiduciary responsibility for institutional investors.
Explicit green policies and regulations are, however, only the tip of the iceberg. The Inquiry`s initial review of on-going policy research in the field revealed a growing wealth of work, including the ground-breaking work of the Council on Economic Policy`s work on monetary policy and sustainability, the wide-ranging work on stranded assets by Carbon Tracker and others, the work by the International Institute for Sustainable Development and the Chinese Development Research Center for the State Council on greening China`s financial markets, and the growing body of policy work being undertaken by the UNEP Finance Initiative around the world. Broader work, furthermore, such as the emerging evidence of the impact of short-termism on capital allocation, is without doubt of relevance to the Inquiry`s mandate.
The first Advisory Council meeting was attended by about half of the Council, including Maria Kiwanuka, Minister of Finance, Government of Uganda; Rachel Kyte, Group Vice President at the World Bank; David Pitt-Watson, co-Chair of UNEP Finance Initiative; Murilo Portugal, President of the Brazilian Bankers Association; Dr Rahman, Governor of the Central Bank of Bangladesh; Neeraj Sahai, President of S&P Rating Services; Rick Samans, Managing Director of the World Economic Forum; and Andrew Sheng, Distinguished Senior Fellow at the Global Fung Institute.
The Council also includes Kuandyk Bishimbayev, Chairman, Baiterek Development Bank; Jean-Pierre Landau, Former Deputy Governor, Banque de France; John Lipsky, ex-first Deputy Managing Director, IMF; Naina Kidwai, Group General Manager & Country Head, HSBC India; Mallam Sanusi, ex-Governor, Central Bank of Nigeria; Ann Stausboll, CEO of CalPers; and Adair Turner, ex-Chair of the UK`s Financial Services Authority.
Emerging from the Council meeting was, first and foremost, a strong endorsement of the Inquiry`s core aim and underlying approach. This was reinforced by the sense that the nexus of financial system design and sustainability, despite some exemplary practice and the growing research activity alluded to above, remained under-explored, and has the potential to make a significance difference. Building on the Council`s guidance, three, inter-related work streams will be initiated going forward.
- Key, first, will be to ground the Inquiry in country-based work, across a range of major financial centers, emerging markets and developing countries.
- Second, will be to invest in a coherent analytic framework including scenarios, principles and an agreed approach to assessing the impact of financial policies and regulations on sustainability outcomes.
- And third will be a series of cross-cutting projects designed to crystallize and apply on-going work internationally, for example on accounting standards, credit ratings, incentives, fiduciary innovations and macro-prudential mandates of the regulators themselves.
The Inquiry will run for 18-24 months, so completing its core tasks by the end of 2015. It`s ability to make a difference will be grounded in its success in amplifying, mobilizing and crystallizing the work of others, in raising awareness of the potential for action, and so providing the enabling environment for leadership to emerge. To that end, the Inquiry is designed to leverage knowledge networks, to collaborate in on-going work and in key areas to commission research. It is, in short, an open invitation to join forces in identifying and developing design options for a sustainable financial system. Key design questions for us at this stage include:
- What parts of the system should we focus on?
- Which instruments for intervention should we focus on?
- How should we approach the mandates of governing institutions?
- What should be our theory of change, e.g. countries to focus on, unlikely allies, time horizons.
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For more information or to discuss possible areas of collaboration, contact the author at [email protected], or visit the Inquiry`s website at http://www.unep.org/greeneconomy/financialinquiry/.
Further Reading and Viewing
Inquiry: Summary Briefing - http://bit.ly/1etewuD
Inquiry: 1st Advisory Council, Background Paper - on request
Op Ed: Greening Financial Reform - http://bit.ly/1qDorzJ
Report: Greening China`s Financial System - http://bit.ly/1qDnNlJ
Video: Finance and the Real Economy (Panel at INET event) - bitly.com/1kMhWLR
Video: Can We Afford Sustainable Development (Kapuscinski Lecture) - http://bit.ly/1foU9hx