An efficient and resilient regulatory regime must not only deal competently with the financial system that exists currently; it must also have adaptive capacity to deal competently with the system that is emerging.
This working paper examines disruptive innovations and their implications for the design of a green and inclusive financial system. It identifes five trends relevant to the design of a green and inclusive financial system:
1- disintermediation of capital and payments – such as crowdfunding, peer to peer payments and mobile money;
2- new forms of credit creation – such as digital currencies, local currencies and closed loop credit clearance systems;
3- long-term environmental and social impacts – such as the impact of resource constraints, climate impacts, falling labour productivity, stagnating real wages, demographic change on pensions and insurance;
4- technological innovation – such as big data and the ‘internet of things’.
Rising energy demand and efforts to address climate change require a significant increase in low-carbon electricity generation. Yet, concern has been raised that rapid investment in some novel technologies could cause a new set of environmental problems.
This is a summary of the key findings of the International Resource Panel (IRP) report Green Energy Choices: The Benefits, Risks and Trade-Offs of Low-Carbon Technologies for Electricity Production which aims to support policy-makers in making choices about the technologies, infrastructures and energy sources. It does so through an analysis of the mainstream commercially available renewable and non-renewable power generation technologies3, analysing their GHG mitigation potential, but also tradeoffs in terms of: Environmental impacts (impacts on ecosystems, eutrophication and acidification, etc.) Human health impacts (particulates and toxicity) Resource use implications (iron, copper, aluminium, cement, energy, water and land).
Although there is progress in developing green sectors in some countries, the key challenge facing the expansion of economy-wide green innovation and structural change is the absence of relevant policy follow-up to the green stimulus enacted during the Great Recession. The boost to green sectors provided by such measures is waning quickly, given that much of the green stimulus focused on energy efficiency. The biggest obstacles to sustaining green growth are major market disincentives, especially the underpricing of fossil fuels and market failures to spur green innovation. A three-part strategy to overcome these obstacles would involve, first, removing fossil fuel subsidies, second, employing market-based instruments to further reduce the social costs of fossil fuel use, and third, allocating any resulting revenue to public support for green innovation and investments. Such a strategy would ensure that green growth is not about promoting niche green sectors but instigating economy-wide innovation and structural transformation.
The Inquiry into the Design of a Sustainable Financial System has been initiated by the United Nations Environment Programme to advance design options that would deliver a step change in the financial system’s effectiveness in mobilizing capital towards a green and inclusive economy.
This paper has been produced by the Inquiry’s Secretariat as an invitation to engage in its activities. It also provides a background briefing on the case for linking the development of the financial system with green and inclusive policy objectives, highlights emerging innovation across the world, and offers a set of questions and themes to frame inputs and feedback to the Inquiry’s work. This paper is based on an initial mapping of existing efforts to align the rules that govern the financial system with a green and inclusive economy, as well as inputs from the Inquiry’s Advisory Council and dialogue with policymakers, financial institutions and civil society organisations.
This Working Paper was commissioned by the UNEP Inquiry into the Design of a Sustainable Finance System (“the Inquiry”) to feed into its process of analysis and knowledge dissemination. This Working Paper has attempted to do three things:
1- summarise the underlying logic for why the financial sector should care about the state of the environment and environment-related risks;
2- review the main structural barriers that could prevent the financial system from managing such issues;
3- identify the main researchers and organisations undertaking work on these topics internationally.
The aspiration being that this document should be a useful initial reference guide to those concerned with both how environment-related risks could affect the financial sector and what financial institutions can do to manage such risks.