The G20’s finance ministers and central-bank governors have begun to undertake a stunning shift in mindset. They have become increasingly convinced that “green finance” – financing environmentally sustainable growth – should be at the centre of economic-development strategies. Such an idea, until recently confined to a fringe of academics and policymakers, is potentially one of the most important new “truths” of the twenty-first century
The conventional economic-development model viewed environmental protection as a “luxury good” that societies could only afford after becoming rich. Such thinking explains why the dramatic growth in global income, 80-fold in real terms during the last century, has been accompanied by a decline in natural capital in 127 of 140 countries, according to the United Nations Environment Programme.
But natural capital is not just an abstract concept; it supports lives, livelihoods, and social wellbeing. The environmental destruction that our activities are wreaking – greenhouse-gas emissions add energy to the Earth system at a rate equivalent to the detonation of four nuclear bombs every second – has concrete consequences, which are already being borne by millions of people.
Since 2008, an average of 26.4 million people have been displaced from their homes by natural disasters each year – equivalent to almost one person every second. One-third of the world’s arable land is now jeopardized by land degradation, which causes economic losses of $6.3-10.6trn per year. And 21 of the world’s 37 largest aquifers have passed their sustainability tipping point.
The downsides of the conventional approach to economic development, which favours income and employment over environmental protection, are particularly apparent in China. By some measures – in particular, per capita income and GDP growth – China’s development process has been an extraordinary success. But it has also brought lethal levels of air pollution and extensive contamination and depletion of land and water.
The good news is that Chinese leaders now seem to recognise that they must safeguard the environment before China achieves high-income status. Indeed, they have moved to the forefront of the green-finance movement.
To be sure, the challenge facing China is monumental. Success will require an estimated $600bn in investment each year, in areas including environmental remediation and protection, renewable energies and energy efficiency, and sustainable transportation systems. Given that less than 15% of that finance will come from public sources, China will also have to retool its financial system to support private investment.
But China is already taking concrete steps in the right direction. On August 30, President Xi Jinping presided over a decision by the Central Leading Group for Comprehensively Deepening Reforms to transform China’s financial system to facilitate green investment. The so-called “guidelines for establishing a green finance system” adopted at the meeting represent the world’s first attempt at an integrated policy package to promote an ambitious shift toward a green economy.
According to the guidelines, China will have to develop a wide range of new financial instruments, including green credit, green development funds, green bonds, green equity index products, green insurance, and carbon finance. It must also introduce a host of specific policies, regulations, and incentives, including innovative use of the central bank’s relending operations, interest subsidies, and guarantees. And it must establish a national-level Green Development Fund, much like the UK’s Green Investment Bank.
How this process unfolds in China will hold important lessons for others seeking to build more sustainable economies. But some governments are not hesitating to make their own way. From the City of London’s Green Finance Initiative to Indonesia’s Sustainable Finance Roadmap, innovative policy packages are emerging at an accelerating pace.
Moreover, many of the world’s stock exchanges have committed to requiring listed companies to report on their sustainable development risks. And a coalition of banking regulators has emerged to explore how to advance green credit. Details vary by country, but the goal is a common one: to align capital markets with the financing needs of an inclusive, sustainable economy.
The G20’s agenda, which aims to promote strong, sustainable, and balanced economic growth, should now be updated to reflect this shared goal, with green finance becoming a key component of the G20’s business. This week’s summit in China is the ideal place to start.
Ma Jun, chief economist of the Research Bureau of the People’s Bank of China, is chair of the Green Finance Committee of the China Society for Finance and Banking.
Simon Zadek, co-director of the UNEP inquiry into design options for a sustainable financial system, is DSM senior fellow and visiting professor at the Singapore Management University.
Copyright: Project Syndicate, 2016.
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