The ‘G20 Green Finance Synthesis Report’ submitted by the Green Finance Study Group (GFSG) to the G20 and endorsed in the September 5 communiqué, is one of the most comprehensive outlines for voluntary options that could enhance the ability of the financial system to mobilize private capital for green investment. It is the result of a high-level body of research that has been quietly, quickly and purposefully pulled together this year.
Its welcoming by the G20 could act as a clear financial markets driver for the environmental goals agreed at COP21 in Paris.
The production owes much to the pragmatism, energy and hard work of the UNEP Inquiry, the international bodies that have produced the background research, and the policy makers driving action.
Simon Zadek, along with Nick Robins, the former head of HSBC’s Climate Change Centre, is one of the co-directors of the United Nations Environment Programme (UNEP) ‘Inquiry’ into the Design of a Sustainable Financial System, that was the secretariat for the G20 work. Zadek, a renowned writer and advisory specialist on business and sustainability, has considerable experience working in China, and has been instrumental in allying with this year’s G20 presidency, which has been the green finance driving force. He is a visiting scholar at the School of Economics and Management of Tsinghua University in Beijing.The timeframe for the work has been rapid.
Much of the research and co-ordination was done in the first six months of the year; a rare achievement for such high-level policy corralling.
Since January, the IMF, OECD, and the World Bank, among others, known collectively as the Green Finance Study Group, have produced 15 advisory papers across green finance and capital markets themes. The combined output – the G20 Green Finance Synthesis Report – was presented at the third G20 Finance Ministers and Central Bank Governors Meeting under the Chinese Presidency in Chengdu on July 23/24. At the meeting, the G20 welcomed the voluntary options developed within the advisory papers, which it said would “enhance the ability of the financial system to mobilize private capital for green investment.”
It amounted to the boldest commitment yet of G20 member states to serious capital support, adding: “We recognize that, in order to support environmentally sustainable growth globally, it is necessary to scale-up green financing.”
The research was turned into G20 working papers during the summer to be considered by the government leaders in Hangzhou.
The genesis of the endeavour, however, goes back to the initial two-year UNEP Inquiry, which published its findings in October 2015. During the Inquiry, the People’s Bank of China (PBoC) set up a domestic taskforce on green finance starting in August 2014, co-convened by Ma Jun,
PBOC’s Chief Economist, Research Bureau, and Zadek.
It converged with two other policy initiatives on green finance, one by the Bank of England, the other a collaborative international project. The timeline for these various initiatives is represented in the chart. (see visual)
Importantly, at the October 2015 UNEP Inquiry final presentation at the IMF annual meeting in Lima, Peru, Mark Carney, governor of the Bank of England and Yi Gang, deputy governor of the PBOC shared a panel. Gang announced that China would be pushing the green finance topic within the G20 during its presidency. It invited the Bank of England to co-chair and UNEP to be the secretariat. Importantly, the partners promoted the discussions to the G20 finance ministers ‘track’. Zadek explains: “The G20 isn’t a unitary process and the finance track, overseen by finance ministers and central bank governors, is where the power lies. There was widespread surprise this happened, and then further surprise when China asked UNEP, a UN-agency, to become part of the process. Historically the UN has not taken part in debate and policy around financial market reform and development.”
Zadek says a historical, trusting working relationship between the people involved was critical to moving the project forward.
He says China’s position in supporting a serious alliance between financial markets and the environment to promote real change has changed the tenor of the debate.“That this work has taken place under the co-chairing of China, one of the most important emerging central banks and the Bank of England, arguably, one of the most experienced, classic central banks, is important. I think if it had only been China, it would have been more marginal, and if it had only been the UK, it may never have happened.”
Crucial, however, he says, is that the synthesis report, a consensus document between all the G20 countries, has now been formally launched: “That is almost unheard of for a brand new topic that has only been worked on for six months. That is a significant success already.”
The G20 working papers that UNEP has curated are now published on the web (see link at foot of article). While they are now formally endorsed G20 positions, they are policy input papers, and therefore significant government/civil service influencers.
The secondary impact of the policy build, Zadek says, is the major ‘signal’ that G20 finance ministers and bank governors will be giving that environmental issues are relevant to the development of capital markets. Zadek says this is an “astonishing deliverable”, even if it is high-level: “It is a very big deal that all the G20 countries from India to Saudi Arabia, the US, France, Germany and China, are saying that despite their different views they accept that the green-finance nexus is a legitimate topic for them to work on!”
We have, of course, heard ‘big deal’ agreements before in green finance that have delivered a lot less, so why is this one different?
Zadek says scepticism is healthy, but we should overcome cynicism: “Yes, we’ve all heard high-level statements before that did not translate. But there is now no G20 country that can say they believe the environment is divorced from the way in which we develop financial markets. We’re already seeing results. Earlier in the summer, Valdis Dombrovskis, vice-president for the euro and social dialogue, and in charge of financial stability, financial services and capital markets union, announced to the European Parliament that he would be initiating a strategic review of sustainable finance in Europe’s financial and capital markets development strategy. That is a significant breakthrough. The fact that this topic was going through the G20 was an influential factor.”
Zadek says that when the G20’s work begins to cascade into national plans is when policy gets traction: “The work creates validation and political space for G20 countries and non-G20 countries to work out what green finance means to them, and political pressure and encouragement for them to act.”
To this end, he says, it is significant that the work of the Green Finance Study Group was broad: “Take the bond market work as an example. We didn’t want to just look at the evolution of green bonds, but bond markets more broadly and what their potential influence is on green finance. Weargued – ultimately successfully – that what was required was a landscape review of the wide opportunities for future green finance activity.”
Zadek says it is important to clarify the G20 ‘green finance’ terminology: “Climate finance, as an example, is part of green finance, but green finance may include nano-technology or waste management, which is not part of climate finance, but is critically important.”
He says there are many green finance topics that have not been looked at in detail in the first year, notably insurance: “It is a major topic in this space, and its omission was not a downgrade of importance, simply a question of work volume. We covered a lot of territory in the first round, but there are many other topics of importance to deal with.”
He sums up the three main pillars for which the G20’s work will be the foundations. The first, he says, are the signals that policy interest and innovation around green finance is now pushing more deeply into financial markets.
The second is that more effective pricing of environmental risk at the enterprise level and, crucially, at the financial system level, is going to become the norm globally. That, he says, will tend to drive a redeployment of resources from environmental high risk to environmental low risk projects/products. Third, and perhaps the biggest story, he believes, is that as the economy begins to go into a higher gear in the green transition, those financial institutions that have a handle on environmental risks, new technology opportunities, institutions and partnerships, will have a competitive advantage that will scale quickly as the transition accelerates.
The G20 Green Finance Study Group Document Repository can be accessed here
This article first appeared in the September 2016 issue 5 of ESG Magazine