Op-Ed: Masamichi Kono, OECD Deputy Secretary-General: A new paradigm shift toward environmentally sustainable finance

The OECD stands ready to support efforts to build political leadership and address outstanding barriers to sustainable finance

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Is this the beginning of a paradigm shift in the financial system towards environmentally sustainable finance? And if not, what can we do to accelerate this shift?
In the one year since my previous Op-Ed in Responsible Investor, momentum has been building in environmentally sustainable finance. Developments have come in several forms.

Investors and issuers increasingly consider climate change risks and opportunities and other environmental, social and governance (ESG) factors. According to recent surveys, 78% of responding asset owners worldwide are already integrating ESG factors into investment decisions (1). and 53% of European investors always factor ESG considerations into investment decisions (2).
In September 2019, an alliance of asset owners responsible for USD 2.4 trillion in investments committed to achieving carbon-neutral investment portfolios by 2050 (3). The Climate Action 100+ initiative is generating pressure on asset managers and corporations to better manage climate risks. New green bond issuance also increased again last year, reaching more than 180 billion US dollars in 2018 (4). And the trend towards sustainable investing is expected to continue to grow further. In the next 15 years, millennials will inherit USD 24 trillion of wealth, and they are more than twice as likely as other generations to invest in assets that target social or environmental outcomes (5).

On the regulatory side, no one could have predicted three years ago that so many central banks and supervisors are beginning to consider climate risks and broader sustainability factors as part of their core functions. The Central Banks and Supervisors Network on Greening the Financial System (NGFS), which started with eight members at the One Planet Summit in December 2017, now counts 46 members and 9 observers, representing jurisdictions accounting for over half of global greenhouse gas (GHG) emissions (6). The NGFS has recognised that climate change is a source of financial risk, which “falls squarely within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.” (7) Just last month, the Bank for International Settlements (BIS) launched an open-ended fund for central banks’ reserve managers to invest in green bonds, to respond to a growing demand for climate-friendly investments among central banks.
Other important initiatives include: the European Commission’s Action Plan on Financing Sustainable Growth, and its Technical Expert Group on Sustainable Finance (TEG) and newly launched International Platform on Sustainable Finance (IPSF); the Coalition of Finance Ministers for Climate Action (CFCA); and the Sustainable Finance Network of the International Organization of Securities Commissions (IOSCO). The OECD serves as observer to the TEG, IPSF and NGFS and contributes to CFCA.

But we are not there yet. Far from it.
A year ago, the UN Intergovernmental Panel on Climate Change (IPCC) special report on 1.5°C reminded us that climate change threatens economic growth and human wellbeing. It identified the significant benefits of aiming for a 1.5 instead of a 2 degree global temperature target. July 2019 was the Earth’s hottest month on record (8). And climate change has already increased the intensity of some weather and climate-related disasters (9).

2017 was on the most costly hurricane season in the United States on record, causing USD 200 billion in damages (10). The list of recent disasters goes on. And climate damages will increase. Without adaptation, flood damage under higher-end sea-level rise (1.3 metres) could reach 4% of the world GDP (11).Air pollution linked to fossil fuel use is also causing large damages worldwide. According to the World Health Organization (WHO), an estimated 4.2 million premature deaths globally are linked to ambient air pollution. Air pollution now kills more people than tobacco. Worldwide, ambient air pollution accounts for 29% of all deaths and disease from lung cancer (12).

Lest we forget, we are also witnessing massive biodiversity losses, with around 1 million species threatened with extinction (13). Our natural ecosystems are all being degraded, undermining the services which underpin our economies.
To meet these challenges, we need a paradigm shift towards sustainable finance, and away from unsustainable finance. The Guardian recently revealed that the world’s top three asset managers oversee USD 300 billion in fossil-fuel investments (14). If we do not shift toward sustainable infrastructure, land use and business models now, the transition in the future will have to be far more painful and drastic.
As we confront environmental challenges, we should heed an important lesson from the 2008 financial crisis: we must break existing silos in policymaking and implementation. In making the transition to more sustainable economic models, we cannot avoid dealing with issues such as rising social inequalities and human rights violations (15). Given the complexity of the global financial system, changes in regulatory and institutional design are also needed to strengthen the governance and resilience of our financial system (16). This could include transformative changes in the mandates of regulatory and supervisory authorities, toolkits for policymakers, and instruments and incentives for addressing systemic challenges. We need a whole-of-government approach.
The challenges are urgent. We have only 10 years to cut emissions in half to have a chance to limit warming to 1.5 degrees (17). In addition, climate change aggravates land degradation, thus exacerbating existing risks to biodiversity, human health and food systems (18). Fiscal policies are also critical to help price GHG and other environmental externalities. Yet the OECD finds that only four countries (19) tax non-road energy above EUR 30/tCO2 (20). Higher taxes may be warranted, while ensuring that broader well-being concerns, including affordability and jobs, are taken into account (21). To have markets correctly price carbon, fiscal tools might also need to be complemented by financial policy instruments, such as climate-risk disclosure, including on stress-testing.
We are at a historic moment, and we cannot afford to get it wrong. Halting climate change is a top concern of the younger generation. The financial sector has started to develop some tools for sustainable finance. But more must be done quickly, not only on climate but also on biodiversity and other sustainable development goals. The OECD stands ready to support efforts to build political leadership and address outstanding barriers to environmentally sustainable finance, including by:

• Building capacity amongst regulators and policy makers on climate stress testing, scenarios and modelling;
• Better defining sustainable finance and providing transparency and comparability;
• Addressing practical challenges for investors who want to integrate environmental risks in investment decisions;
• Strengthening our understanding of the private and social returns from green investments; and
• Creating greater awareness of the investment risks and opportunities linked to biodiversity (22).

More than 700 stakeholders are gathering this week to discuss these pressing issues at the 6th OECD Forum on Green Finance and Investment on 29-30 October 2019 in Paris. We look forward to working with investors and policymakers to accelerate green, environmentally sustainable finance (23).

Masamichi Kono is OECD Deputy Secretary-General.

Please refer to notes overleaf >>>>

(1) RI Journalists (2019), “Almost 80% of responding asset owners to global Responsible Investor survey now integrating ESG into investment”, based on survey by Responsible Investor Research and UBS Asset Management Link
(2) HSBC (2019), Sustainable Financing and Investing Survey 2019, Link
(3) IISD (2019), “‘Net-Zero Asset Owner Alliance’ Commits to Carbon-neutral Portfolios by 2050” Link
(4) BloombergNEF (2019), “Sustainable Debt Market Sees Record Activity in 2018” Link

(5) Lagarde, C. (2019), “ The Financial Sector: Redefining a Broader Sense of Purpose”, Tacitus Lecture—Guildhall, London—February 28, 2019 Link
(6) Network for Greening the Financial System (NGFS) (2019), “NGFS welcomes four new members and the IMF as an observer”, Press Release
(7) NGFS (2019), First Comprehensive Report – A call for action: Climate change as a source of financial risk Link
(8) World Meteorological Organization (WMO) (2019), “July matched, and maybe broke, the record for the hottest month since analysis began” Link
(9) Intergovernmental Panel on Climate Change (IPCC) (2018),Special Report on the Impacts of Global Warming of 1.5 °C (SR15) Link
(10) Drye, W. (2017), “2017 Hurricane Season Was the Most Expensive in U.S. History“, National Geographic Link
(11) OECD (2019), Responding to Rising Seas: OECD Country Approaches to Tackling Coastal Risks, OECD Policy Highlights Link

(12) World Health Organization (WHO) (2019), “Ambient air pollution: Health impacts” Link
(13) Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) (2019), Global Assessment*(14)* Greenfield, P. (2019), “World’s top three asset managers oversee $300bn fossil fuel investments”, The Guardian, 12 October 2019 Link
(15) OECD (2019), Accelerating Climate Action: Refocusing Policies through a Well-being Lens, OECD Publishing, Paris Link
(16) Welcome and Introductory Remarks by Sunil Sharma, Distinguished Visiting Scholar, IIEP, Elliott School, GWU, former Assistant Director, Research Department, IMF, at the Seminar on Governing Finance for Sustainability, Wednesday, October 16th, 2019, Elliott School of International Affairs, Washington, DC.
(17) Global net human-caused emissions of carbon dioxide (CO2) would need to fall by about 45 percent from 2010 levels by 2030, reaching ‘net zero’ around 2050; IPCC (2018), 1.5 degree special report (SR15).
(18) IPCC (2019), IPCC special report on climate change, desertification, land degradation, sustainable land management, food security, and greenhouse gas fluxes in terrestrial ecosystems Link
(19) Denmark, the Netherlands, Norway and Switzerland; OECD (2019), Taxing Energy Use 2019: Using Taxes for Climate Action, OECD Publishing, Paris Link
(20) EUR 30 is considered a low-end estimate of the costs to the climate of carbon emissions.
(21) OECD (2019), Accelerating Climate Action: Refocusing Policies through a Well-being Lens.
(22) Including in the run-up to the Convention on Biological Diversity’s 15th Conference of the Parties (CBD COP15) in China in 2020. The economic and business case for action on biodiversity was highlighted by the OECD report on Biodiversity: Finance and the Economic and Business Case for Action, presented to the meeting of G7 Environment Ministers in May 2019 at the request of the French G7 Presidency Link
(23) This Op-Ed by Masamichi Kono is a collaborative product made of substantial inputs from OECD colleagues, including Geraldine Ang, Simon Buckle and Robert Youngman.