UN/World Bank sustainability roadmap proposes fossil fuel subsidy review and green tagging

Major new report launched in Bonn, as IEA releases Sustainable Development Scenario

A review of fossil fuel subsidies is one of the key recommendations of a new United Nations/World Bank “roadmap” for a sustainable financial system.

One of the next steps identified by the report is for policymakers to “incorporate sustainability considerations into national fiscal frameworks, including a review of the effectiveness of fiscal interventions and subsidies in support of green activities and expenditures in unsustainable activities, including fossil fuel subsidies”. This is a medium-term target, to be completed within the next 24-36 months.

The report has been put together by UN Environment’s Inquiry into the Design of a Sustainable Financial System, co-headed by Simon Zadek and Nick Robins.

Such a move would require the development of a methodology to assess national scale measures that may have an impact on flows toward sustainable activities, the report states. It would entail an “inventory of direct and indirect subsidies”.

The roadmap also calls for the inclusion of sustainability data in central bank reporting to the International Monetary Fund (IMF). This would be “crucial” to ensuring that the results of multiple initiatives could be measured using common metrics.

One short-term initiative that the report proposes is a consultation on a set of global principles for sustainable finance.

The report highlights “green tagging” as a way forward, defining it as a process of identifying, tracking, and reporting the green share of a financial institution’s portfolio. Various approaches for tracking/tagging green finance are being piloted. The UN Environment Inquiry 
has launched an initiative with 10 of the largest European banks to explore the “state of the art” in linking real estate lending with energy performance standards. And the European Investment Bank has an initiative to align taxonomies for green projects. The World Bank too has an initiative on green tagging that “seeks a broader approach to ensure that bank loans are being consistently and comprehensively tagged at the appropriate levels”.It’s hoped the process will facilitate the development of longer-term capital markets products by providing valuable information on the portfolios of green/climate-smart loans that could be packaged as asset-backed securities or green bonds. 
Sweden’s SEB, for example, spent two years identifying its “virtual green balance sheet” before it issued its first green bond earlier this year.

Tagging would also, it is hoped, contribute to the measurement of the existing level of green finance and manage exposure to “non-green” or “brown” sectors – leading to a “leap in market transparency”.

The 104-page roadmap states: “This is particularly important in the banking sector where no criteria equivalent 
to that in debt markets — such as the Green Bond Principles managed by the International Capital Market Association — exists to identify green assets.”

Green tagging could also “provide the basis for evaluating the financial performance of green/climate-smart loans relative to their inefficient alternatives, including an appropriate level of capital charges”. The report cites evidence that green assets may have lower default rates and higher valuations than similar assets of otherwise identical risk characteristics.

The roadmap’s “ultimate vision” is a financial system that integrates sustainability “including the full costing of positive and negative externalities”.

“Sustainable growth must be the only growth option for the planet and will require sustainable financial systems that are inclusive, deep, and sound,” said Hartwig Schafer, World Bank Vice President for Global Themes.

It comes as the International Energy Agency has for the first time released a scenario that provides an integrated way to achieve climate stabilisation, cleaner air and universal access to modern energy. It comes alongside its flagship World Energy Outlook (WEO) publication. The new scenario – the Sustainable Development Scenario – provides a benchmark for measuring progress towards a more sustainable energy future, in contrast with the WEO’s other scenarios that track current and planned policies. It integrates the objectives of the three Sustainable Development Goals (SDGs) that are most closely related to energy and moves beyond WEO’s 450 Scenario, which focuses on climate change.