By Eric Usher and Careen Abb
of financial sector authorities with the recent work and recommendations of the Financial Stability Board on climate-related financial disclosures.
In 25 years of action, UNEP FI has promoted the sus-tainable finance agenda on several levels, spanning from the establishment of codes of conduct (Principles for Responsible Investment, Principles for Sustainable Insur-ance), to the development of implementation guidelines (Guide to Banking & Sustainability) and capacity-build-ing for financial institutions, to engagement of financial regulators and the facilitation of finance sector participa-tion at relevant negotiaparticipa-tions – the climate negotiaparticipa-tions being the most notable case in point. Figure 31 on the next page provides an overview of the partnership’s specific contributions to the agenda.
But the role of the finance sector is as yet far from being fully realised, most critically in terms of actually chan-nelling financial services and financial flows to support a range of sustainability objectives, as enshrined in the SDGs. Blended finance, venture capital, impact investing, crowd funding and environmentally or socially oriented market instruments such as green bonds constitute major developments that signal our economies are changing.
Nonetheless, the volumes mobilised remain far removed from what is needed (the green bond market represents approximately 1% of the overall bond market).
The value of leveraging
So why is there so little private finance flowing to SDG areas? The difficulty in bridging the gap resides in the fact that the existing projects, entities and individuals which need to be financed do not seem able to com-ply with the laws of risk and return that constrain the market – or less so than those that currently make up the bulk of the market. They have poor credit ratings, they have no credit record or simply no bank account at all.
They lack scale and defeat the logic of current business models. Hardly a commercial target in today’s economy.
What is needed is real financial innovation to address two key issues:
way. The private financial sector needs to set itself up internally to be an active stakeholder of the fourth industrial revolution. It must know how to select and engage with corporates, and devise impact-based financing solutions for the new business models, among other things.
In sum, sustainable development is a matter of strategic concern to the financial sector. So, can we go further?
UNEP FI firmly believes the answer is yes.
UNEP FI Positive Impact Manifesto &
the Principles for Positive Impact Finance
Philantropic action by FIs for special causes
Gradual integration of environmental and social considerations by financial institutions in buisiness analysis and
decision-making - Equator Principles - Principles for Responsible Investment
1992 in the 21st Century
2014 sustainability issues by financial regulators - National regulatory and supervisory principles - Financial Stability Board creates Task Force on
Climate-related Financial Disclosures
Growing recognition by public policy of the role of the private financial sector for the achievement of sustainability goals
- Rio+20 and the SDGs - COP22
- G20 Green Ginance Study Group
Growing financial sector interest in sustainable finance opportunities
- Green, social and other themes bonds market
- Sustainability related portfolio targets
2014
Figure 31: Sustainable finance timeline
The value of leveraging
Accordingly, the Positive Impact Principles were launched in January 2017. By providing a common language for the finance community and the broader stakeholder commu-nity, the Principles will help bring coherence and clarity to what is currently a fragmented market, where multiple definitions, objectives and assessment frameworks coexist.
There are four principles:
1. The first and most important principle is definition of positive impact. Positive Impact finance should be understood as that which serves to deliver a positive impact on one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated. This means Principles are not sector based.
The definition embodies a holistic approach to sustainability.
2. The second principle deals with methodologies and frameworks. It translates the definition into what needs to happen inside institutions. It establishes the need for dedicated processes, methodologies and tools to identify and monitor impact.
3. The third principle is a request for transparency - rather than compliance with set sectors and or methodologies - is required to ensure that holders can judge whether financings are in line with their own needs and requirements.
4. The fourth principle is about assessment. The intention is that target impacts must be assessed and verified based on their magnitude, scale, variety and level of additionality.
The Principles propose a new way of looking at business and investment. Over time the emergence of positive impact finance as a recognised standard will further help to build-up the SDG ‘market’, as public and private investors, clients and service providers are empowered to identify private finance players aligned with sustainable development objectives.
Towards an SDG market
So, what are the implications of such a new financing paradigm for the sustainable development agenda and the ways to finance it? What is in the making is a more fundamental reconsideration of the interaction between financiers, their clients (corporates, businesses and entre-preneurs) and public entities ranging from national gov-ernments to municipalities and communities. This implies some fundamental disruptions for public planning.
Figure 32:
Today, to a large extent, the economic actors (corpo-rations, individuals, projects) targeted by the SDGs are considered eligible as clients only if the risks can be carried or shared with multilateral, development and/or export credit agencies. This approach has shown its lim-its, as evidenced by the difficulties in meeting a variety of public policy targets.
Solution-providers and financiers need to be active-ly involved at the outset, that is in the design stages of public programmes, to ensure that business models are economically sound, before getting to the pure financing aspects. If the use of public money is to be optimised, private sector players (financial and non-financial) could in theory be asked to prove the need for public funds in the first place.
In sum, what is at stake is for public players to act as programme initiators rather than fundraisers, and for the private sector to see the SDGs as a market where public agencies, whether multilateral or not, are clients.
The UN, with its unique mandate and legitimacy and its broad multilateral network spanning all geographical regions and all sustainability issues, stands in a position of choice to convene all actors of society, to experiment, promote and drive the transformation of public-private interaction.
Can we finance the SDGs? Yes we can.
The value of leveraging
Homi Kharas is a Senior Fellow and Co- Director at The Brookings Institution, which is a non-profit public policy organisation that brings together more than 300 leading experts in government and academia from all over the world. Homi Kharas studies policies and trends influencing developing countries, including aid to poor countries, the emergence of the middle class, global governance and the G20.