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Report

Making Waves: Aligning the Financial System with Sustainable Development

The UN Environment Programme’s Inquiry into the Design of a Sustainable Financial System was mandated between January 2014 and March 2018 to “advance options to align the financial system with sustainable development”. During this time, the Inquiry published over 120 reports.

Key points

“Making Waves: Aligning the Financial System with Sustainable Development” (April 2018) is the final report of the Inquiry, which aims to offer “a closing reflection of what has happened in the world of sustainable finance over the Inquiry’s life, building on our activities, the body of work and the community of practice. In offering this short reflection, we hope also to point to what still needs to be done, and what lessons can be learned, even at this early stage, form our contribution.”

The Inquiry concludes that there are four “main ‘first-best’ policy solutions for governments to mobilize financing for sustainable development”:

  1. Pricing externalities: Action may be justified where financial markets systematically ignore the impact of pursuing financial returns on social and environmental externalities, thereby being party to creating negative spillover impacts on third parties or society in general.
  2. Promoting innovation: Action may be justified to stimulate ‘missing markets’, generating positive spillovers, for example, through common standards that improve liquidity in embryonic areas.
  3. Ensuring financial stability: Action may be justified where the stability of parts of the financial system may be affected by environmental impacts, or by associated policy, technological and social responses.
  4. Ensuring policy coherence: Action may be justified to ensure that the rules governing the financial system are consistent with wider government policies (for example, aligning the capital requirements for banks and insures with environmental and social factors).

During the last four years the Inquiry worked on cross-cutting issues regarding the ability of the financial sector to contribute to a sustainable development, including:

  • banking;
  • credit rating;
  • digital finance;
  • foreign direct investment;
  • fiduciary duty;
  • green bonds;
  • insurance;
  • liability; and
  • performance framework.

The authors of the report observe that over the “last four years, a significant change has occurred” giving the term sustainable financial system a more profound meaning. There has been progress made regarding green label bonds and divestments in carbon-intensive assets. Yet theses progresses remain small compared to the overall bond market and ongoing investments in coal, oil and gas.

Looking forward, the Inquiry states that: “Early-stage evidence points to a momentum towards aligning parts of the financial system with aspects of sustainable development. Sustainability is becoming part of the routine debate within financial institutions and regulatory bodies.” Further developments and where action is needed from financial institutions to achieve the transition towards a sustainable financial system include, among others:

  • “Incorporating sustainability considerations and the risks and opportunities that they entail becomes part of the financial sector culture, business, and regulation.”
  • “Both short- and long-term sustainability risks are measured, priced, and managed with respect to specific financial transactions and systemically.”
  • “Disclosure standards are implemented and incorporated as part of standard financial markets’ integrity practices.”
  • “Standards to measure and manage long-term sustainability risks and opportunities are adopted.”
  • “Common information metrics are used broadly across the financial system and stakeholders have the know-how to incorporate such information into day-to-day operations and long-term strategy formulation.”

Some of the working areas of the Inquiry will continue with the Sustainable Finance at the G20, the Network of Financial Centres for Sustainability, the Sustainable Digital Finance Alliance and the Sustainable Insurance Forum.