For the first time in years, a healthy dose of optimism seems to be in order. The global economy—a few trouble spots aside—is finally moving beyond the financial crisis. Technological breakthroughs have put renewable energy on a competitive footing with fossil fuels. And the international community seems poised to forge critical agreements on sustainable development and the fight against climate change.
And yet the risk remains that these gains will be frittered away, as policymakers, business leaders, and investors focus on short-term concerns at the expense of looming threats to the global economy. If we are to lock in our progress, we will need to address the failures of our financial system at their roots, putting in place standards, regulations, and practices that make it compatible with the long-term needs of a more inclusive, sustainable economy.
This year, the world has the potential to do just that. The transition to a green economy now seems to be a certainty, rather than a hopeful aspiration, as growing public acceptance and technological advances make investments in clean energy increasingly practical. In 2014, global investment in renewable energy increased by 17%, even as oil prices plummeted, according to a recent report by the United Nations Environment Programme (UNEP). The trend was driven by a boom in solar energy in China and Japan and increasing European investment in off-shore wind power.
Stock exchanges from Shanghai to São Paulo have established reporting requirements to inform investors about how companies are weaving sustainability into their strategies. Green bonds have taken off, with upwards of $40 billion issued in 2014, and they are likely to become only more popular as clearer standards and regulations are established. Even central banks have turned their attention to the environment. The People’s Bank of China has joined with UNEP to identify practical steps to ensure “green” financial-market reform, and the Bank of England (BoE) has initiated a prudential review of the systemic risks posed by climate change to the United Kingdom’s insurance sector.
September will mark the launch of the UN’s Sustainable Development Goals, the world’s first universally adopted, measurable targets for ending poverty and hunger while protecting the environment and the planet’s natural-resource base. And, later this year, the international community is expected to agree on binding commitments to cut emissions and finance the fight against climate change.
But, although the signs are all pointing in the right direction, success is far from guaranteed. The gains could slip away if the moment is not seized. The real question is one of timing, and the irreversible damage that delays could inflict. More than 80% of the 140 countries surveyed in UNEP’s “Inclusive Wealth” report registered a deterioration in their stock of natural capital. The economic damage resulting from environmental degradation is estimated to be roughly $7 trillion a year, much of it irreversible. The longer we wait, the worse our problems will become.
What is needed is a major international effort to realign financial and capital markets in ways that support sustainable development. Our financial system’s current design all but guarantees what BoE Governor Mark Carney has called the “tragedy of horizons”—a market failure resulting from the inability of investors, companies, and governments to act on problems, such as climate change, with consequences that will be felt only far in the future.
Policymakers and business leaders cite many reasons for focusing on immediate concerns. Indeed, the very policy actions needed to reduce the risks of another financial crisis force banks and asset managers to lend and invest for the short term, passing up often more profitable, but less liquid, longer-term opportunities.
Short-term pressures will always be present, but they can be overcome with the proper tools: improved pricing of environmental risks, climate-sensitive credit ratings, environmental lender liability, and efforts to mitigate the environmental risks to financial stability. A sustainable future is within reach, but only if we put in place the policies that make it possible.
Simon Zadek is co-director of the UNEP Inquiry into the Design of a Sustainable Financial System, a visiting scholar at Tsinghua School of Economics and Management, and a senior fellow of the Global Green Growth Institute and the International Institute for Sustainable Development.
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