By Jamie Brown, Project Director of BASE – a UNEP Collaborating Centre, Basel, Switzerland [1]
Returning from another round of climate discussions, this one in Cancun, the UNFCCC climate negotiators are unable to agree on a binding international framework to reduce future greenhouse gas emissions. Meanwhile, the global ecosystem continues to feel the heat as economies remain dependent on expanding use of fossil fuels. In the face of intensifying environmental crisis, the world would do well to ask: Is there any other policy approach that might expose more options?
We believe there is.
Why Engage The Global Finance Policy System?
Independent efforts by national governments to finance sustainability are important, but because the biosphere is global, environmental policy must be coordinated globally. Since the world does not have a global government capable of establishing hard law, the UNFCCC climate negotiations have so far led the development of a global framework for financing climate policy. However, there is a separate policy system that has long been capable of making decisions influencing massive financial flows worldwide: the financial sector itself.
In legal and regulatory terms, finance is the most globalized of any sector. Its policy system establishes recommendations with a record of successful adoption worldwide – the functional equivalent of global law. For example, bank lending around the world is limited by Capital Requirements, which are set by a single regulatory body at the Bank for International Settlements (BIS) in Basel, Switzerland. In response to the financial crisis, national governments took steps to further expand the reach of BIS-based authorities. The former Financial Stability Forum, hosted at the BIS, became the Financial Stability Board (FSB), intended to serve as “a roof over all the global standard setters”.[2]
The BIS is the bank of central banks. When the world economy needs a coordinated infusion of new liquidity, central banks come together and take action to expand money supplies by the equivalent of USD billions, even trillions at a time. To maintain price stability, they aim to keep money supply expansion more or less in line with economic growth. Given the average projected global GDP growth rate of 4.2% between 2010 and 2012,[3] with the global money supply (M3) now at over USD 60 trillion,[4] this means that central banks would need to collectively oversee the creation and infusion of more than USD 2.5 trillion-worth of brand new money every year for the next few years simply to maintain price stability.
These figures dwarf the numbers being debated by the UNFCCC climate negotiators, who have yet to acquire the authority to enforce any plan at all. Clearly, if the world needs to mobilize finance at the global level, monetary and financial policy is a system to consult. After all – what better way to finance a Green Economy than by “greening” the financial system directly?
This is not just a fuzzy idea, or a brilliant hope; it is potentially the most practical way out of the tangle of conflicting interests preventing meaningful action by normal governmental channels. A global policy partnership between money and environment may also be an inevitable step in the evolution of human institutions. If the world is to achieve a financial system capable of delivering a Green Economy, then the policy structures governing money and environment must align their goals.
This partnership would be a logical priority for the financial sector as well. Its own global policies are currently organized around the principles of financial stability and systemic risk. A profound decline of the biological ecosystem is the greatest conceivable threat to financial system stability because finance itself swings in the balance along with humanity and the biosphere. More importantly, global instability and the collapse of the biological ecosystem are the profoundest conceivable consequences of an incompatible, unsustainable financial system. Mitigating this risk requires adjusting financial flows worldwide, and as we’ve seen, the financial sector is in the best position to do this. The future of finance therefore depends fundamentally on its own capacity to integrate sustainability considerations into its policy frameworks.
In fact, there’s good reason to believe certain macro-environmental risks simply won’t get mitigated until finance takes on the challenge directly. Monetary and financial policymakers, after all, play a privileged role in establishing economic frameworks more broadly. Consider the G20, which is formally the Group of Twenty Finance Ministers and Central Bank Governors – and now perhaps the loudest voice in global economic policy.
Is it realistic to expect finance ministers and central bank governors to become environmentally conscious? Yes, and in fact it’s starting to happen. For example, the G20 recently reviewed its vision for global economic forecasts in terms of fiscal, social and environmental sustainability, and included the following wording in its April 23, 2010 Communiqué:
“Sustainable growth should be…consistent with social and environmental policy goals.”
Global policymakers have floated a proposal for a new and better relationship between the systems of money and environment. Now it’s time for them to engage the challenge seriously and deepen their commitment.
How Might a Partnership Between Money and Environment Work?
The policy institutions that most closely represent each system at the global level are, respectively, the Bank for International Settlements (BIS) and the United Nations Environment Programme (UNEP). At the moment, these two organizations have no formal relationship whatsoever. This is a curious gap in the functionality of the institutional framework, but it would be logistically easy to fill. A simple meeting between the Executive Director of UNEP and the Chairman of the BIS to explore common ground, map the challenges and analyze possible solutions could begin the process.
BASE (the Basel Agency for Sustainable Energy) is organizing an effort to facilitate this broader institutional relationship. We are a non-profit foundation and UNEP Collaborating Centre specializing in finance that neighbors the BIS in Basel. Since 2001, we have worked to mobilize investment in sustainable energy worldwide. We have developed and implemented a variety of approaches to providing financiers with the tools, support, and global network needed to conceive and manage investments in clean energy. We also design new financing mechanisms to leverage private investment in low-carbon sectors, particularly in developing countries.
In the broader effort to mobilize finance for sustainability, we recognize that it’s time to go one step further. The financial sector is like a “forest” of financing mechanisms. Focusing on specific instruments is helpful so long as we don’t miss the forest for the trees. In the current global context, it’s time to look at the design of the forest.
What BASE Is Doing
BASE is therefore organising a process to engage the global finance policy system (GFPS) on sustainability and respond to questions such as:
- What is the underlying purpose of finance, and how can finance be repurposed and redesigned for compatibility with the natural, cultural and other systems within which it is embedded?
- Where are the interconnections between financial stability and environmentally and socially inclusive development? For example, what are the metrics of physical system budgets and how might these interact with financial stability frameworks?
- How might the founding principle of sustainability – long-term planning and long-term success – be embedded into the financial sector? Which macroeconomic, monetary and fiscal policy instruments are or need to be made available for this purpose, and how should they be employed?
The GFPS includes the institutions working with a global mandate to address issues of finance, such as the Bank for International Settlements, Financial Stability Board, G20, IMF, OECD, World Bank, the International Financial Reporting Standards and other groupings.
BASE is partnering with the UNEP Finance Initiative (UNEP FI) and the International Institute for Sustainable Development (IISD) on this effort. UNEP FI is a global partnership between UNEP and the finance sector on sustainability that includes over 180 financial institutions worldwide. IISD is an international non-profit that champions sustainable development around the world through innovation, partnerships, research and communications.
BASE, UNEP FI and IISD seek to collaboratively implement three broad work streams: first, a series of policy briefs on how the global economic and financial system could better provide for sustainable development; second, direct engagement of GFPS actors in dialogue and consultation to produce, with their oversight, specific proposals for how to integrate sustainability considerations into global finance policy structures; and third, a service for lower-income economies advising them on how they might respond to trends in international capital markets and to the economic and monetary policies of the G20 economies in their quest towards sustainable development.
The vision of this work is to support the development of a global financial sector that is oriented towards long-term success, and towards financing the production of goods and services that are environmentally preferable and socially inclusive. We recognize socio-environmental sustainability as a foundational determinant of long-term economic performance, which is the rationale for the existence of a financial sector. The hope is thus to enhance the financial system through appropriate inclusion of sustainability in its governance, function and culture. There’s also a chance, it seems, that this rather obvious but consistently overlooked world resource could help save the day.
Article Notes:
[1] Special thanks to Leland Lehrman (Fund Balance) and his colleagues for assisting with this article.
[2] http://www.reuters.com/article/idUSTRE6A92I120101110
[3] At purchasing power parity (PPP). Source: World Bank, The global outlook in summary, accessed 29 Nov. 2010.
[4] Source: Mike Hewitt, (2008)
Reprinted with Permission (from Leland Lehrman). Article Originally published in New European Economy ( http://neweuropeaneconomy.com )
