Harnessing The Global Financial System


New UN Report Lays Out Financial Reforms Needed to Harness Multi-Trillion Investments towards Insulating Countries, Communities from Climate Shocks and Build Market Resilience

Harnessing the global financial system to deliver climate security, reduce the risks of high carbon assets, and scale up capital for the low carbon transition is possible, but will only happen with a comprehensive, system-wide approach to financing — including the $37 trillion of energy infrastructure — in the next two decades.

Drawing from an array of policy innovations, some of which are already taking place at the country level, ‘The Coming Financial Climate’, a new report by the UN Environment Programme (UNEP), identifies measures that can make climate security an integral part of a sustainable financial system.

These measures cover risk, capital mobilization, transparency and a shift in the financial culture. Each country will need to decide how these options relate to its financial system and priorities for action.

The World Bank estimates that over the next 15 years, the global economy will require US $89 trillion in infrastructure investments across cities, energy, and land-use systems, and  US $4.1 trillion in incremental investment for the low-carbon transition to keep within the internationally agreed limit of a 2 degree Celsius temperature rise.

Tackling climate change requires economic transformation and a re-channeling of private finance.

According to the report, the task for those charged with governing the financial system is to enable the orderly transition from high-carbon to low-carbon investments, and also from vulnerable to resilient assets.

As with all financial shifts, this is likely to generate a set of transition risks for incumbent assets – risks that are not reflected in conventional models for delivering financial stability, which could create billions of dollars of stranded assets.

“To create lasting value in the real economy, we need to continuously evolve the effectiveness of our financial system thereby aligning the financial economy with the needs and markets of the future. Recent trends such as last year’s US$ 270 billion market for renewable energy investments and the emergence of new principles, standards and incentives for the fast-moving ‘green bond’ market are indicative of the scope for transformation”,  said UN Under-Secretary-General and Executive Director of UNEP, Achim Steiner.

“Integrating sustainability criteria that include environment and social factors into the rules that govern the financial system can substantially strengthen the resilience of the world’s financial systems, which has been a key goal of governments and regulators since the global financial crises of 2008. If brought to scale, the approximately US $300 trillion global financial system could help close the widening gap in sustainable development investment.” he added.

Yet, financial markets do not tend to effectively price environmental resources, resulting in undervaluation of natural capital stocks such as clean air, productive soils and abundant water in 116 out of 140 countries across the world.

Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), said, “The pathway to combating climate change, restoring the balance of planet Earth and unlocking opportunity for billions of people is clear—a peaking of global emissions in the next ten years, followed by a deep de-carbonization of the global economy.”

“In order to achieve this, and support the aspirations for growth and poverty eradication of developing countries, the globe’s financial systems need to better price pollution and invest in real wealth. It is happening but nowhere near the scale required. Paris 2015 can be a trigger that starts directing the trillions of dollars required away from high carbon, high risk investments and infrastructure towards the low carbon, Green Economy that is everyone’s future,” she said.