Green Finance and the Role of Government (Global Capital)
Date: 13 Oct 2017
Green finance has grown exponentially in recent years and — fortunately for the planet — shows no sign of stopping. In 2016, global issuance of green bonds reached $84bn, more than doubling 2015’s total, with many countries issuing them for the first time. In the first nine months of 2017, global green bond issuance rose 54% year-over-year. In China, at least 50 green investment funds were recently launched, and new green financial products have popped up like mushrooms. Government policy is developing apace, with China, the EU, Italy, Singapore, Hong Kong, India, Indonesia and many more developing green finance-related policy guidelines.
This rapid growth results in part from the increased attention of G20 leaders. During its G20 presidency in 2016, China launched the G20 Green Finance Study Group (GFSG), co-chaired by the People’s Bank of China and the Bank of England, with United Nations Environment as its secretariat. The GFSG developed seven options for scaling-up the global green finance market that were included in the G20 Hangzhou Communiqué in September 2016. This year, during the German G20 presidency, GFSG proposals on encouraging environmental risk analysis by financial institutions and improving the availability of environmental data for financial analysis were included in the G20 Hamburg Action Plan. These policy signals from G20 leaders have inspired many countries and their financial institutions to be more actively engaged in green finance and to devote more resources to capacity building.
A broad consensus has emerged in recent years that if nations want to mobilise the tens of trillions of dollars needed to finance environmentally sustainable development, then the financial system must proactively “go green”. The key question now is how to do it faster and more effectively. Historically, many countries adopted a laissez-faire approach, believing market forces alone would develop green finance. Indeed, some good practices, such as the Equator Principles, the Principles for Responsible Investment, and the Green Bond Principles, gradually emerged after multiple rounds of negotiation among private sector players and industry associations. However, more than a decade after the Equator Principles were agreed, only three countries have developed definitions and statistics on green loans. Worse yet, fewer than 1% of the global bonds are labelled “green” bonds, and only a few global institutional investments are classified as “green” or “low carbon”. The world cannot wait another few decades for the financial system to green itself, particularly in light of the massive environmental challenges we now face.
I believe governments, regulators and multilateral development banks (MDBs) need to play a more prominent role in encouraging green finance by helping the market allocate resources in a more sustainable way and by lifting private sector capacity to do so. This role can take many different forms and does not need to be very costly. For green projects that deliver ROEs slightly below market expectations or involve higher risks, incentives — such as guarantees, interest subsidies, and co-investment by public sector or MDB funds — could help mobilise private investment with limited public resources. I have come across several successful cases involving actors such as China, the US, the World Bank, the IFC and the ADB that prove this point. For markets that cannot identify green firms, green securities and green projects, government leadership in co-ordinating work on green definitions, information disclosure, and impact evaluation could significantly speed up the development of the green finance market. China’s relatively new green bond market, which accounted for 30% of global green bond issuance since 2016, provides an excellent example of government action that helped quickly create a sizeable green market. Moreover, the public sector should play a more active role in developing green finance capacity. Many key elements of this capacity, such as environmental risk analysis models and environmental data for assessing green investment opportunities, are largely public goods in nature. Some public sector-led work on developing and disseminating such methods and data could help avoid wasteful duplication of efforts by financial institutions investing in similar models and data.
I am glad to see that many policymakers and policy advisors, including in the EU, Asia, and Latin America, are beginning to appreciate the signalling and convening power of the government in developing green finance, and are exploring the role of government in catalysing private green investment.