Developing countries are increasingly involved in the development and use of green finance, and in many instances have taken leadership in experimenting with policy and regulatory measures as well as through the adoption of breakthrough financial technologies to leapfrog financial market development. At the same time, some developing countries are voicing concerns over the profusion of green and sustainable finance initiatives internationally, and the many unresolved issues as to how their growth might impact sustainable development. These concerns and issues, summarized in Green Finance and Developing Countries, include:
- Sustainable development impact: green finance is clearly intended to address key environmental aspects of sustainable development, but cannot be taken in isolation from social and economic effects, both in the short as well as the longer term. The G20 Green Finance Study Group has also highlighted concerns over the broader impacts of green financing, with problems arising both from too little and, indeed, ‘too much’. Positively, increased green finance could accelerate the transition to clean energy and resilient infrastructure. It would be more problematic, on the other hand, if moving too quickly to enforce strict environmental risk assessment in financing decisions undermined employment-generating businesses, or if integrating climate risk into sovereign credit ratings were to lead to a ‘double penalty’ to vulnerable countries by raising their cost of capital.
- Missing elements: much of the green finance focus to date has been on banking and domestic capital markets – certainly relevant to developing countries – but other aspects have not been considered, such as greening foreign direct investment, the leapfrogging of green finance opportunities offered by fintech, and the effects on green finance of market integrity shortfalls such as illicit finance or market structure issues, such as the dominance of larger or offshore banks. Recognizing that some of these issues are in any case relevant to developing countries as they seek to develop their financial markets, it is essential to understand how they relate both to the goal of mobilizing and mainstreaming green finance and to the achievement of their broader development objectives.
- Spillover effects: green finance initiatives in global and regional financial centres are likely to have spillover effects on financing for sustainable development in developing countries. For example, legal reinterpretations of pension funds’ fiduciary responsibilities in the US or Europe would in all likelihood have an impact on these funds’ interest and capacity to channel green finance to developing countries, just as new international capital requirement rules established under Basel 3 impacts on the ability of banks to provide long-term loans to finance clean technology. Yet developing countries, beyond a few of the largest that are G20 members, have limited voice and means of influencing these developments.
- Coordination and integration: many international initiatives have grown up, covering institutional investors, stock exchanges, bonds, banks and so on. Coordination is needed to improve the capacity to generate integrated solutions for the participant countries.