The Role of Policy-Driven Institutions

Policy Lever: Directing Finance Through Policy

Policy directed finance approaches introduce requirements or prohibitions that shift capital allocation. Such measures in effect introduce new performance criteria into financial decision-making, which might reduce or increase risk-adjusted returns. The Inquiry found that measures that change the legal requirements facing financial institutions are perhaps the most contentious, but are also widely used.

Examples

Examples in practice include:
  • Lender and other liabilities: legal liability regimes for lenders, fiduciaries and insurers (and responses in terms of due diligence for environmental risk).
  • Capital requirements: adjustments to capital ratios to enable lending towards critical sectors (e.g. for SMEs, green assets).
  • Priority sector lending: integration of environmental and social factors into priority lending programmes.
  • Prohibitions: restrictionson financial transactions due to excessive societal costs e.g. lending to illegal deforestation (Brazil) and pollution intensive industrial plants (China).
  • Directed service provision: requirements that financial institutions provide access to particular financial services such as basic bank accounts and insurance.
  • Mandatory purchase requirements: mandatory requirements for purchase of key financial services (such as insurance) that are essential for system resilience in the face of environmental stress.

Impacts

Measures such as priority lending and strengthened environmental liability have a strong potential for driving change, but need careful design and market preparation to avoid unintended consequences.    

Inquiry Publications

  • China Report: A Systemic View of the Insurance Industry and Sustainable Development

    Date: 06-Oct-2015

    The contribution of the insurance industry to sustainable development relates to its three roles as a financial loss “shock absorber” in reducing real risks to assets, in safety and health, and as a significant investor in the real economy. Particular areas where the insurance industry is responding to sustainable development challenges are in relation to

  • Greening the Financial System: Exploring the Ways Forward

    Date: 01-Nov-2017

    This briefing summarises the discussions held during the “Greening the Financial System: Exploring the Ways Forward” event in Washington, D.C. on 12 October 2017. The goal of this convening, the fourth in the series, was to examine lessons from developing and implementing green finance initiatives over the last few years and to highlight successful examples

  • Delivering The Green Economy Through Financial Policy

    Date: 07-May-2014

    This working paper was produced for the early stage of the Inquiry to provide an inital overview of the areas where the financial sector can have an impact on moving the green economy forward and the extent to which green financial policy is already actively being practiced. The paper is focused on financial regulation and the instruments of financial policy that

  • China Green Finance Task Force Report: Green Insurance

    Date: 02-Apr-2015

    The rapid and continuous increase of environmental incidents in China in recent years has led to severe impacts on its sustainable social and economic development and public health. This paper sets out the case for green insurance as a market-based risk management mechanism which could play a proactive role in preventing and transferring environmental pollution risks and

  • China Report: Lessons from the Development of Green Finance in China

    Date: 06-Oct-2015

    With the initial progress of China’s green finance market, some lessons are emerging that are useful both for the further development of the green finance system and for other emerging market countries embarking on green finance development.  Strategic political commitment has been the key driver for China’s development of green finance, but translating this into

  • China Green Finance Task Force Report: Lender Liability

    Date: 02-Apr-2015

    In the event of a project causing environmental damage, in many countries its commercial lenders can also face legal liabilities. This forces lenders to take environmental impact into consideration in making investment and financing decisions. This paper makes the case for establishing environmental legal liabilities for commercial banks in China and highlights steps to take to implement this: Revise

  • China Report: Problems and Difficulties in the Development of China’s Green Finance

    Date: 06-Oct-2015

    In recent years, financial market policy-makers and regulators in China have shown leadership in advancing their roles in creating a green financial system. However, the impacts to date have been constrained by countervailing forces. In particular, the performance criteria on which local government officials are assessed still prioritizes economic growth over environmental compliance. The positive

  • China Green Finance Task Force Report: International Experience

    Date: 02-Apr-2015

    The Green Finance Taskforce was convened in 2014 by the People’s Bank of China and the UNEP Inquiry. The Taskforce brought together leading Chinese experts on financial markets, policy and regulation from government, academia and from the private sector together with international experts and practitioners. One of the inputs to the deliberations of the Taskforce

  • China Report: Internalizing Climate Mitigation for Financial Policy-Makers

    Date: 06-Oct-2015

    The paper also shows how the  objectives of financial policy-makers—such as investor protection, transparency, maintaining the safety and soundness of financial firms, financial stability, tackling systemic risk, reducing information asymmetries, tacking market failures and developmental objectives— offer multiple avenues to legitimize policy measures that can contribute to the greening of the financial system. In particular,

Copyright © United Nations Environment Programme. All Rights Reserved. Contact us