Banking
Reform ideas

How to 'green' our financial system

Burgess COMMENTARY

Peter Burgess

How to 'green' our financial system

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 says Jamie Brown from BASE.

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 globalised 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”.

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, with the global money supply (M3) now at over USD 60 trillion, 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 mobilise 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 organised 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…[c]onsistent 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 organisations 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 analyse possible solutions could begin the process.

BASE (the Basel Agency for Sustainable Energy) is organising an effort to facilitate this broader institutional relationship. We are a non-profit foundation and UNEP Collaborating Centre specialising in finance that neighbours the BIS in Basel. Since 2001, we have worked to mobilise 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 mobilise finance for sustainability, we recognise 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.

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