EXECUTIVE PERSPECTIVE: The Secret Life of Green Finance

Published: September 04, 2017
EXECUTIVE PERSPECTIVE: The Secret Life of Green Finance

Simon Zadek is writing in his personal capacity, and currently serves as the senior advisor on finance in Executive Office of the Secretary General, is co-Director of the UN Environment’s Inquiry into the Design of a Sustainable Financial System, and is Visiting Professor at the Singapore Management University.

Green finance’s meteoric rise has been a remarkable feature of the contemporary global financial landscape. From London to Nairobi, and Sao Paulo to Singapore, green finance has become the currency of high profile advocacy, policy and regulatory developments and increasingly market practice.

The G20’s embrace of green finance as a legitimate topic for finance ministers and central bank governors has catalysed action across the world, from the green finance work being led by the Reserve Bank of India to the European Commission’s High Level Expert Group on Sustainable Finance. The G7 has highlighted the growing focus of the world’s major financial centres on green finance as a basis for product innovation and competitiveness, such as the City of London’s Green Finance Initiative. And the darling of green finance, green bonds, has seen a ten fold increase in annual issuance over the last five years.

The logic of green finance’s rise is undeniable. Environmental challenges have impacted markets and returns, through droughts and other natural disasters, volatility in food and other commodity prices, and growing liability risks as the more stringent enforcement of environmental and climate-related regulations become a global norm. Climate change necessitates accelerated action by the world’s largest emitters, both to keep global temperature rises below 2 degrees, and to more effectively manage investor risks.

Beyond downside risks, environmental stewardship and resilience has become a source of value. Renewables have transitioned from a side-show to the main game across global energy markets, stranding along the way carbon intensive assets. Electric vehicle and battery technology threatens to overturn the all-powerful auto industry and reward investors who have backed businesses at the nexus of environmental concerns, policy responses, and breakthrough technologies.

Financial regulators have woken up to systemic risks in such a transition, especially those linked to climate, requiring the financial community to demonstrate their will and capability to manage this new generation of risks and report accordingly.

History’s impeccable logic alone, however, rarely guarantees the right response. People make a difference, and the secret life of green finance is a disparate band of people who have made it their mission to green the global financial system. Dr Rahman, for example, placed Bangladesh on the global map by championing the development role of central banks in advancing financial inclusion and green finance.

Dr Ndung’u, likewise, as Kenya’s central bank governor, was a key player in turning Kenya into a global leader in digital finance, which now underpins the country’s growing eco-system of green financing innovations connecting mobile payment platforms, distributed solar and now also crowd-sourcing, block chain and crypto-currencies. Muliaman Hadad, until recently Commissioner of the Indonesian Financial Regulatory Authority, has championed what was arguably the world’s first ‘sustainable finance roadmap’. And in Brazil, Murilo Portugal, president of the powerful bankers association, Febraban, has championed the greening of the country’s banking community.

Further north, Mark Carney, Bank of England’s charismatic governor, delivered a world first in championing a prudential review of climate risks to the UK’s all-important insurance sector, and then in his role as Chair of the Financial Stability Board established the Task Force on Climate Related Risk Disclosure. Meanwhile, in another part of London, Mark Campanale led the charge with the Climate Tracker Initiative in effectively inventing and then globalising the narrative about climate-related stranded assets, just as ‘down-under’ Sean Kidney has worked tirelessly to advance the cause of green bonds around the world.

Across the English Channel, the Dutch pensions regulator, Frank Elderson, along with researcher and civil society activist Rens Tilburg, mobilised the country’s pension industry alongside its banks and insurance sector in advancing a national sustainable finance dialogue and strategy. And across the pond, it would be wrong to ignore the contributions made by such luminaries as Mary Shapiro 29th Chair of the U.S. Securities and Exchange Commission, Mindy Lubbers as inveterate green investor campaigner, and Al Gore in his role as co-founder and Chair of the sustainability-minded Generation Investment Management, along with co-founder David Blood.

Yet it has been in China that the most ambitious game plan has been hatched and progressed to green the country’s rapidly developing financial system. Early leadership came in the form of Yi Yanfei, a modest champion buried deep in the China Banking Regulatory Commission, in advancing the Green Credit Guidelines, encouraged and ably supported by Rachel Kyte’s team when she was at the World Bank. More recently, however, leadership has come from Dr Ma, without doubt one of the world’s more unusual central bank chief economists.

Catalysed into action by China’s destructive air pollution, Ma Jun advanced first an ambitious domestic green finance initiative, working with a UN-based initiative launched by Achim Steiner, then head of the UN Environment Program, making full use of the central bank’s convening and signalling power. Then at the IMF Annual Meetings in Lima in 2015, his boss, Deputy Governor Yi Gang, announced that China would take the topic of green finance to the G20 under its Presidency in 2016, a move that has catalysed action on green finance across the G20 and elsewhere.

Leadership counts, all the more so when the need for transition is so urgent, and the scale of change required is so great. Dragging a reluctant mainstream into the future, requires the kind of inspiration and persistence that is too often absent from either corporate or public technocrats. Such leadership is, however, more of a relay race than a marathon.

The success of today’s leaders depends on the unsung efforts of their predecessors, just as tomorrow’s efforts will be taken forward by others. More recently, for example, key leadership has come from that most unlikely source, central banks and financial regulators, reflecting their broader rise to power over the last decade. Going forward, other sources of leadership are likely to become more important, such as the world of digital finance and its intersection with big data, artificial intelligence and the internet of things.

This article first appeared in Thomas Reuters