“We always underestimate the change that will occur in the next two years as a change that will happen in the next ten.” –Bill Gates
Last October 25-26, the biggest names in the global financial industry converged in Dubai under the auspices of the United Nations Environment Program-Finance Initiative (UNEP-FI). The setting could not be more apt. Dubai, a land of extreme heat—and, thanks to some clever government policies, extreme wealth—hosted the world’s leading central bank governors, asset managers, institutional investors, banks, insurance providers, and investment advisories, such as SSG, to check-in on an effort launched last 2012 at Rio+20, that is, to build “the financial system we need.”
In the early 2000s, it became apparent that financing sustainable development required a completely new paradigm—one that is able to drive inclusive growth while genuinely, and maybe even profitably, addressing sustainable development challenges. While the idea has long been floated in the nooks and crannies of UN conferences, in whispers in boardrooms and chants from the NGO sector, its urgency quickly rose into the mainstream with the advent of three major global events.
Three major global events signaling a changing financial system
- The landmark adoption of the 2030 Sustainable Development Agenda and the Paris Climate Agreement.
- The 2008 financial crisis driving public demand for a more resilient and effective financial system.
- The rapid evolution of the financial industry itself in light of post-crisis macroeconomic reforms, the increasing influence of developing and emerging countries, and the rise of disruptive technologies and new social expectations across the financial landscape.
“The Financial System We Need”
- Overall, it will take an estimated USD 5-7 trillion per year to meet global sustainable development goals, of which 60-70% will need to be channeled to developing countries;
- As one example, it will take about USD 1 trillion per year to decarbonize energy; USD 400 billion per year to ensure resilient infrastructure; and USD 50 billion per year to halt tropical deforestation;
- Less than a third of these resources are currently flowing and will therefore need to come from private sources;
- In contrast, banks alone manage $140 trillion of assets and institutional investors over $100 trillion. Capital markets, including bonds and equities, exceed $100 trillion and $73 trillion respectively.
In light of this major financing gap, re-engineering the global financial system now ceases to be an activity reserved for academics and economic theorists, but instead now serves as a marching order for multilateral agencies, central banks, and financial institutions if these same entities are to stay competitive and relevant to their clients’ new realities. As evidenced by the groundswell being orchestrated by no less than the top financial firms in the world, this transformation will require new thinking, new business models, new assets classes, new products, new services, and new tools possibly already existing within the current system. However, it will now need a long-deserved shot in the arm and some fresh political will.
Dubai Roundtable Sentiments Expressed
At the global roundtable, key personalities from the financial industry shared how a quiet revolution is now taking hold across various pillars of the international financial industry. To paraphrase sentiments expressed:
- Public debate has rapidly moved forward. Central bank governors, finance ministers and regulators, and finance sector executives are being pressured to explain their contribution to advancing sustainable development.
- Public interest institutions are playing a more important role in shaping public debate, for example about the risks of ‘stranded assets’.
- More members of the public are taking up the opportunities to redeploy their own capital aligned to their values and longer-term interests.
- Sustainability is becoming a major driver in the development of the world’s financial centers, with global and regional centers including Hong Kong, Nairobi, London, Paris and Switzerland exploring how best to develop rules, fiscal measures and market leadership to guide competition in the midst of new opportunities.
- Collaborative networks are multiplying, forging partnerships and establishing fora to share best practices, information and experiences, for instance, across responsible investment, insurance, and green infrastructure.
From Momentum to Transformation
But perhaps most encouraging are some of the concrete developments happening directly out of the public and private spheres that altogether point to a sea-change in thinking among financial institutions on how a new “financial system that we need” can indeed look like.
- In 2009, the Financial Stability Board (FSB) was established under the auspices of the G20 to utilize monetary policies to better manage risk and introduce resilience to the global financial system in light of controversies surrounding the “excesses” of the “current system.”
- In 2015, a dedicated task force to tackle climate-related financial disclosures was set-up under the FSB to dive deeper onto how the global financial system should be compelled to act on sustainable development and be held accountable for climate change.
- In 2016, green bond issuances totaled an estimated USD 694 billion and growing, signaling the arrival of a new and truly “green financial product.”
- In 2016, China, arguably one the world’s most powerful economic influencers, signs a national policy package to create a “green finance system” to transform its own financial system. The EU later follows suit with a policy to create its own green financial strategy.
- As of 2016, 60 stock exchanges across the world have joined the “Sustainable Stock Exchanges Initiative” (SSEI) under the UN to systematically promote sustainable investment and ESG disclosures.
- And the list goes on…
SSG Advisors’ Role in Developing Promising Solutions
SSG Advisors, as a global development solutions firm and impact investment advisory, is now participating in a series of cross-sectoral discussions between multilateral agencies and investment practitioners looking specifically at “Positive Impact Finance”—an approach which aims to “finance businesses seeking to make a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.”
SSG’s experience in discovering new business models and facilitating innovative partnerships between the public and private sectors will be shared to the ongoing discourse of identifying practical solutions to solve sustainable development challenges hand-in-hand with businesses and the financial industry. Indeed, impact investing, venture capital, blended finance and environmentally or socially oriented market instruments such as green bonds and development impact bonds will be needed. But as many point out, these may all fall short if the kinds of projects or entities most capable of providing the most promising development returns are not equally capable of providing the typical risk/return profile the mainstream market demands. As part of its participation to the global movement to create “the financial system we need”, we enjoin our colleagues from the private sector to help us imagine creative and profitable ways to make the “unbankable” potentially attractive to mainstream investors as well as connect business to promising solutions in need of urgent financing.
Lawrence Ang is Director for Asia for SSG Advisors. He brings nearly ten years’ experience at the nexus of sustainable development and private sector engagement in the region.