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Opinion

September 7, 2016

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Green finance

The G20’s finance ministers and central bank governors have begun to undertake a stunning shift in mindset. They have become increasingly convinced that ‘green finance’ – financing environmentally sustainable growth – should be at the centre of economic development strategies.

Such an idea, until recently confined to a fringe of academics and policymakers, is potentially one of the most important new “truths” of the 21st century.

The conventional economic development model viewed environmental protection as a “luxury good” that societies could afford only after they became rich.

Such thinking explains why the dramatic growth in global income, 80-fold in real terms during the last century, has been accompanied by a decline, according to the United Nations Environment Programme, in natural capital in 127 of 140 countries.

But natural capital is not just an abstract concept; it supports lives, livelihoods, and societal wellbeing. The environmental destruction that our activities are wreaking has concrete consequences, which are already being borne by millions of people.

Since 2008, an average of 26.4 million people has been displaced from their homes by natural disasters each year - equivalent to almost one person every second.

One third of the world’s arable land is now jeopardised by land degradation, which causes economic losses of $6.3-10.6 trillion per year (PDF). And 21 of the world’s 37 largest aquifers have passed their sustainability tipping point.

The downsides of the conventional approach to economic development, which favours income and employment over environmental protection, are particularly apparent in China.

By some measures - in particular, per capita income and gross domestic product growth - China’s development process has been an extraordinary success. But it has also brought lethal levels of air pollution and extensive contamination and depletion of land and water.

The good news is that Chinese leaders now seem to recognise that they must safeguard the environment before China achieves high-income status. Indeed, they have moved to the forefront of the green finance movement.

To be sure, the challenge facing China is monumental. Success will require an estimated $600bn in investment each year, in areas including environmental remediation and protection, renewable energies and energy efficiency, and sustainable transportation systems.

But China is already taking concrete steps in the right direction. On August 30, President Xi Jinping presided over a decision by the Central Leading Group for Comprehensively Deepening Reforms to transform China’s financial system to facilitate green investment.

The so-called “guidelines for establishing a green finance system” adopted at the meeting represent the world’s first attempt at an integrated policy package to promote an ambitious shift towards a green economy.

According to the guidelines, China will have to develop a wide range of new financial instruments, including green credit, green development funds, green bonds, green equity index products, green insurance, and carbon finance.

It must also introduce a host of specific policies, regulations, and incentives, including innovative use of the central bank’s relending operations, interest subsidies, and guarantees. And it must establish a national-level Green Development Fund, much like the United Kingdom’s Green Investment Bank.

How this process unfolds in China will hold important lessons for others seeking to build more sustainable economies.

The G20’s agenda, which aims to promote strong, sustainable, and balanced economic growth, should now be updated to reflect this shared goal, with green finance becoming a key component of the G20’s business. This week’s summit in China is the ideal place to start.

This article has been excerpted from: ‘The G20 embraces green finance’.

Courtesy: Aljazeera.com

 

 

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