The years 2015 and 2016 are rightly viewed as watershed moments for climate action and sustainable development finance.
The release by the UN of the Addis Ababa Action Agenda in 2015 marked the graduation of the UN Sustainable Development Goals (SDG) from aspirational to top priority goals for development, policy and sustainability. A year later, the COP 21 climate agreement in Paris, with its goal of limiting global warming to an additional 2 degrees Celsius, remains the most ambitious statement of intent to date for global climate action.
And yet, in 2019 the consensus is that global action so far has been underwhelming. The latest report by the intergovernmental Panel on Climate Change (IPCC) offered a stark warning that the world remains perilously off-target for keeping global warming within the Paris Agreement targets. Meanwhile, the “billions to trillions” agenda aiming to direct private sector finance towards the realisation of the SDGs is equally-badly underperforming. Frustration regarding the failure to close the multi-trillion SDG financing gap and the associated sustainable infrastructure gap remains high and despair is growing.
However, for all the legitimate disappointment on the action front, 2018 has in fact proven to be a momentous year with regards to how mobilising private sector finance towards these objectives is perceived by the financial community and other proponents of “business-as-usual”.
Not fit for purpose
The present international monetary and financial system lacks the coherence, joint capacity and effectiveness to support [sustainable development] goalsExcerpt from “Making the Financial System Work for All”, by the G20’s Eminent Persons Group for Global Financial Governance, October 2018
First of all, 2018 marked the year when, beyond habitual capitalism-skeptic circles, there was a mainstream realisation that, in the face of the existential threat of climate change and the need to meet the UN SDGs, the current architecture of global finance (and, within it, development finance) is no longer fit for purpose, after years of attempting to reverse-engineer the private sector into large-scale sustainable development finance within existing financial frameworks and conventional wisdom on “bankability”.
Within a few months of each other, with the contribution and support of central bankers, senior global finance figures and policy experts, three seminal reports were released by respectively the UN Environment Program (“Making Waves – Aligning the Financial System with Sustainable Development“, April 2018), the G20-backed group of experts (“Making the Financial System Work for All”, October 2018) and the OECD, one of the world’s most influential public policy think tanks (“Financing Climate Futures: rethinking infrastructure”, November 2018).
These reports pronounce the shared diagnostic that global finance needs more than incentives and investment de-risking to funnel private sector money towards sustainable investment, namely in the Global South. They highlight the importance of the radical shift towards a more sustainable financial system accounting for climate and social risks, and the limits of the current financing models. In its report, the OECD calls for nothing less than to “reset the financial system in line with long term climate risks and opportunities”.
There is also consensus that the workings and focus of global development finance need to be redesigned: greater collaboration among the Development Finance Institutions (DFIs) such as the World Bank; a greater focus on technical assistance and investment de-risking activities (e.g. guarantees, political risk insurance) rather than direct funding of projects.
For this message of radical change to arise from respected forums and figures in the finance community represents a potentially major shift which may increase overall willingness to challenge conventional wisdom which has so far kept sustainable finance away from the areas that arguably need it the most.
Taking it to the streets
Cities are where the climate battle will be won or lostPatricia Espinosa, executive secretary of the U.N. Framework Convention on Climate Change
The second breakthrough to have occurred is the global acknowledgement of cities as one of the major systems to target for transformation in order to successfully address climate change, along with energy, industry and transportation.
The first-ever U20 Mayors Summit, gathering twenty mayors from G20 countries, was held on the fringes of the November 2018 G20 Summit in Buenos Aires, highlighting the greater profile of mayors and local governments on the global stage for climate action and sustainable development.
Local government-focused advocacy organisations and networks such as C40 Cities or Local Governments for Sustainability (ICLEI) have been promoting this perspective for a number of years, out of an appreciation of the climate impact of cities, which are expected to account for 2/3 of global greenhouse gas (GHG) emissions by the year 2050, the rapid pace of urbanisation, especially in developing countries, as well as out of frustration with the slow pace of national and international-level climate action.
Today, the proliferation of “green city” finance forums, city-focused technical assistance facilities and “sustainable cities” strategies from Development Finance Institutions underscore the acceptance of the central importance of cities in the fight against climate change. A 2017 report by the Cities Climate Finance Leadership Alliance, a multidisciplinary network, counted 89 different initiatives “targeting specifically the urban, subnational and climate nexus” globally.
In another first, underscoring the frontline role of cities in climate action and sustainable development globally, the theme of the next UNFCCC Forum of the Standing Committee on Finance in November 2019, the world’s foremost conference on climate finance, will be “Climate Finance and Sustainable Cities“.
We need bolder reforms to harness complementarities and synergies in the development system. (…). We must also leverage more actively on the work of the non-official sector, including NGOs and philanthropies.Excerpt from “Making the Financial System Work for All”, by the G20’s Eminent Persons Group for Global Financial Governance, October 2018
The third idea to have cemented itself into mainstream conversation about sustainable and climate finance – and a notable shared observation among the three major reports mentioned in this post – is the need for new forms of partnerships — “coalitions”, “alliances” — across disciplines and areas of expertise.
This observation from a public policy standpoint mirrors ongoing developments in the academic field of sustainable urban development. So-called triple/quadruple-helix partnerships between the private sector, the public sector, citizens and academia are currently being experimented with in district-scale urban living labs. Beyond experiments, existing synergistic urban planning and real estate models are being theorised for scaling up, such as “anchor plus” or “innovation districts” which focus urban regeneration around an education hub acting as a catalyst, as recently promoted in Manchester, England’s second-largest city.
New partnerships are needed to jointly create and finance the next solutions to sustainable urban transformation: “systemic programmatic approaches” for public policy-minded people; “co-designing” in language more often found in urban design; or “multidisciplinary”, “multistakeholder” and “integrated” when discussed in finance and business circles.
Groups such as the Cities Climate Finance Leadership Alliance, along with the Coalition for Urban Transitions or the UN Environment Program Finance Initiative (UNEP FI) are examples of multidisciplinary forums working towards a common vision for financing the SDGs and sustainable urban infrastructure.
From acknowledgment to alignment
The next phase in sustainable finance will be about making the shift from acknowledgement to alignment. It will be multidimensional and non-linear. It will involve new, better ways of doing finance.Extract from “Making Waves – Aligning the Financial System with Sustainable Development”, UN Environment Program, April 2018
The message has moved from the fringes to the centre of the sustainable finance agenda: it’s time to acknowledge the need to be bold with respect to sustainable development finance, to accelerate the decarbonisation and climate resilience of cities and to form new partnerships to do so. The initiatives arising from these three changes and the interplay between them should hold the keys to renewed momentum behind closing the SDG and sustainable infrastructure finance gap.
While “the shift from acknowledgment to alignment” as expressed by the “Making Waves” report is underway, and solutions are being searched for and experimented with, there will certainly be plenty of skepticism and even defeatism along the way from either end of the ideological spectrum.
The “business-as-usual” crowd will insist that the SDG financing gap is evidence that there is only so much that the for-profit sector can do to realise sustainable development without resulting in fatal capital allocation inefficiency and perverting itself into virtue signalling, while that same financing gap is already being viewed by more left-leaning critics as proof if any further was required that amoral capitalism in the long run is fated to eat itself through over-consumption, inequalities and inevitable shocks.
In truth, neither case has been conclusively disproven at this time – the stage is being set as we speak.