July 5th 2017 Paper 3: Private sector contribution to financing the Sustainable Development

By Felix Dodds Associate Fellow Tellus Institute

 “We must devise a regulatory system, at both the national and international levels, including an adequate incentive structure, that will make inclusive, sustainable investments also the most profitable investments.”

President of the UN General Assembly (2016-2017) H.E. Peter Thomson

The Sustainable Development Goals represent a unique opportunity for policy makers, companies, investors and others to work together to affect positive change and move capital markets to a more sustainable basis.

Inspired by the Brundtland Report, our aim should be to promote

“capital markets that finance development that meets the need of the present, without compromising the ability of future generations to meet their own needs.”

The SDGs have great aspirations for the roughly $150 billion worth of official development assistance (ODA). According to the Brookings Report “Links in the Chain of Sustainable Finance: Accelerating Private Investments for the SDGs, including Climate Action” approximately US$5-7 trillion of incremental annual investment will be needed to finance the SDGs. Therefore, business and finance in particular, has a critical role in ensuring that the Goals are met.

However, there is insufficient focus on encouraging investors to redeploy the $300 trillion of capital in the global markets in a way that will help achieve these Goals.

Investors can be a catalyst for the innovation in sustainable technologies and entrepreneurialism required to meet the growing demand for goods and services from an ever—growing global population.

This paper outlines the focus in the UN system on, in particular, Environmental, Social and Governance (ESG) reporting by companies, the Principles for Responsible Investment (PRI), the UNEP Inquiry recommendations and finally on the recommendations put forward for the President of the General Assembly by the 2016 Brookings Report.

A Short History

This paper takes stock of the history of the issue at the UN. It also maps the most important stakeholders that could support this agenda.

“Now a new generation of policy innovation is aiming to ensure that the financial system serves the needs of inclusive, environmentally-sustainable, economic development. These innovations in financial and monetary policies and regulations, along with wider market standards are creating a critical nexus between the rules that govern the financial system and sustainable development.”

The United Nations Environment Programme (UNEP) Inquiry into the Design of a Sustainable Financial System

The role of international business in sustainable development has been debated since the United Nations Conference on Human Development in 1972, which called for “the acceptance of responsibilities by citizens, communities and by enterprises and institutions at every level, all sharing equitably in common efforts”. In the 1992 UN Conference on Sustainable Development included a mention on the “rights and responsibilities” of transnational corporations and the need to embed environmental management and ethics in their operations. Additionally, the conference also emphasized the need to leverage and mobilise financial resources, including from private sources, for the implementation of sustainable development.

Subsequent resolutions and sustainable development conferences such as the World Summit on Sustainable Development (WSSD) which produced the Johannesburg Implementation Plan (2002), underscored the need to align business and private finance with sustainable development principles.

In 2006 UNEP Finance Initiative (UNEP FI) and the UN Global Compact were founding partners for the United Nations Principles for Responsible Investment (PRI). This has become an international network of investors working together to put its six principles into practice.

More recently, a multi-stakeholder coalition played an important role on profiling ESG reporting at the United Nations in the context of the Rio+20 Conference on Sustainable Development.Non-financial reporting provided a concrete proposal based on actual country initiatives in developed and developing countries and ever increasing international demand for this type of information. The Conference raised the profile of the sustainability reporting agenda as stipulated in paragraph:

“47. We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments and relevant stakeholders with the support of the United Nations system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account experiences from already existing frameworks and paying particular attention to the needs of developing countries, including for capacity building.”

The Future We Want, 2012

This became an important stage for a more visible and active role of progressive businesses and investors in sustainable development and the multilateral process. It also showed how the private sector and civil society can effectively work together towards a common goal. At Rio+20 four countries established the ‘Friends of para 47’ (Brazil, Denmark, France and South Africa). This group has grown in numbers and has working with UNEP and GRI worked to advance the international culture of corporate transparency and accountability.

The issues were also included as part of the Financing for Development’s Addis Action Agenda. The Addis Financing for Development Resolution (para. 38) commits governments to design policies which incentivize long-term performance and the use of sustainability indicators in the investment chain.

“38. We acknowledge the importance of robust risk-based regulatory frameworks for all financial intermediation, from microfinance to international banking. We acknowledge that some risk-mitigating measures could potentially have unintended consequences, such as making it more difficult for micro, small and medium-sized enterprises to access financial services. We will work to ensure that our policy and regulatory environment supports financial market stability and promotes financial inclusion in a balanced manner, and with appropriate consumer protection. We will endeavour to design policies, including capital market regulations where appropriate, that promote incentives along the investment chain that are aligned with long-term performance and sustainability indicators, and that reduce excess volatility.”

Addis Ababa Action Agenda, 2015

We are now at the implementation phase of the globally agreed Sustainable Development Goals and the Addis Ababa Action Agenda adopted in September 2015, both refer to the role of private sector finance in a number of places.

In the next 15 years, conversations and efforts around sustainable development will be guided by how to achieve this, what progress is being made and how to enable it to scale up both in resources and actions at national and international level.

The Paris Agreement reached at COP21 in December 2015 also included the comment to:

“making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (Article 2.1.c).

The Agreement, by itself, will not move money out of the latter and into the former. Linking climate finance solely to aid is limiting. We should be looking at how we can motivate the trillions in the global capital markets towards sustainable practices. This means that the framework for regulating capital markets will need to support sustainable practices across the financial supply chain, including the way in which Member States should set out a capital raising plan for Intended Nationally Determined Contributions (INDCs).

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures, is developing disclosure guidelines to provide a common reference point for companies, investors, lenders, insurers and other stakeholders.

Principles for Responsible Investment

In 2006, UNEP Finance Initiative (UNEP-FI) and the UN Global Compact (UNGC) established as founding partners the United Nations Principles for Responsible Investment. Over 1,500 investors managing around $60 trillion in assets have committed to the UN-supported Principles for Responsible Investment (PRI). However, there remains a failure by a majority of investors to turn these aspirations into action. Recently the PRI reported that only 43% of its signatories integrate ESG into the fundamental analysis of company valuations in equities. So, what is holding them back?

PRINCIPLES OF RESPONSIBLE INVESTMENT

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

 

Sustainable Stock Exchanges (SSE) initiative

The Sustainable Stock Exchanges (SSE) initiative is a peer-to-peer learning platform for exploring how exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency – and ultimately performance – on ESG (environmental, social and corporate governance) issues and encourage sustainable investment. The SSE is organized by the UN Conference on Trade and Development (UNCTAD), the UN Global Compact, the UN Environment Program Finance Initiative (UNEP FI), and the Principles for Responsible Investment (PRI). The first meeting of the SSE was opened by UN Secretary-General Ban Ki-Moon in New York City, USA in 2009

There is unfinished work around securing a date by which companies listed on stock exchanges should produce their ESG reports and an enabling environment to promote good practice within the investment chain. This was an issue for Rio+20 and Addis. One of the biggest barriers preventing investors from properly incorporating ESG factors into their investment decisions is the inaccessibility of consistent data such as carbon emissions, employee turnover or water use.  For example, how can an investor be expected to reduce its exposure to water risk when most large companies in most sectors do not report their water usage, or do so using different standards and methodologies. Building a bridge to cross this gap is one of the most important next steps if we are to harness capital markets to help deliver the SDGs.

It is important to acknowledge that due to the fine work of many companies, investors do have access to some ESG data. Nearly 2,000 companies report climate change information to the CDP (Carbon Disclosure Project) and around 10,000 companies report ESG data using the Global Reporting Initiative’s framework. However, these items are not consistent or global enough to meet investor needs.

And when it comes to global financial architecture the only ones who can deliver the standardized ESG data which investors require – are stock exchanges and their regulators. This work is important in the context of the Post-2030 agenda and the Paris Climate Change Agreement as many stakeholders believe that the role of the private sector as a delivery mechanism has been expanded without adequate balance. It will be crucial to address this at this point of the implementation stage.

The requirement for companies listed on Stock Exchanges to have to produce their ESG reports as a listing requirement has been led by countries such as South Africa, Brazil and more recently Malaysia, Thailand and India. The European Union is now catching up. A European Union Directive on the Disclosure of Non-Financial and Diversity Information requires ESG disclosures by large companies and groups, beginning in 2017.

The 63 SSE Partner Exchanges and which have ESG as a Listing Rule 2016

Requires ESG Reporting as a Listing Rule Offers written guidance on ESG reporting Requires ESG Reporting as a Listing Rule Offers written guidance on ESG reporting
Argentina – Bolsa de Comercio de Buenos Aires No No Mexico – Bolsa Mexicana de Valores  No Committed
Australia – Sydney Stock Exchange No Yes Morocco – Casablanca Exchange No No
Bangladesh – Chittagong Stock Exchange No No Namibia – Namibia Stock Exchange No No
Belarus – Belarusian Currency and Stock Exchange No No Netherlands – Euronext Amsterdam Soon Committed
Belgium – Euronext Brussels Soon Committed New Zealand – NZX Limited  No No
Botswana – Botswana Stock Exchange No No Nigeria – Nigerian Stock Exchange No Committed
Brazil – B3 (formerly BM&FBOVESPA) Yes Yes Norway – Oslo Børs No Committed
Canada – Aequitas NEO Exchange Yes Yes Peru – Bolsa de Valores de Lima No No
Chile – Bolsa de Comercio de Santiago  No Committed Poland – Warsaw Stock Exchange Soon Committed
Colombia – Bolsa de Valores de Colombia  No Yes Portugal – Euronext Lisbon Soon Committed
Denmark – Nasdaq Copenhagen Soon Committed Qatar – Qatar Stock Exchange No Committed
Egypt – Egyptian Exchange No Committed Romania – Bucharest Stock Exchange Soon Committed
Estonia – Nasdaq Tallinn Soon Committed Rwanda – Rwanda Stock Exchange No No
Finland – Nasdaq Helsinki Soon Committed Seychelles – Trop-X Yes Committed
France – Euronext Paris Soon Committed Singapore – Singapore Exchange Yes Committed
Germany – Deutsche Börse AG  Soon Committed South Africa – Johannesburg Stock Exchange Yes Committed
Iceland – Nasdaq Iceland No Committed Spain – Bolsas y Mercados Españoles (BME) Soon Committed
India – BSE India Ltd.  Yes Committed Sri Lanka – Colombo Stock Exchange Yes Committed
India – National Stock Exchange of India (NSE) Yes Committed Sweden – Nasdaq Stockholm Soon Committed
Italy – Borsa Italiana Soon Committed Tanzania – Dar es Salaam Stock Exchange (DSE) No No
Jamaica – Jamaica Stock Exchange No No Thailand – Stock Exchange of Thailand Yes Committed
Jordan – Amman Stock Exchange No No Tunisia Bourse des Valeurs Mobilières de Tunis  No No
Kazakhstan – Kazakhstan Stock Exchange (KASE) No Committed Turkey – Borsa Istanbul  No Yes
Kenya – Nairobi Securities Exchange No Committed United Arab Emirates – Dubai Financial Market No No
Korea (Republic of) – Korea Exchange No No United Kingdom – Euronext London Soon Committed
Kuwait – Boursa Kuwait No No United Kingdom – London Stock Exchange Soon Committed
Latvia – Nasdaq Riga Soon Committed USA  – Nasdaq No No
Lithuania – Nasdaq Vilnius Soon Committed USA – NYSE No No
Luxembourg – Bourse de Luxembourg Soon Committed Vietnam – Hanoi Stock Exchange No Committed
Malaysia – Bursa Malaysia Yes Committed Vietnam – HoChiMinh Stock Exchange Yes Committed
Mauritius – Stock Exchange of Mauritius (SEM) No No Zimbabwe – Zimbabwe Stock Exchange No No
Western Africa – BVRM No No
Not members of SSI
Hong Kong China Yes Committed
China Shanghai Stock Exchange No Committed
China Shenzhen Stock Exchange No Committed
Hungary Soon Committed

 

The work of UNEP in its Inquiry into the Design of a Sustainable Financial System (2015) has mapped actions for accelerating the financial system’s transition in support a green economy. It has pointed the way to mobilizing the capital required and suggested the reforms needed which are in line with the above.

The share of investment subject to ESG considerations remains small relative to global capital markets, at 7 per cent or US$ 611 trillion of investments in the US$ 12,143 trillion global capital market in 2010. It is clear that there are trillions in the capital market which could be focused on helping us to move quicker to living on the planet in a more sustainable way.

Member States have over the last four years moved close to agreeing on a set of regulatory instruments such as the requirement that companies listed on stock exchanges should produce their ESG report or explain why not. Building on the excellent work by the Sustainable Stock Exchanges (SSE) and other stakeholders from the investors and civil society community, there is in place support for stock exchanges that go down this path.

The G7 more recently on the 12 June this year joined the G20, other countries and markets in throwing its weight behind a growing movement to turn the power of the global financial system to sustainable development. Responding to this one of the co-Directors of the UNEP Inquiry Nick Robbins said:

“G7 nations hold the bulk of the world’s financial assets and often lead the pack in terms of making environmental and social factors a core aspect of banking, investment and insurance,” he said. “We need to take this positive momentum to scale, so that finance supports the transition to a sustainable economy, particularly the needs of entrepreneurs and small businesses.”

G7 throws weight behind sustainable finance movement

The Brookings Report

In April 2016 due to calls at events the Finance for Development Forum and the Special Event Achieving the Sustainable Development Goals the President of the UN General Assembly H.E. Mogens Lykketoft, commissioned the Brookings Institute to produce the report “Links in the Chain of Sustainable Finance: Accelerating Private Investments for the SDGs, including Climate Action.” In his introduction to the report he said:

“The whole set-up of the financial sector must be adjusted so as to contribute to SDG implementation. Capital flows need to be redirected towards SDG priorities and away from areas that accelerate climate change, deplete natural and human capital, and exacerbate social and income inequalities. This corresponds partly with experience from the finance sector where some stakeholders have started to rethink their established practice, due to normative reasons and because of risks, instability or the need for more long-term investment. But how to turn this new thinking from the exception to the norm?

President of the United Nations General Assembly (2015-2016) H.E. Mogens Lykketoft

The report had a number of recommendations I would like to share with you today and which Member States may wish to consider how they take them forward in their deliberations.

The Report made ten recommendations for some specific actions to encourage sustainable finance:

  1. For the International Organization of Securities Commissions (IOSCO) to take a leadership role in ensuring its member bodies adopt streamlined regulatory efforts for “positive” ESG-SDG filters and to ensure SDG-consistency with an expanded Sustainable Stock Exchange initiative.
  2. For national regulators of banks and insurances companies to commit to identify and promote incentives that ensure member institutions assess appropriately broad metrics of risk and performance among clients.
  3. For the International Standards Organization (ISO) to establish SDG-consistent minimum certification standards for private companies.
  4. For credit ratings agencies to establish “SDG ratings” for individual companies, differentiated by industry, building upon emergent methodologies.
  5. For interested financial institutions to create “SDG index funds” that track the performance of qualifying companies, building on lessons from efforts like the ESG India Index.
  6. For all large companies to identify and include SDG-consistent performance standards as part of their annual financial reports.
  7. For governments to implement sustainable development benchmarks in their own procurement practices.
  8. For national and sub-national governments to establish timetables for implementing SDG-consistent policy incentives for private investment.
  9. For local, national, and international business alliances and organizations that promote public private partnerships to celebrate top companies that adopt and report on SDG-consistent ESG processes and performance standards. Prizes could be organized by industry.
  10. For government shareholders in multilateral development banks to ensure those banks undertake an expanded and catalytic role to leverage and mobilize public and private finance in developing countries—for example by preparing and originating “bankable and sustainable” projects that bring down the weighted average cost of capital and promote improved access to sustainable technologies.

Timetables

The Brookings Report suggested a two-part timetable organized around actions that could be considered for 2019 and others for 2023.

These should be aligned with the annual forum on Financing for Development follow-up:

“First, Member States can establish a set of interim deliverables to be achieved by the 2019 High Level Political Forum (HLPF) when heads of state and government will gather to review progress on SDG implementation. These would include the presentation of each country’s “national action strategy” for sustainable finance at the 2019 HLPF.”

Brookings Report for the PGA (2016)

The report argued that countries could then engage in coordination and peer review during the course of the following year, and bring the results into the processes leading up to the 2020 deadline for presenting long-term national climate strategies. This year’s Finance for Development Forum went some way to address this:

“7……We will expand peer learning and experience-sharing among countries and regions in finding the right financing mixes that match countries’ respective needs, capacities and national circumstances and encourage support for capacity-building to help countries, according to their needs, to design and implement nationally appropriate social protection systems and measures consistent with national development strategies.”

Follow-up and review of the financing for development outcomes and the means of implementation of the 2030 Agenda for Sustainable Development

If this were to be achieved at the 2019 juncture, all countries would need to initiate a process in 2017 across key stakeholders within their respective jurisdictions.

Regulatory changes can be implemented if Member States give the right push in particular in light of the ten recommendations from the Brookings Report corporate ESG reporting standards could

“establish a 2023 deadline for fully implementing a globally coherent and sustainable finance system consistent with the SDGs. That year will include the next major HLPF summit, and will mark the calendar midpoint between now and the Agenda 2030 deadline. This deadline must be a centerpiece for global collaboration, otherwise the window of opportunity will close—before the right mix of resources can make it to the right places for SDG achievement.”

Brookings Report for the PGA (2016)

A Final Word

We are in interesting times where old certainties are no longer certain. In these times, it is important to where possible create more stability. The UN can and has played a critical role in this since its founding. There is no question in my mind that 2015 was a once in a generation year. It set out through the Addis Ababa Action Agenda, the 2030 Agenda for Sustainable Development and the Paris Climate Agreement a roadmap to a safer, fairer, more equitable and sustainable world.

In main ways that was the easy part – though it didn’t seem so at the time. Now it is about implementing these agendas and to do that there needs to be change at the United Nations, in governments at all levels and financial institutions and stakeholders. This paper looked at what could be done to move the financial institutions to align with these agendas. The UN can help and inspire those working in the finance sector to take up the call but to do that there needs to be clear regulation and this paper suggests some of the elements that might be considered. As I wrote the paper the Secretary General published his Report “Repositioning the UN development system to deliver on the 2030 Agenda – Ensuring a Better Future for All”

Ill end with para 44 from that report which underlines much in this paper.

  1. The financing needs for the SDGs call for a comprehensive overhaul in the UN system’s approach to financing. As per the Addis Ababa Action Agenda, to unlock the trillions of dollars needed to achieve the SDGs, Governments will need more support to attract, leverage and mobilise investments of all kinds – public and private, national and global. Continued Official Development Assistance (ODA) will be critical to leave no one behind and catalyse other financing streams, but insufficient for the achievement of the SDGs. In spite of an increasingly conducive environment, SDGs investments continue to lack scale. Cross-sectoral partnerships and a blending of capital are also proving complex for many Governments. To date, the lack of “bankable” projects has been a major impediment to greater SDG investment.

Repositioning the UN development system to deliver on the 2030 Agenda – Ensuring a Better Future for All: Report of the Secretary-General

 

 

 

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