What’s Next for Green Finance?

Even though 2016 was the hottest year on record, we need to also celebrate that it the best year ever for green finance. Green finance covers the financing of investments that generate environmental benefits as part of the broader strategy to achieve inclusive and sustainable development. G20 heads of state recognized the need to scale up green finance by setting out a series of steps to make this happen. Key countries have issued strategies for greening their financial systems, with China leading the way. Leading insurance regulators also decided to work together on how to respond to sustainability challenges, such as climate change.

With global carbon emissions stalling and clean tech costs plummeting, the task ahead for green finance in 2017 is to step up the pace. Financial institutions with assets worth trillions of dollars are now committed to aligning their portfolios with the low-carbon transition and sustainable development more broadly. Yet the actual reallocation of capital still remains insufficient. Amongst the opportunities that exist, there are three practical steps stand out to shift the trillions of private capital. First, rolling out sustainable finance roadmaps at the national level. Secondly, targeting public effort where market forces cannot reach. Finally, encouraging a convergence at the international level in terms of the rules that shape financial markets.

The vast bulk of green and climate finance will come from the private sector. But experience has also shown that without a combination of public finance and policy frameworks, capital will often not flow. This is especially the case in developing countries, where many key financial markets are still missing and where governments shape a large share of capital deployment. This places a high priority in targeting public effort where market forces cannot reach.

Central banks, finance ministries, and regulators are starting to make sustainability factors a routine part of financial practice. This is accomplished through measures to build competence and strengthen accountability. International cooperation is important to share emerging experience and ensure that there is a convergence on key rules of the game. What is most impressive about 2016 was seeing countries sharing information and applying best practices. China and India’s regulations to drive their green bond markets are prime example of this trend.

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