Reform proposals: Finance
We at the SMART project believe that reforming finance as a key driver of the global economy will be crucial to achieving sustainability. Humanity is on the cusp of the fourth Industrial Revolution. Never before have we been as capable of mass and rapid technological advances.
The ways in which people live, work and communicate with one another are in the midst of a fundamental transformation. The revolution we are experiencing of course has the capacity to lift the income of the world's poorest, reduce inequality and protect the earth's ecosystem whilst respecting planetary boundaries. The financial sector will be crucial to this revolution, which requires investments of unparalleled scale and breadth. On the other hand we know that humanity is capable of socially and environmentally destructive behavior. And the financial sector is often complicit by funding such activities. Such destructive activities of course continue unabated.
According to the UN by 2050 the costs of environmentally destructive activities globally could reach twenty eight point six trillion dollars or 18 percent of world GDP. Financial institutions and markets will play a key role in determining whether such activities continue and whether sustainable finance initiatives can be scaled successfully. For example in the context of climate change the OECD is estimated that in order to keep up with international commitments signed up to under the Paris accord, global infrastructure investment needs to be at least 6.9 trillion dollars per year, or 70 trillion dollars in total by the year 2030.
Financing such investments will of course require significant private sector involvement. Some financial institutions and some central banks, including the European Central Bank, have indicated their support for the transition to sustainable finance. And yet in spite of the positive torque emanating from the financial sector, regarding sustainability, progress remains too slow to avoid some of the negative effects from a changing environment. The EU alone for example has an infrastructure investment deficit of around 180 billion euros per year.
Financial institutions continue to fund some of the most environmentally destructive practices and activities on our planet. Between 2004 and 2014 for example the largest 25 global banks channeled at least 1.85 trillion dollars to fossil fuel companies.
In contrast: only 171 billion dollars was given to renewable energy projects. If financial institutions continue on the same path then before the decade is out another six trillion dollars will be funneled towards fossil fuel companies. We at the SMART project are convinced that the faith placed in private financial markets alone to achieve sustainability is misplaced.
Of course, initiatives such as the European Green Deal are welcome. However they cannot achieve sustainability on their own, and moreover they cannot prevent being flow of finance to unsustainable projects. Well as private market actors and institutions are a key component of the move towards sustainability, they cannot achieve it alone. One reason for this is that private investors often suffer from what Mark Carney governor of the Bank of England has called the tragedy of the horizon.
Investors often simply don't care what the consequences of their investment decisions will be decades from now, partly because of uncertainty about the future, but also because of the endemicshort-termism in financial markets. Yet, time frames of decades are precisely what is required for a sustainable finance agenda. Although we don't know what the consequences will be over the next half century of a continued business as usual approach, we do know that if we continue along this path, those consequences are likely to be catastrophic.
That is why we at the SMART project believe that we need to introduce regulation which not only complements private and public market actors, investment programs in the sustainable finance sphere, but also acts as a check and balance against private market actors incentives. This must be based on a recognition of the sustainability risks that the financial sector poses to the planet.
In short, SMART believes that we must protect the planet from finance, rather than protecting finance from the planet.
We at the SMART project recommend the following: To broaden the sustainable finance initiative, to go beyond climate change and respect all planetary boundaries, we also recommend that the sustainable finance initiative tackles issues such as inequality, human rights abuses and inclusive social dialogue.
Secondly we recommend that banks are more fully included in the transition to sustainability. European businesses receive around 70% of their financing from the banking sector. We therefore propose to regulate banks to ensure that sustainability is integrated into their decision-making.
We also propose that brown capital requirements are introduced into the European bank regulation capital framework, to reflect sustainability risks of brown projects.
We also propose amending EU monetary policy, to this end we recommend that the European Central Bank's legal mandate is amended or reinterpreted to reflect sustainability considerations.
We also propose that the ECB's collateral framework recognizes that certain ventures are unsustainable in their nature and are prohibited from refinancing operations. Building the brown taxonomy of unsustainable activities to complement the green taxonomy under the sustainable Finance Initiative, will be of key importance in this endeavor.
All of this needs to be based upon a strong principle of precaution. We don't need to know the precise level of damage that awaits us. All we need to know is that change is necessary, and sustainability is possible if we do enough and quickly.