Setting green finance on the right track

Illustration: Patrick Hoesly

Environmental disasters around the globe keep reminding us that humankind has to change its unsustainable ways of living. Therefore we need enormous amounts of green finance to tackle these challenges in the coming decades. The good news is that we have a broad consensus on this necessity. However, almost acknowledged as much as the notion that we have to restrict our ways of living in a way that we stay within the planetary boundaries, is the sense of helplessness about where this green finance shall come from.

At this point, we are facing the first hurdle: we do not have a precise definition of ‘green finance’, which makes it hard to mobilize it. For the moment, we will define ‘green finance’ broadly as finance flows or investments that respect the planetary boundaries.

A multitude of reports on the bottlenecks and challenges of green finance have been published. The same is true for estimations of financing resources and needs, as well as case studies on best practices. In a nutshell, financing needs are impressively high, with estimates for investments in green infrastructure varying between US$1-2trn per year for the next decades.

Government budgets are insufficient, even more so in the aftermath of the latest crisis, and private and institutional investors (such as pension funds, assurances and sovereign wealth funds) that have assets under management of several tens of trillions of dollars only invest less than 1% of their portfolios in capital products that are targeted for green investments. The well-known constraints include high risks, insufficient policy support and enabling environments, and a lack of a project pipeline.

Why can’t we succeed in moving forward, in scaling-up and mainstreaming green investments? The answer is definitely a complex one, but a good starting point might be to change the way, the processes and the places that we are using to discuss green finance and the necessary economic, political, legal and regulatory framework conditions.

We need a trio of exchange, transparency and cooperation. Why will this make the difference? The answer is straightforward: there are too many actors, too much fragmentation. The problem is not just that we have two distinct communities, development cooperation and climate finance, with different perspectives on green finance, as well as many different processes on the international level, within the different international organizations and country groupings. 

The problem is also that within national governments there are many parallel working streams that all focus on green finance in one way or another. It seems logical that the ministry for development cooperation deals with the financing of sustainable green investments, the environment ministry with climate finance, the finance ministry with long-term infrastructure investments – which have to be green to avoid lock-in effects, and the energy ministry (if such a ministry exists) with financing for sustainable energy, and so on and so forth. 

But it does not stop here; often there are several directorates within one ministry that feel responsible for the processes in different international bodies, like the UN system, the World Bank and the G20. If this seems confusing, inefficient or even counter-productive, well, it is.

The first thing to do is to establish ways of exchanging and sharing among actors engaged in green finance-related activities – within ministries and governments, but also within the international bodies, such as the G20 Development Working Group’s Dialogue Platform for Inclusive Green Investments, the G20 Study Group on Long-Term Investment Financing, the G8 Impact Investment Taskforce, and the UNFCCC Work Programme on Long-term Finance, to name just a few. Although, the main focus and purpose of their activities might differ, after all their goals are ultimately all related to financing a sustainable future for humankind.

The second thing to do is to put transparency at the core. One aspect concerns the different processes: it should be feasible for all interested stakeholders to get a rough overview of relevant processes with a bit of research. The other relevant aspect is the necessity to publish the data relating to the experience of existing financing of green projects. 

Here, development finance institutions and the private and institutional finance sector will have to make an effort and break ingrained habits. They certainly have good reasons to be reluctant to publish information about green finance, but we urgently need this data in order to rigorously assess existing experiences, to learn about best practices, to find out more about broadly applicable business models and to deduce recommendations for others. If we are to shift the focus from pioneering to mainstreaming green finance, case studies are no longer sufficient.

The third thing that needs to be done is to increase cooperation and stop fragmentation into different communities (the development advocates versus the climate change combatants versus the long-term financing promoters). It is not always necessary to create a new task force or an additional working group, just because the framing or wording of the existing initiatives is, for whatever reason, not the favoured one. 

Less can be more. It is not necessary to separate sustainable green finance from climate finance, from long-term finance, from developing finance. The goal must be to consolidate the different processes, to make them more effective and efficient. Cooperation should, however, not only include governments, but research institutions, the financial sector and private companies too.

The goal must be to come up with consistent, concise and apt recommendations – and more importantly – policy actions that speed-up the rise of green finance. We have to achieve this on time – climate change is not waiting until we finally find a good solution – and making use of the collective intelligence might make a difference.

Our resolution for 2014 should be to pave the way for green finance. In theory, it is simple. The trio of more exchange, more transparency and more cooperation can contribute significantly to our common goal: to mobilize the necessary resources to finance a decent life for every single one of more than seven billion people and their descendants.

Nannette Lindenberg is an economist and researcher in the World Economy and Development Financing Department at the German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE) in Bonn. She specializes in green finance.