Invisible threat and a rare opportunity

Photo by Pixabay

For the first time in several decades, people in Kathmandu Valley, Nepal were able to get a rare glimpse of Mount Everest. Lower air pollution levels due to the pandemic allowed the smog to clear to reveal the magnificent peaks of Mount Kang Nachugo, Mount Everest and Mount Chobutse. 

In April this year, climate researchers estimated that daily global carbon emissions level were 17% lower compared to the same period in 2019. The International Energy Agency estimates that 2020 carbon emissions will be lower by 8% as a result of Covid-19 restrictions. Such an annual drop in emissions has not been seen since World War II. These are indeed good news for the planet. Now stay tuned for the challenges…

A UN report last year indicated that global emissions need to fall around 8% every year from 2020 to 2030 to limit global warming to 1.5°C. Cynics might say the world needs a pandemic-type event every few years to jolt policymakers and businesses to take action on climate change.   

Researchers at King’s College London found that falling incomes, as a result of the pandemic, could push 80 million to 580 million people into poverty, depending on the size of the income contractions. That would effectively wipe out several decades of progress against poverty.

I mention these extreme outcomes to illustrate the challenging tradeoffs that society must make. Upon reflection, I find that ‘society’ is a nebulous concept. There is no homogeneous society. I should perhaps say the tradeoffs that individual leaders must consider. This realisation then leads me to ask questions about the type of leadership we are observing today.

Collectively, the developed economies have found creative ways to channel trillions of dollars into the pandemic fight. I am curious, as are many others, as to what factors led to this outcome? The immediacy of the invisible threat and the survival of humanity come to mind. Yet, I believe leadership played a crucial role in delivering this result. Indeed some future studies will surely explore which leaders did well and which ones did poorly during this crisis. And importantly, the question remains as to why a similar level of leadership( and funds) does not exist to pursue the sustainable development of our economies.

Much has been written on the opportunities presented by the current Covid-19 pandemic to steer the trajectory of economic growth towards development that is consistent with the permissible planetary boundaries. Let us build back better is the chorus we hear. This chorus, I suspect, resonates with millions of people around the world. However, everyone should raise their game; from individual consumers to businesses and governments. Otherwise, there is a good chance that once this episodic crisis is over, we will revert to business as usual and miss a rare opportunity for meaningful change.

O Finance, where are you?

UN sustainable development goals took decades to develop

Getting a consensus to achieve global cooperation on any issue is challenging. It took several decades for the United Nations(UN) to get its members to adopt the 17 sustainable development goals(SDGs) in 2015. The process started years earlier with the Earth Summit in 1992 in Rio de Janeiro where 178 members agreed to an action plan to protect human lives and protect the planet. Eight years later, in September 2000, the UN adopted the Millenium Development Goals with the explicit goal to reduce extreme poverty by 2015.

Fifteen years later, in September  2015, the UN 2030 Agenda for sustainable development was adopted by the UN General Assembly.  A few months earlier in July 2015, the Addis Ababa Action Agenda was formally launched by the UN. The plan stressed the importance of long-term investment and the need to align all financing with sustainable development.

No sense of urgency

During the 2008 financial crisis, almost 426 billion dollars were mobilised within two years to ‘save’ the US  financial system.  There is no sense of urgency to mobilise funds to implement the UN sustainable development goals. Yet the investments required are huge.

Recent OECD estimates indicate that around USD 6.9 trillion of infrastructure investment is needed each year to 2030 to meet the sustainable development goals and meet the goals of the Paris Agreement. The current annual spending on infrastructure is between USD 3.4 – 4.4 trillion, depending on the measurement metrics used. An investment gap of between 2.5 to 3.5 trillion dollars per year exist today.

There is clearly a large and significant investment gap to reach society’s desired sustainable development goals. The availability of capital does not seem to be the problem. According to the Financial Stability Board, global total financial assets stood at  382 trillion dollars as of 2017. Pension funds and insurance corporations’ assets were close to 65  trillion dollars. The core challenge is to incentivise the flow of a bigger share of this capital towards sustainable investments. To do this, strong leadership is a must.

EU leads the way

To address some of these issues, the European Union High-Level Expert Group on Sustainable Finance produced a set of recommendations to accelerate the flow of capital towards sustainable development objectives. The European Commission(EC) adopted an action plan on sustainable finance in March 2018. Among the various actions, the Commission highlighted the limitations of existing sustainability benchmarks. Accordingly, it proposed an initiative to create a designated category of benchmarks comprising low-carbon issuers.

To prepare for the creation of these benchmarks, the European Commission had to clarify what exactly constitutes sustainable investments.  In June 2019, the European Commission produced a taxonomy of sustainable investments.   According to the European Union,  the Taxonomy is an implementation tool that can enable capital markets to identify and respond to investment opportunities that contribute to environmental policy objectives.   In October 2019, the  European Union launched the International Platform on Sustainable Finance(IPSF) to strengthen international cooperation and scale up mobilisation of capital towards environmentally sustainable investments.

There is hope that the development of the EU Taxonomy, the new carbon benchmarks and the IPSF will enable the private sector to increase their capital allocation towards sustainable investments. The result could be substantially more funds to achieve the UN sustainable development goals. And Finance will finally show up.

Change, we must.

Yesterday I was clever, so I wanted to change the world. Today I am wise, so I am changing myself.

Rumi

The global challenges we face will necessitate an unprecedented level of international cooperation and leadership if there is to be hope of implementing timely solutions.  It is easy to feel powerless to make and lead change that will ultimately move the needle. Yet, change we must. Through this blog I hope to make a small contribution to the discussion on the leadership that is required for our journey towards a sustainable economy. I welcome your comments and feedback.