IFI governance


Aligning the financial system with sustainable development

16 April 2015 | Minutes



Ma Jun, Chief Economist, Peoples Bank of China

Rachel Kyte, Group Vice President and Special Envoy, Climate Change, World Bank Group

Murilo Portugal, President, FEBRABAN (Brazilian Bankers Association)

Laurence Tubiana, Special Representative of the Minister of Foreign Affairs for the 2015 Paris Climate Conference, and Ambassador for Climate Negotiations, France

Nick Robins, co-Director, UNEP Inquiry

Adair Turner, Senior Fellow, Institute for New Economic Thinking

Simon Zadek, co-Director, UNEP Inquiry

Looking to low-carbon and resilient growth – how to finance it?

Kim – need for shift of trillion $ – need for strong goal setting… WB as ‘more neutral’ space provider for ‘difficult’ discussions.

Simon Zadek:

UNEP Inquiry:

Three messages:

  1. Trillions not billions – about system design. No longer about low-level innovation. Need to support real economy.
  2. Extraordinary amount of work already ongoing. Integrating design and sustainability.
  3. Lots to do – beginning of the journey…

Set up in 2014 – two-year lifespan. How can one align financial sector with needs of sustainable development.

Obviously a diverse universe of rules… including macro policies.

Simple principle – go to country-level realities. 20 countries. Integrated Regulator in Indonesia – 10-year framework… Central Bank of Brazil, China, Bank of England – how can prudential tools be applied to deal with environmental risks?

These remain ad hoc and use of tools out of context in involved countries. Need to understand sequencing and patterns.

Now is the time… Why now?

  1. Critical year – COP21. Opportunities to move constituency.
  2. Prior to 2008 – difficult to think of challenges. Crisis has not gone away, but there is a bit of breathing space for reflection.
  3. Many innovations are coming from emerging markets. New patterns of innovation?

Ma Jun:

China is under significant environmental stress. New Greening of economy (5th pillar).

Who will come up with the funds – annual 2 trillion rnb – 85% or more must come from private capital.

Green credit guideline – very substantial growth 9% of total credit. Perhaps to grow up to 20%. Not used other instruments…

Previously, discouraging loans to polluting sector. No emphasis on incentivising green investments, but this will change.

Adair Turner:

Can one rely on private profit-seeking system? No.

  1. Cannot rely on private sector to focus on needed long-term required investments. Financial system – propensity to loan funds for real estate speculation (can crowd out other things). Real estate with its available collateral is useful for individual but not socially beneficial.
  1. Equity market – certain purpose. Google, etc. Downstream application of existing technologies that were only developed through the fundamental use of state support. Can’t not expect it to drive science research.
  1. Also not well suited for long-term infrastructure investments.

Thus cannot ensure on wholly autonomous finance system.

Should public intervene in financial sector – likely yes. One must seek to reflect externality (e.g., price of carbon). Climate Change Committee – carbon price uncertainty most likely not most efficient way to change behaviour. Perhaps reflect externality in the price of capital upfront.

Laurence Tubiana:

What would system that respond to 2 degree increase?

Difficult in absence of central planning – need to change ‘path dependency’. Very similar to what one does with economy as such vis-à-vis planning. Identify what drives financial systems to respond – as it was done in post-war period.

Paris too early.

Must segment approach by institution – system should not arbitrage against long-term green investment or collective utilisation. E.g., asking Pension funds, for example, what it can offer.

Rhetoric – waiting for other actors to act. First mover disadvantage. Countries have undertaken to seek unilateral action. Private bankers – focusing on risk-sharing.

However – catch 22 as requires legitimate pooling (believable).

Ma Jun – PRBC – set up inquiry – together with UNEP. 14 recommendations:

  1. Not only green loans but expand number and variety of instruments – green insurance, green bonds, etc.

Green bond advantages – better at easing mismatch in maturity vs. use of deposits. Looking at incentives for investment in bonds – i.e., tax incentive. Holder of treasury not liable to tax – do same with bond.

PPP-based financing – equity funding.

  1. Funding costs are very important –e.g., subway which is eco – return at only 4% while costs at 5%. Can use incentives to decrease gap.
  2. Must develop and incubate specialised institution – green investment fund(?) in UK. Must reduce risk aversion by public sector. Much technical expertise is required.

China Industrial Bank – has a green subsidiary. ROE at near 20%, which is much above the average.


  1. Legal system adaptation – compulsive pollution insurance (green insurance – thus drives consideration by companies). Obligatory information disclosure. Market will take this into consideration and price in risks vs. credit.

Bond market guideline is being developed. Previously issued, but not called green bonds.

FRACTION of recommendation.


 What is the role central bank- Very comprehensive report by China. In UK Green Bank not placed in greater context.

Likely that ‘developed’ economies will face much stiffer resistance.

Developmental CB – challenge – public policy intervention that drive sustainability while avoiding politisation of decision-making. This has been true of economic history – e.g., preferential re-discounting (e.g., Japan – not to real estate, but to industrial sector).

These tools were also used by Indonesia and Philippines – to disastrous impact. This is the challenge. Requires strong governance/ legitimate structures.

Laurence Tubiana:

Old new role of CB….

Need second or third best system as the other ‘Chinese’ approach seems not open.

Asks that China open the discussion at next G20.

Task CBs to respond to how they see their role in dealing with concern they recognise. To date these institutions are very quiet.

Can G20 make a statement? Remains very difficult. Can we have an agreed statement by CBs? Again, seems very difficult. Legitimate to ask central bankers what they will do or at least to discuss. However very limited leverage.


AfDB – most finance raised has been in spent in LIC. What about middle income countries?

Oxfam: externalities – fossil fuel subsidies 1Trillion. How are will calculations of externalities to be considered?

WB – former Bank regulator NED:

Green or not green focus – to what extent did China take into consideration environmental costing? Do what extend can this be done?


Tubiana – MICS – public guarantee is the key. Simple or complex – this can be produced prior to Paris. Discussion is quite mature.

Ma Jun – focusing on non-greening/ i.e., penalise lending to polluting industries (construction industry cannot be provided credit).

China Development Bank – software developed to assist non-technical staff to quantify impact. Have not gone to the extent of costing health, etc.

International cooperation:

One country doing well has massive positive externalities – must seek to share positive lessons.

Murillo Portugal:

Biggest challenge to mankind… blah, blah,

Flow of capital so far insufficient. Brazil:

Two innovations:

2011 – rules for Basil – capital adequacy/ CB required that banks demonstrate how banks will deal with environmental risks

CB new regulation 2014 – all banks must now develop internal ES policies with basic criteria set by CB. Some variation by size, etc. Must be reported to Board. Bank must appoint Director responsible. This is particularly useful for medium and small banks.

Federation of Brazilian Banks – developed system of self-regulation / 80% of assets.

Providing training for bank officials.

Rules for legal liability: uncertainty in Brazil? Agrees, this is an important issue. Environmental law in 1980. Very tough law. Objective joint responsibility – fine – however courts have issued very divergent decisions. Need to clarify jurisprudence. Need to clarify causal-nexus.

Q: can one not use ratings system?

Not enough information – Lack of information regarding on indoor

Member of a few boards – EPA:

What about sovereign funds?

Ma Jun – credit rating – China may proposed a dual credit rating. Begin with easier companies.

BIS – it may take some time. China is undertaking environmental stress assessment in some sectors.


Should not leap to conclusion that CBers are the only answers. True that one must seek to influence cost of capital – but perhaps can use Development Bank or ban certain activities. This is likely better than working through BIS to set up risk weighting, etc…

QE 12% in Europe is intended to be provided to EIB.

Negative return on bonds (approximately -1%). Governments can therefore borrow to finance these costs.


Agree with focus on rating agencies.

We require more institutions, including Central Banks to disclose their position and action plans.

Portugal –

Currently – do no harm. Must move to ‘do good’ – regulations may not be then the right answer.

What about prices in the real economy? Private sector is guided by price signals. I.e., must work with systems/ tools that will internalise costs and benefits… that is incentivise vs. penalising banks.

UNEP – Brazil – tried to estimate resources to green economy – as baseline: 2013: Getulio Vargas: 9 Banks responsible for 80% of loan. However data was a key challenge. Need for standardised parameters.

WB – cannot rely on private sector alone…nice words, where is the supporting WB tech advise?


Elliot Harris: ASG – Head of Office, UNEP

There is agreement on the need of a common approach, particularly on externality –e.g., lowering cost of capital. Pricing to internalise externalities.