Indian G20 Presidency: Aligning Global Capital Flows with Sustainable Development

The Environmental Cost of Economic Growth: Shifting Investment Paradigms 

As societies increasingly rely on markets for resource allocation, there is a growing realization that the health of the world economy is intricately linked to the environment’s wellbeing. This private-sector-led growth engine has led to ecological imbalances and contributed to social inequality. For example, research by CDP shows that 100 companies account for 71% of industrial greenhouse gas (GHG) emissions since 1988. The rising temperatures due to the GHG emissions over the last century are costing the global economy USD 520 billion annually as 90 percent of natural disasters are now weather- and climate-related.  

Amid these challenges, investors are becoming acutely aware of the environmental and societal impact of their investments. They are increasingly seeking to finance sustainable enterprises. A recent EY survey reveals that 74% of investors now consider companies’ ESG (Environmental, Social, and Governance) disclosures when making investment decisions, a significant rise from just 32% in 2018. However, issues such as insufficient data-reporting and a lack of analytical expertise within financial institutions hinder the redirection of financial flows towards sustainable activities. 

Global Challenges, Global Solutions: The Need for International Cooperation in Finance/India’s leadership in G20 Negotiations 

The solution to these challenges cannot be region- or country-specific. Similarly, the effects of industrial emissions and resource exploitations are not limited to a region and transgress political boundaries. This creates a need for a globally cooperative solution. The G20 Sustainable Finance Working Group (SFWG) serves as a key forum for fostering such collaboration on sustainable finance matters.    

In 2023, the Indian Ministry of Finance, in collaboration with G20 SFWG co-chairs, People’s Bank of China and the United States Treasury, led year-long negotiations with other G20 jurisdictions, international organizations (IOs) and invited countries. Through four meetings over 10 months, the SFWG engaged diverse stakeholders to develop actionable recommendations providing a suitable environment to upscale sustainable finance. It culminated in a consensus over international policy recommendations that aim to drive the global economy toward sustainability while safeguarding the interest of developing nations. 

Overcoming the Challenges: a G20 focus on supporting SMEs and Developing Economies 

Under India’s G20 presidency, the SFWG addressed two critical concerns. First, it set out to meet investors’ escalating demand for sustainability-related data through policy support. It recommended data sharing among nature and biodiversity platforms and the use of satellite imagery and AI to monitor and evaluate the health of ecosystems and assess nature-related risks, dependencies, and impacts. 

Second, it worked to ensure that sustainability reporting does not place an undue burden on small and medium enterprises (SMEs), potentially disadvantaging them against well-resourced industries from developed countries. In the push towards financing sustainable avenues, two kinds of firms are at risk of losing access to finance – SMEs who do not have the resources to certify and report on the sustainability of their activities, and high-emission industries, such as coal industries, which require critical financing to reduce their emissions and transition towards carbon neutrality. Furthermore, developing countries’ economies are heavily dependent on both types of firms. Any policy frameworks that impede their access to finance could consequently slow down the flow of capital to these developing economies. The G20 Leaders also endorsed recommendations that are focused on building capacity of financial stakeholders including on sustainability disclosures. 

Strengthening the Sustainable Finance ecosystem: the G20 Sustainable Finance Technical Assistance Action Plan  

Addressing the need to build technical capacity is crucial for developing countries to achieve Agenda 2030. Recognizing this need, the SFWG crafted the G20 Sustainable Finance Technical Assistance Action Plan (TAAP). This multi-year, action-driven document was endorsed by the finance Ministers of the G20 countries at the 3rd Finance Ministers and Central Governors Meeting in July 2023 and promotes a coordinated approach to enhance capabilities of various financial system stakeholders. 

TAAP aims to align the global financial trajectory with sustainable objectives. It encourages governments, international bodies, and financial institutions to recognize capacity-building as a cornerstone for an affordable and just transition. This involves strengthening internal expertise, raising awareness of sustainable products, especially for MSMEs (Micro, Small and Medium Enterprises), and tailoring capacity-building services to local needs—be it risk analysis, sustainability disclosure, or innovative financial products. The emphasis on transition finance, intertwined with SDGs, is crucial, urging institutions to adopt forward-thinking strategies in transition plans.  The expectation is that TAAP will facilitate addressing the growing need for professionals skilled in understanding and managing ESG-related risks and opportunities. Enhancing this expertise could potentially tap into climate investment opportunities worth $23 trillion by 2030, as indicated by an IFC report.  

Meanwhile, the SFWG has also engaged the United Nations Development Programme to convene the TAAP Implementation Mechanism. As India takes steps to ensure the seamless implementation of the TAAP, it is clear that a collaborative, forward-thinking approach is not just the best way, but the only way, to align the world’s financial systems with sustainability goals for the benefit of all.

Originally posted here.