- Green and inclusive recovery requires both public and private capital.
Building back better and greener from COVID-19 will demand large investments that are often beyond the means of the public sector alone. Promisingly, green and social finance from private sources has grown rapidly in recent years.
- Private green and social finance is becoming financially driven.
While it was investors’ environmental and social goals that initially drove global growth in sustainable investment, financial motives are increasingly coming to the fore. After Australia’s ratification of the Kyoto Protocol restricted its emissions, to cite one illustration, the debt costs of high-emitting Australian companies increased by an average of 5.4%, and their equity costs by 2.5%, relative to low-emitting companies. Tapping green and social finance helps meet the preferences of various stakeholders, hedge and mitigate sustainability risks, and generate resilience under shocks. Green and social finance also fosters positive recognition among investors, thus broadening the financing base.
- Sustainable finance offers real environmental and social benefits.
Asian firms that issue green bonds typically improve their environmental performance by 17% after 1 year and 30% after 2 years, as measured by corporate environmental ratings. At the market level, green bond issuance is associated with reduced carbon dioxide (CO2) emissions as market participants become more aware of the Sustainable Development Goals (SDGs) and committed to achieving them. Social impacts are more varied, but innovative financing instruments such as impact bonds show potential.
- Engaged public policy is central to nurturing social and green finance.
Governments can use a range of policy options both to shape markets and to participate in them. Regulation that enforces common standards of information disclosure and impact measurement is the most powerful policy option to support the development of green and social finance. Policy makers can align finance with the SDGs by incorporating sustainability risks into the micro- and macroprudential framework to safeguard financial stability, strengthen market infrastructure and ecosystems, and expand fiscal revenue available for development along a green, resilient, and inclusive pathway.