One of the key themes in the COP28 conference in Dubai held this year is the creation of new mechanisms and platforms for financing environmental projects to counter climate change. Thus far it has mostly been about ad hoc efforts of countries to come up with additional funds for the environmental cause – at the COP28 meetings one of such initiatives has been the creation of a “loss and damage fund” to support vulnerable economies faced with the adverse effects of climate change. In terms of the more systemic financing trajectories for environmental projects the introduction of a global platform for trade in carbon units is yet to crystallize, with substantial fragmentation in the operation of such markets and tax regimes still observed across countries. At the same time, the search for additional investments into environmental projects has not yet exhausted all of the available reserves in the global economy – one of the sizeable sources of green financing may be a platform of the world’s largest Sovereign Wealth Funds (SWFs), whose cumulative resources potentially exceed trillions of dollars. Even more importantly, there is also scope for creating a macroeconomic policy framework as well as a set of economic policy rules that render the attainment of sustainable development goals more systematic rather than ad hoc at the level of national economies.
As regards the formation of a global network for SWFs that are to undertake investments into environmental projects and instruments, such a platform could potentially be coordinated together with the G20 along with the International Monetary Fund (IMF). A discussion among the largest SWFs on the modalities of allocations into green instruments could be followed by the adoption of additional provisions into the Santiago principles that would deal with the issues of sustainable investments. The SWF platform could also explore such modalities as benchmarking best practices and levels of allocations for sustainable projects/instruments. The quality of the operation of such a SWF platform could be enhanced via coordination with the newly created platform for regional development banks headed by the World Bank. In fact, one of the key rationales for this World Bank-led platform was the pooling of resources for financing large scale priority projects, most notably in the environmental sphere.
Over and above the platforms for regional development banks and sovereign wealth funds there may also be an important role for the regional financing arrangements (RFAs) that have closely collaborated with the IMF on issues of policy coordination. The RFA/IMF platform could cooperate with the RDB/World Bank platform on issues pertaining to assessments of macroeconomic conditions (including risks and vulnerabilities) for international environmental projects as well as allocations by RFAs into green projects and instruments (some of the RFAs finance such projects in a similar vein to regional development banks). Another possible global platform that could deliver an important contribution to sustainable development is that of Regional Trade Arrangements (RTAs) – together with the World Trade Organization these regional blocs could explore the possibilities of coordinated reductions in import barriers for environmental goods.
Apart from the sheer mobilization of financial resources another important track in rendering the global economy more equipped in countering climate change is the introduction of economic policy rules into the national economic policy frameworks that would prioritize superior environmental outcomes. In the budget policy domain, there may be case for “green fiscal rules” that in turn may involve the following:
- A “floor” on the share of long-term financing allocated to environmental projects/programs
- A “floor” on the share of the share of the sovereign fund/Stabilization fund investments into green projects/instruments
- A target of an “ESG-adjusted” fiscal balance that would allow for a comparison between the headline fiscal balance figures and the evolution of the fiscal balance that takes into account contingent liabilities and the needed financing to attain environmental, social and governance goals
With respect to the operation of the fiscal rule governing commodity-sourced Sovereign Wealth Funds, there may be additional rules/guidelines on the pace of the “greening” of such Funds and the share of deficit financing covered by “green bonds” and other such instruments. Indeed, the use of the Sovereign Wealth Funds as key vehicles in “green financing” is particularly important, given that the majority of such funds are accumulated on the back of high commodity prices. A coordinated strategy directed at increasing the share of investments undertaken by such funds into “green instruments” may introduce a link between the rate of the accumulation of these funds on the back of high oil/gas prices and the pace transferring this wealth towards environmental goals. In this respect, a platform that brings together the main resource-based SWFs could introduce a “net zero” benchmark for the operation of such funds, whereby the effects of the accumulation of resource-based SWFs on the back of increasing oil/gas production are compensated by greater investment into environmental projects/green instruments.
Finally, another source of greater funding for sustainability projects has to do with efficiency improvements in the coordination of environmental platforms undertaken within the framework of China’s Belt and Road Initiative (BRI), the EU’s Global Gateway and the G7’s B3W. Going forward, rather than a “reactive” framework with respect to global vulnerabilities such as climate change, the institutional construct of the world economy could envisage a pro-active/ex-ante tracking and mitigation of potential risks and economic fragilities. The latter may in particular involve threats that like pandemics and climate change have a relatively low initial probability but a very high cost for the global economy. The creation of global financing platforms that bring together regional development institutions and SWFs with the support provided by multilateral organizations such as the IMF and the World Bank could be well-suited for a transition towards a greater level of preparedness of the world community to the rising susceptibility to high cost risks such as climate change.
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