Based on the Report, “Financing for Sustainable Development 2021” of United Nations, Department of Economic and Social Affairs, these points have been highlighted for the benefit of readers and researchers. The Report is a joint activity of the Inter-agency Task Force on Financing for Development, which is comprised of more than 60 United Nations Agencies and International organizations. The author extends his thanks to Mathieu Verougstraete, UNO for sharing the Report.
It has to be agreed that the effect of COVID19 is awful in the economy of almost all the countries. China was also worst affected as China's economy grew at the slowest pace in more than four decades in 2020 (2.3 %). Of course, many countries had low growth rates, even negative also. The International Labour Organization estimated that because of the COVID19 crisis, there was loss of 255 million jobs worldwide which means purchasing power of the people has severely reduced. According to the Report “The Financing for Sustainable Development, 2021” the global economy has experienced the worst recession in 90 years, with the most vulnerable segments of societies disproportionately affected. About 120 million people have been plunged back into extreme poverty”. So, “only immediate action can prevent a lost decade for development for many countries”. It has been clearly mentioned in the Report that Policymakers can support sustainable development investing and increase its impact. Directing funds to companies and projects aligned with the Sustainable Development Goals (SDGs) requires providing investors with the appropriate tools. I am straight away presenting the tools for the benefit of readers and researchers without any change of word.
1) First, there is a need to improve the quality and comparability of data/metrics on the impact of companies on social and environmental issues. Without comparable data, investors cannot properly incorporate sustainability issues into their investment decisions and allocate capital to companies aligned with the SDGs. In addition to corporate reporting rating agencies could help inform market participants. However, sustainability is not fully incorporated into traditional credit ratings and environmental, social and governance (ESG) rating providers often have different views on the same companies. ESG scores show a correlation of just 61 per cent among the leading ESG score providers; and for some
ESG rating providers, it has been found that high E scores positively correlate with high carbon emissions. This raises concerns about the suitability of current ESG scoring for helping investors align their portfolios with a low-carbon economy;
2) Second, there is a need for a greater clarity on which economic activities positively contribute to sustainable development, for instance, through a globally harmonized Taxonomy. Different regulators have started developing taxonomies of activities with positive impacts to sustainable development, including Bangladesh, Canada, China, India, Malaysia, Mongolia, New Zealand, Singapore and the European Commission. Developing taxonomies at the global level would help avoid investor confusion and financial markets segmentation. Also, the scope of existing taxonomies could be broadened to cover all the SDGs, as most of them currently focus exclusively on green activities. Development impact should also be considered, meaning that activities in countries with large SDG gaps should be favourably regarded when creating sustainable taxonomies or setting standards for sustainable financial products;
3) Third, there is a need to advance a common understanding of sustainable development investing to mitigate the risk of green washing or SDG washing. Too many investment products and strategies claim to be sustainable without making a meaningful contribution to the SDGs. Without minimum standards or criteria, any investment can make such a claim and use sustainable development as branding. This can be misleading for investors and hurt the credibility of the industry. To address this issue, the GISD Alliance has developed a common definition of what constitutes sustainable development investing. This definition could serve as an effective norm for the market if widely adopted by market participants and policymakers. The definition goes beyond broad principles and includes concrete steps for its operationalization in an investment portfolio centred around the SDGs. These steps build on the many initiatives under way to reinforce investment practices, as well as on existing sustainability-related standards and taxonomies;
4) Fourth, there is a need to strengthen over time the impact of sustainable debt products, such as green bonds. For policymakers, as the green bond market matures, it is important to understand whether these bonds create additional positive outcomes and carbon reduction, or finance activities that would have been realized anyway. Complementing green bond labels with “green” ratings (e.g., attesting to a company’s compatibility with a 2°C pathway) may be necessary to better align incentives and provide a complete picture to investors. Rather than focusing on the bond’s use of proceeds, other approaches could also be promoted, such as sustainability-linked bonds where the issuer commits to improvements in overall firm performance against green or social metrics, or the labelling of bonds issued by companies aligned with the SDGs at the corporate level.
It is also observed from the Report that Policymakers can also encourage the demand for investment aligned with sustainable development. For example, Governments could provide tax credits or regulatory relief for sources of financing directed towards sustainable investment. Central banks could also accept suitable sustainable debt instruments as collateral, and include these bonds in their asset purchase programmes. COVID-19 has created awful impact in the economy of the world and all the countries have economically suffered so hope as the suggestions extended in the Report must be adhered.
Dr Shankar Chatterjee, Hyderabad, India
Dt 20 April 2021