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Trillions held in financial system 'fuel inequalities' in tackling sustainability

Lucy Harley-McKeown
·3-min read
UKRAINE - 2020/10/29: In this photo illustration the Dow Jones Industrial Average index displayed on a smartphone screen. Stock market indexes sharply dropped as investors nervously looked at elevating coronavirus case counts in the US and Europe, as media reported. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)
It is currently difficult to assess the quality or sustainability of investments across different sources of financing due to the fragmentation of measures around the world. Photo: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images

The trillions held in the financial system continue to fuel inequalities and unsustainable investments.

According to the Organisation for Economic Co-operation and Development (OECD’s) Global Outlook on Financing for Sustainable Development 2021 report, published today (9 November), a step change is needed to shift the trillions in favour of sustainable and inclusive development along the investment chain.

Investing in the sustainable development goals (SDGs) and “leaving no one behind” go beyond an ethical imperative; they are also a risk mitigation strategy and a business opportunity, the report says.

It lays out the issue: “On the one hand, a debt crisis looms in developing countries who lack financial reserves to implement a greener and more resilient recovery. On the other hand, a black box surrounds the actual environmental and social impact of investments.”

It is currently difficult to assess the quality or sustainability of investments across different sources of financing due to the fragmentation of measures around the world.

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What’s more, the annual financing gap to achieve SDGs now stands at $2.5tn (£1.5tn). And the increased needs and declining resources due to the COVID-19 pandemic means it is becoming more difficult to close the gap.

In the era of COVID-19, with its greater spending needs and restricted funding sources, governments rely on financial institutions to help mobilise financing and overcome fiscal constraints.

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Financial institutions such as institutional investors, banks and asset managers play an important role to ensure the availability of capital and integrate long-term risks into investment decisions, the report says.

These financial actors guide the market by deciding which kinds of companies to invest in, determining which kinds of risk criteria to assess, and labelling categories of finance and investments.

While financial assets grow globally, this does little to reduce the financing gap. Since 2012, global financial assets have grown at 5.9% per annum and amounted to $378.9tn in 2019, due mainly to the rise of financial intermediation.

Today, financial assets represent six times GDP in high-income economies and three times GDP in middle-income countries.

The largest gap in financing to achieve the SDGs is for infrastructure investment needs, estimated at $70tn through 2030. However, infrastructure asset holdings by institutional investors are low.

For example, only 1.3% of financial assets of pension funds are allocated to the sector. A lack of reliable and standardised information is a major barrier to investment and required to channel long-term investment towards the SDGs.

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This research goes hand-in-hand with data released by the Institute for Public Policy Research (IPPR) over the weekend that showed the UK is off course to meet its target of net zero carbon emissions by 2050.

The report showed the UK government has not yet delivered the scale of investment needed to ensure a low-carbon future.

A new analysis shows that over the course of this parliament the government has committed to investing just 12% of what is needed to meet their net zero emissions target.

The think tank estimates that £33bn a year in additional annual investment is needed to meet the net zero target, but only around £4bn annually has so far been committed.

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