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«United Nations United Nations Report of the Intergovernmental Committee of Experts on Sustainable Development Financing asdf United Nations New York, ...»

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53 Recent Impact Evidence”, Focus Note No. 92 (Washington, D.C., Consultative Group to Assist the Poor (CGAP), April 2014).

Asli Demirguc-Kunt and Leora Klapper, “Measuring Financial Inclusion: The Global 54 Findex Database”, Policy Research Working Paper No. 6025 (Washington, D.C., World Bank, 2012).

Building Inclusive Financial Sectors for Development (United Nations publication, Sales 55 No. E.06.II.A.3).

24 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing (wage, pension and social welfare payments) with lower administrative costs and less leakages. Bringing more people into the formal financial sector is believed to also have a beneficial effect on tax collection. Furthermore, regulation is important to ensure responsible digital finance and avoid abusive practices.

Surveys demonstrate that a lack of awareness of financial products and institutions is a barrier to their utilization, particularly for insurance. The public sector can promote strengthened financial capability, including financial literacy, while also expanding consumer protection. In particular, financial service providers should be required to disclose key information in a clear and understandable, preferably uniform, format. Policymakers should also enact clear standards for treating consumers fairly and ethically, and set up uniform recourse mechanisms for effective resolution of disputes across the industry. In this regard, Governments might establish consumer protection agencies to oversee the necessary framework for consumer protection within a country context.

Although it is only one aspect of financial inclusion, a good deal of attention has been paid to microfinance. There is a wide global network of forums and international support networks in the public and non-profit microfinance sectors, which speaks to the vibrancy of the industry. Nonetheless, microfinance remains outside the regulatory framework in many countries. With the growth of microfinance institutions, both managers and regulators should be concerned about the need to balance expanding access to financial services with managing risks, including social risks of household indebtedness.

Promote lending to small and medium-sized enterprises An important area where access to financial services (in this case, credit) is insufficient relates to small and medium-sized enterprises (SMEs), which in many countries are main drivers of innovation, employment and growth. More than 200 million SMEs lack access to financial services worldwide. Frequently, the financial needs of SMEs are too large for the traditional moneylenders and microcredit agencies, while large banks tend to bypass this market, owing to administrative intensity, the lack of information and the uncertainty of credit risk. By providing credit information, credit registries/bureaux, and collateral and insolvency regimes could help extend SME access to credit.

Long-term bond markets are limited in many developing countries, and alternative vehicles for financing innovative start-ups, such as angel investors and venture capital funds, are largely missing in many developing countries.

National development banks can play an important role here. To support greater access to finance for SMEs, a calibrated interplay of private and public banks can also be used. For example, one model used by development banks is to provide concessional public funding to the commercial banking sector, which on-lends the funds at a preferential rate for SMEs. Instruments can encompass guarantees, loans, interest-rate subsidies, equity and equity-linked investments as well as access to services and information. Many countries also maintain other forms of support for SMEs, such as low-interest government loan programmes. Cooperative banks, post banks and savings banks are also well suited to offer financial services to SMEs, including developing and offering more diversified loan products.

Lending to SMEs is considered high risk by many bankers owing to lack of information and uncertainty of credit risk. Credit is often insufficient, even when 25 Options for an integrated sustainable development financing strategy there is ample liquidity in the banking sector. However, a diversified portfolio of SME loans can significantly reduce risks. Securitization of diverse portfolios of SME loans, potentially sourced across a variety of banks to ensure greater diversification, can potentially increase funds available for SME lending. However, safeguards need to be in place to address risks in “lend-to-distribute” banking, as highlighted during the financial crisis, so that the issuer maintains a stake in keeping the loans performing (such as rules that require banks to maintain a percentage of each loan on their balance sheets).

Develop financial markets for long-term investment and enhancing regulations to balance access and stability A well-capitalized banking sector and long-term bond markets allow domestic companies to meet their longer-term financing needs — without taking foreign exchange risks associated with borrowing in foreign currency. Local bond markets can thus play an important role in financing long-term sustainable development. To successfully develop local capital markets, policymakers need to build institutions and infrastructure, including supervision, clearing and settlement systems, effective credit bureaux, measures to safeguard consumers, and other appropriate regulation.

Institutional investors, particularly those with long-term liabilities, such as pension funds, life insurance companies, endowments, and sovereign wealth funds are particularly well suited to provide long-term finance (though international institutional investors have tended to invest with a short-term time horizon in recent decades, see section IV.D). To nurture the development of an institutional investor base, policymakers need to develop an institutional, legal and regulatory framework. This includes securities laws, asset management regulations, and consumer protection. Policymakers could provide rules for transparent processes, sound governance, and an efficient enforcement system. There are numerous examples of successful regulatory frameworks from developed and emerging market countries, though policymakers in developing countries should adapt these to local conditions, and be flexible to update them in response to changing market conditions.

In general, financial markets need to be developed with care as bond and equity markets often demonstrate high volatility, especially in small markets that lack liquidity. To limit excessive volatility that can impact the real economy, regulations can be enacted in conjunction with capital account management tools to deter “hot money”. In some areas, developing a regional market might be effective in achieving a scale and depth not attainable in individual small markets. Partnerships between nascent markets and established global financial centres can support the transfer of skills, knowledge and technology to developing countries, though care should be taken to adapt them to local conditions.

On the flipside, it is important to note that the financial sector can grow too large relative to the domestic economy. Above certain thresholds financial sector growth may increase inequality and instability, owing in part to excessive credit growth and asset price bubbles.56 It is therefore important for all countries to design strong “macroprudential” regulatory frameworks.

Stijn Claessens and M. Ayhan Kose, “Financial Crises: Explanations, Types, and Implications”, Working Paper No. WP/13/28 (Washington, D.C., IMF, January 2013).

26 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing A robust regulatory framework should consider all areas of financial intermediation, including shadow banking, ranging from microfinance to complex derivative instruments. Enhancing stability and reducing risks while promoting access to credit presents a complex challenge for policymakers, since there can be trade-offs between the two. Policymakers should design the regulatory and policy framework to strike a balance between these goals. For example, the European Union included special provisions (e.g., Capital Requirement Directive IV) in its implementation of Basel III to reduce the capital cost of lending to SMEs. There are also calls for financial sector regulatory systems to be widened from focusing on financial stability to include sustainability criteria.

Islamic finance has also generated important mechanisms that can support sustainable development financing.57 Islamic financial assets have grown rapidly in the last decade, including in the areas of infrastructure financing, social investments and green investments. The investment vehicles used in Islamic finance, which are based on shared business risk, improve depth and breadth of financial markets by providing alternative sources of financing. These financing structures might offer lessons on how to develop a class of new long-term investment.

Strengthen the enabling environment It is well known that strengthening the domestic policy, legal, regulatory and institutional environment is an effective way for Governments to encourage private investment. To better mobilize and effectively use finance, policy measures should focus on easing the bottlenecks within the country context. As a result of such efforts over the past decade, many developing countries have reduced excessive complexity and cost that businesses pay to start and maintain operations.

While the structure of reforms varies between countries and regions in line with their historical experience, culture and politics, policymakers can strengthen the enforceability of contracts, the protection of creditor and debtor rights and the effectiveness of trade and competition policies, streamline business registration regimes, and promote the rule of law, human rights and effective security. Investment in infrastructure and essential public services, as well as human capital, would also help to make the business environment more attractive. Political instability, macroeconomic instability and policy uncertainty are significant obstacles to doing business in any country, underlining the importance of sound policies more broadly.

Strengthen economic, environmental, social and governance and sustainability considerations in the financial system Policymakers should aim to foster sustainability considerations in all institutions and at all levels. This can be done by encouraging joint reporting on both environmental, social and governance (ESG) impacts and economic returns — which can be referred to as EESG reporting. In addition, appropriate regulations, such as portfolio requirements and other measures in line with domestic conditions can be used to strengthen these considerations.

–  –  –

There are signs of a strengthened focus on EESG considerations in some financial markets. Increasing numbers of private sector actors have signed on to the Equator Principles for project financiers, Principles for Responsible Investment, and Principles for Sustainable Insurance, which set standards for private investors. Similarly, the Sustainable Stock Exchanges Initiative aims to explore how exchanges can work with investors, regulators, and companies to enhance corporate transparency, report performance on EESG issues, and encourage responsible long-term approaches to investment. Knowledge of these initiatives within many businesses and financial institutions remains limited. It is thus important to scale up awareness and capacity-building, in both public institutions and financial market firms. In this regard, Governments could encourage financial market firms to train their employees on EESG issues, which could be included in qualifying exams and courses for industry licences.

An important consideration in sustainable development is the emissions impact of financing activities. In this context, some pension funds, albeit relatively smaller funds, have begun to monitor the emissions of their portfolios on a voluntary basis,58 allowing fund managers to recognize the risks they are already bearing. Policymakers could play a catalytic role in this area by encouraging index providers to accelerate work on the design of benchmarks and encouraging transparency regarding emissions impact, particularly in public investment funds (e.g., public pension funds).

A key question is whether largely voluntary initiatives can change the way financial institutions make investment decisions. Policymakers could consider creating regulatory frameworks that make some of these practices mandatory.

To be most effective, these policies should be based on extensive engagement between the private sector, civil society, financial regulators, and policymakers. In this regard, several countries have already mandated some ESG criteria, including South Africa, Brazil, Malaysia, France and the United Kingdom, among others. More research should be done on the impact of different mechanisms.

International organizations can create a platform for sharing experiences on both successes and failures of various instruments and arrangements.

C. International public financing International public finance plays a central role in financing sustainable development. Similar to domestic public finance, there are three functions of international public finance: poverty eradication and development; financing the provision of regional and global public goods; and maintaining global macroeconomic stability within the context of the broader global enabling environment (see section V). International public finance should complement and facilitate national efforts in these areas, and will remain indispensable in implementing sustainable development. ODA in particular will remain critical and should be focused where needs are greatest and the capacity to raise resources is weakest.

See www.rafp.fr/download.php?file_url=IMG/pdf/PR_Carbon_Audit_ERAFP.pdf.

58 28 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing Meet existing commitments ODA remains an important source of external public financing for developing countries, particularly least developed countries. ODA reached record levels in 2013, though it still remains significantly below the internationally agreed target of 0.7 per cent of gross national income (GNI), averaging 0.3 per cent of GNI in

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