SDG finance: a core driving force for sustainable development

Release time:2022-12-28Source:China Sustainability TribuneAuthor:Ma Weihua

111.pngInstead of taking money for governance and then for poverty alleviation after problems, we must start from the strategic decision-making and investment implementation, and adhere to the concept of sustainable development throughout the investment process and to the consistency of economic benefits, social benefits or value.

Ma Weihua, Member of the UNDP SDG Impact Steering Group, Executive Chairman at CASVI, Chairman, SusallWave

Racing against climate change and unprecedented challenges

We encountered unprecedented challenges in advancing SDGs. I don’t think these may have been expected when signing the UN's 2030 Agenda for Sustainable Development in September 2015. In 2021, UN Secretary-General Antonio Guterres said that the COVID-19 pandemic has greatly hindered the process of sustainable development. Our awareness of this is deeper and deeper. Although we have made great achievements in poverty alleviation, the global extreme poverty rate returned to 20 years ago in 2021.

Now we are racing against climate change again and everyone can feel it from the floods in 2021 to the high temperatures in 2022, including droughts that haven’t occurred in some parts of Europe and the United States in 500 years. Two days ago, I went to Sichuan province and experienced temperatures of over 40°C. With hydropower as the mainstay, droughts and heat in Sichuan province have affected power generation, even production and livelihood. This problem will not just influence the present.

A report released by IPCC in April indicated that if current situations continue, the average global temperature will be 4°C warmer than that in 1850 AD at the end of the century. The average global temperature is now 1.1°C above the pre-industrial level, but the Paris Agreement aims to keep it at 1.5°C by the end of the century.

A report issued by IPCC experts two years ago pointed out that the degree cannot exceed 2°C. If it exceeds 2°C, it is possible that the sea level will rise by more than 2 meters, and biodiversity may crash down. What would 4°C rise look like? How can we stand that? I saw a video of thousands of walruses living in the Arctic Ocean jumping from cliffs into the sea two days ago. The reason is their smaller living space caused by climate change. Thus, global sustainable development has encountered unprecedented challenges and we are in a race against climate change.


SDG finance: foundation of final solution

How should we solve these problems? Currently, only SDG finance or sustainable finance is the most fundamental measure.

In 2015, when the UN first launched the SDGs, the funding gap to achieve the 17 goals (SDGs) was USD 3.9 trillion, while now it has exceeded USD 4.2 trillion with an increase of 40%. Therefore, the most urgent task at present is still how to channel funds to sustainable development. It is the only way can we find a way out.

What is SDG finance? I think it is sustainable finance and they have the same connotation. All financial services that can bring positive benefits to the society and environment are called sustainable finance or SDG finance. Humanity has taken a lot of research on this issue and it can go back to the sixteenth century when there were ethical investments. At the end of the last century, bottom-line investing, responsible investing, ESG investing, impact investing, SDG finance have emerged one after another, including current green finance and inclusive finance.

After so many years of exploration, human beings have realized that current problems, that is, the problems of the 17 SDGs, mostly arise after economic and social development and cannot be solved by government investment and charitable donations alone. They can only be fixed from the root, which is to ensure that every investment and economic activity can notice the integration and consistency of its environmental, social and economic benefits from its beginning.

Of course, this is ideal. However, from now on, if more and more funds, people and businesses can pay attention to this and combine current development with human beings, there will be more funds directed to related areas of SDGs. This is our only way out.

From responsible investing, and ESG investing to impact investing, they all advocate initiative, instead of taking money for governance and then for poverty alleviation after problems arise because that will incur many governance costs and poverty alleviation costs. We must start from the strategic decision-making and investment implementation, and adhere to the concept of sustainable development throughout the investment process and to the consistency of economic benefits, social benefits or value so that issues could be greatly improved.

 Sustainable development must be embedded in the mind of every person engaged in investment and financing or financial business or every entrepreneur. Only then can this matter be carried out faster and we can race against climate change.


The upsurge of global development of SDG finance

The world is also undergoing tremendous changes in terms of SDG finance. According to incomplete statistics, ESG investing had exceeded USD 35 trillion by 2020, and impact investing which I focused more on in the past has almost increased exponentially. In recent years, the SDG finance in our country have also grown very fast.

President Xi announced in 2021 that we had achieved great success in poverty alleviation. The first goal of the SDGs is no poverty, and the second is zero hunger. In these respects, China's poverty alleviation has contributed more than 75% to the world. In order to consolidate the results, we are promoting rural vitalization and the credit input in this area is all sustainable finance. The financial activities that support rural vitalization should also be called sustainable finance. For example, Chongho Bridge has provided credit support to millions of global poor populations, making great contributions to the promotion of inclusive finance.

In addition, after President Xi proposed the carbon peak and carbon neutrality goals, it led a profound economic and social revolution in China. Focusing on carbon peak and carbon neutrality, the entire investment direction and structure in the financial sector, including the connotation of investment risks, have changed. The efforts and policies to promote green finance and inclusive finance have also increased.

China has made great contributions to the world in terms of green finance. In 2021, China's green credit was close to RMB 16 trillion, ranking first in the world. Green bonds exceeded RMB 600 billion with an increase of nearly 170% and ranking among the top in the world. Green insurance exceeded RMB 18 trillion, growing by nearly 25% on a yearly basis. Also, inclusive loans of micro and small businesses were just under RMB 20 trillion, up by almost 25% compared with a year ago. China is leading the development of sustainable finance.


Creating an ecosystem for SDG finance

We have achieved a lot, but there is still a long way to go. If climate change really increases by 4°C compared to BC, mankind will face a terrible future, so we must increase SDG finance. To allow more funds to flow to the field of sustainable development, it is key to creating an ecological environment for SDG finance.

 In recent years, we have worked much on theoretical guidance and cognitive consensus, but the most urgent task is to establish an ecology, including a large number of regulations and policies issued by the government, which is very significant. In the financial sector alone, the government has issued more than 20 supporting policies for SDG finance.

Furthermore, a trading system for sustainability rights should be established. The focus is to solve the internalization of externalities of sustainable finance, so that every enterprise engaging in SDG finance can receive realistic incentives and that those non-performers will pay the price. Besides, a third-party assessment system should be built. How to assess the sustainable performance of a financial institution or enterprise must have criteria, methods, and results so that we can truly recognize which is good and which is bad, and which can be supported by capital in the capital market.

In the past, the China Alliance of Social Value Investment (CASVI) evaluated the Social Value 99 (SV 99) index for seven or eight years, accumulating a large number of standards and data. I think there are three important elements to the assessment: criteria, data, and scientific assessment methods enabled by digitization.

About criteria. Everyone is exploring standards. The government has many policies, but they are not standards. Criteria are ones under the guidance of policies, tested boldly and explored by market entities, and finally recognized universally as the most credible. The promotion of sustainable finance must have scientific and reasonable assessment criteria.

At present, our green credit standards only have four principles: compliance, basic compliance, less compliance, and inapplicability, and they are abstract and lack quantitative and detailed indicators. In 2021, the media reported that greenwashing risks and dereliction of duty risks appeared in the rating due to the above problems. Some rated green credit has to be adjusted after their risks happen. It will have a great impact on sustainable development.

About data. The problems in this respect include, the first, the data publicly disclosed by various parties is not uniform; the second, the digital market is not perfect. We now have 81 imperfect digital exchanges. Digital quality, pricing, principles, and trading rules are all being explored. Additionally, the irregularity of their own data will affect the digital market.

There are still many flaws in this regard. In carbon trading in 2021, some enterprises were notified nationally by the Ministry of Ecology and Environment because of data falsification. In the carbon emissions trading market, data authenticity is the lifeblood and is necessary to be taken seriously. We need to establish complete high-quality data support and this is infrastructure construction. 

About assessment methods. Intelligent assessment should be carried out scientifically. In the past, the assessment may be implemented relatively simply by judging whether a project is “green” and how are its financial indicators. This is far from enough and it should be provided by a third-party assessment agency. For example, theoretical emission reduction and dynamic observation of actual emission reduction should be observed through whole life cycles, and emission levels and management processes of different assets should be more accurately rated. Only in this way can borrowing costs and interest rates of assets be managed. 

These are all we should strive to do now. A famous quote of Drucker said that if you can't measure it, you can't manage it. This is why I become the chairman of SusallWave. CASVI released indexes every past year and selected 99 stocks from CSI 300 in accordance with the principle of upholding justice while pursuing shared interests and ESG principles coordinated by environment, society and economy.

A great quantity of data has been accumulated over the past eight years. Our standards are the results of the exploration of 305 experts and can be seen as the first standards in China. It is excellent to have such standards that everyone has reached a consensus on. In the future, we will strive to improve them continuously during practice and help them have higher credibility.

We also launched a green finance comprehensive service platform called Susallwave Carbon Finance during the rating process. It is based on the three functions of green identification, carbon accounting and carbon rating to provide professional “full data + products innovation” comprehensive services for financial institutions and real entities to help financial institutions implement businesses in many scenarios such as green credit, green bonds, green supply chain finance, green notes, and ESG funds. Therefore, it is very popular in the market for its real mirror on corporate ratings.

The road ahead is still long and difficult. It needs more and more people to engage so that more and more financial resources will be channeled into the field of sustainable development and jointly promote SDGs to move forward in difficult times. 

Source: This article is translated from the Chinese script of Ma Weihua's keynote speech on China SDG Finance International Forum 2022, and the translation is not reviewed by himself.

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