Developing countries such as Kenya, Bangladesh and Jordan are leading the world on green finance, which is essential to meet the world's sustainable development aspirations, according to a new report from the Inquiry into the Design of a Sustainable Financial System.

Released to coincide with the High-Level Political Forum on Sustainable Development in New York, the report, Green Finance and Non-G20 Developing Countries, captures progress being made by 13 countries across Africa, Asia and Central America.

“Today, there are numerous examples of developing countries showing strong leadership on green finance,” said Erik Solheim, Executive Director of UN Environment. “This is extremely positive, as private capital will be a major contributor to delivering on the Sustainable Development Goals and climate commitments.”

In order to reach the US$5-7 trillion a year needed to implement the Sustainable Development Goals, the financial system must mobilize finance for specific sustainable development priorities and ensure sustainable development factors are included in financial decision-making.

The report shows how developing countries are leading the world in taking these steps, highlighting the lessons that can be drawn from their leadership in aligning financial market development with national priorities and sustainable development.

The countries surveyed, as part of their innovative approaches, are implementing new models inspired by developments in fintech (the use of technology to make financial services more efficient).

“Green finance is burgeoning; it has reached the point of spontaneous combustion,” Nuru Mugambi, Director of Communications for the Kenya Bankers Association. “But it needs to be aligned. It needs to go beyond the leadership of a few champions and be coordinated across regional trading blocks.”

Green Finance in Action

• In Kenya, the rapid growth of mobile banking has become a platform to enable renewable energy. Several companies offer pay-as-you-go solar home systems that use mobile payments to unlock the use of the solar panel and battery system each day. This in turn enables customers to build up a credit history, which can be used to access additional loans.

• In Bangladesh, the central bank has led a sustained initiative to ingrain inclusive and environmentally sustainable financing in the country’s financial sector, establishing mandatory environmental risk management and also offering a low-cost refinance window for green lending.

• The Central Bank of Jordan has launched a national strategy on financial inclusion including SME finance, women’s access to financing and the protection of consumers of financial services.

• Morocco’s Central Bank has committed to sustainable development as part of its formal strategy and is taking first steps in the field of green finance. It has held meetings with banks to explore regulatory and voluntary options towards developing a roadmap for finance reform for a green economy.

• The Philippines is developing a public-private disaster insurance pool, and will make disaster insurance compulsory for homeowners and SMEs. This will provide families and small businesses with more rapid and reliable support for reconstruction and will support fiscal and financial stability in a country where natural events can result in losses of several points of GDP.

• In Central America, the regional business school INCAE has developed an ECOBANKING programme to improve the Latin American financial sector’s competitiveness through better environmental management and by designing innovative financial products.

• The State Bank of Vietnam and the Vietnam Bankers Association have been working to develop Environmental and social risk management guidelines for the banking sector. They have drawn on international best practices on environmental and social risk management, including through South-South knowledge with the China Banking Regulatory Commission and Industrial Bank.

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Green Finance for Developing Countries: Needs, Concerns and Innovations

This briefing outlines key concerns and needs of developing countries in relation to green finance, particularly focusing on developing countries that are not members of the G20. It also highlights emerging innovations, drawing in particular from engagement with practitioners and regulators from Bangladesh, Colombia, Egypt, Honduras, Jordan, Kenya, Mauritius, Mongolia, Morocco, Nigeria, the Philippines, Thailand and Viet Nam, and the findings from the UNEP Inquiry’s country studies.

Green finance is a strategy for financial sector and broader sustainable development that is relevant around the world. But the context differs considerably for different countries. Developing countries, notably those with underdeveloped financial systems, face particular challenges in financing national development priorities.

Financial development shapes the context for green finance. Different sources of capital and financial institutions are particularly relevant in different countries. Financial systems in developing countries tend to be characterized by a dominant banking sector, and have large areas of the economy that remain unserved by the formal financial sector. Public finance and foreign direct investment can be particularly important as sources of long-term investment.

Broadly, concern and action to align financing to sustainable development is concentrated in three areas:

• Preventing the financing of illicit practices or profiting from weak enforcement. Weak enforcement of environmental, economic and social policies and regulations can lead to social conflicts and market impacts resulting in losses to lenders and investors, and even macroeconomic stability risks.

• Unlocking opportunities for green investment. In many countries, opportunities for green finance such as renewable energy, energy efficiency, agricultural development and Small and Medium-sized Enterprises (SMEs) productivity, as well as insurance markets, are potentially commercially viable, but inadequate owing to barriers in demand or supply.

• Exploring solutions to dilemmas and trade-offs. Many developing countries face a tension between the need to expand the electricity supply and reduce fossil fuel intensity. Similarly, SME finance is an area where regulators must be careful that lending requirements do not result in reduced overall lending or higher rates of non-performing loans and financial instability.

Key findings

Key concerns of developing countries:

1. Integrated approach – It is strongly emphasized that environmental considerations in financing be addressed in conjunction with economic and social issues and priorities, in particular access to finance for SMEs.

2. Dilemmas, gaps and trade offs – International measures to promote appropriate green financing of the transition to a green economy should not come at the cost of developing countries’ competitiveness, equity, development and financial inclusion.

3. Impacts of international developments – Developments in the international financial system, including those in major national financial centres, impact on developing countries positively and negatively. This makes G20 country deliberations and actions a key matter for all developing countries seeking to achieve sustainable development.

Action by developing countries:

4. National collaboration – National strategies and road maps for aligning financial system development with the needs of sustainable development are being elaborated in a number of countries involving public and private actors, and combining market-driven approaches with policies, regulations and standards. These processes are critical to reduce reliance on pioneering individuals or institutions.

5. Disruptive potential – New business models across the financial system, such as those enabled by mobile money and blockchain ledgers, offer the potential for ‘leapfrogging’ that can drive more inclusive, green financial market developments. These could be promoted while recognizing the need to ensure the integrity and robustness of financial markets.

Specific needs of developing countries:

6. Inward direct investment – A key challenge is how to support long-term green finance effectively in advance of mature local bond markets developing. This may include blended finance approaches, drawing on public institutional investment vehicles and integrating green finance considerations into foreign direct investment, as well as pioneer issuance of green bonds.

7. Financial system developments – Developing countries need to be able to contribute to international debate and practice, through the G20 and other relevant for a.

8. International knowledge sharing – Enhanced cooperation is needed to share experience between countries by leveraging, extending and connecting existing platforms and initiatives.

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The Inquiry into the Design of a Sustainable Financial System was established in January 2014 with a mandate to advance policy options that would improve the effectiveness of the financial system in supporting sustainable development. The Inquiry has worked with central banks, environment ministries, international financial institutions as well as major banks, stock exchanges, pension funds and insurance companies. Its first global report, The Financial System We Need, was released in October 2015.