In an innovative and promising development from the Leaders of the Group of 20 (G-20), this year’s meeting in Hangzhou, China, on 4-5 September 2016, considered conclusions from a Green Finance Study Group (GFSG) that this year deliberated for the first time. The Leaders’ Communiqué offers some indications of G-20 governments’ commitment to a green finance that truly allows environmental considerations to influence financial ones.

Parallel Tracks – Can They Ever Meet?

The Green Finance Study Group was set up in December 2015 at the initiative of the G-20’s Chinese Presidency, and chaired by China and the UK. In an unprecedented step, the UN Environmental Program (UNEP) was asked to act as the Secretariat of the group. This decision built on UNEP’s two-year work process leading to the publication of its report, titled ‘An Inquiry into Design Options for a Sustainable Financial System.’

The GFSG defines green finance as “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development.” Its terms of reference call for discussion of five areas. Three of these are: greening the banking system; the bond market; and institutional investment. The other two are topics of a cross-cutting nature: risk analysis by financial institutions; and measuring progress. Two additional important areas that had been initially included were dropped, presumably because consensus on them could not be reached. These would have been: environmental and sustainability disclosure; and leveraging private green investment by public finance.

In July 2016, the GFSG issued its Synthesis Report. To assess the value of the report and, correlatively, the Hangzhou agreement reached in early September, it is important to put them in context. G20 Study Groups are generally less action-oriented, and considered less important, than its Working Groups. The G20 also has different “tracks,” of which no doubt the most influential one is the “Finance Track” – staffed by the Finance Ministers and Central Bank Governors of G20 members. Going into this year’s Leaders’ Summit , observers wondered whether the GFSG would be kept in isolation from related work by the G20 Working Groups dealing with the “hard” financial agenda – such as the Working Groups on International Financial Architecture, on Growth, and on Investment and Infrastructure – despite their linkages.

Keeping the work of the GFSG and the Working Groups delinked could be cause for concern. For instance, one of the areas the GFSG needed to discuss was institutional investment. At the same time the Investment and Infrastructure Working Group has been promoting a model that relies on institutional investors’ finance into infrastructure. But infrastructure, especially in mega-projects, is a high-risk area for environmental protection. A recent independent study showed the enormous incoherence of the G20’s outputs on infrastructure investment and sustainable development, underscoring the need for more careful reflection such as what the GFSG could provide.

Would the GFSG’s scope and findings be ring-fenced by the work of those other groups? Indeed, the arrangement by which the GFSG runs in parallel to finance-focused Working Groups could be seen as an attempt to make sure its conclusions do not “contaminate” the G20 Working Groups’ discussions on finance.

A Step Towards Integration

Perhaps one year of the GFSG is not enough time to tell whether it will exert influence on the outputs of the G20 Working Groups on finance. But the significance of China’s resolve to place the GFSG under the finance track of the G20, and ensure that environmental concerns would permeate financial ones, cannot be overstated. The decision meant that the GFSG deliberations engaged directly Finance Ministers and Central Bank Governors of G20 members. Given the pushback China faced from other members on creating the GFSD and promoting it as part of the finance track, the inclusion of a paragraph in the G20 Finance Ministers Communiqué in July endorsing the findings of the GFSG’s synthesis report and upholding the necessity to scale up green finance (later endorsed by Heads of State in the Hangzhou Communiqué) could be regarded as a triumph for those who care about bringing environmental considerations into financial policymaking.

The Leaders also recognized the challenges to the development of green finance identified by the GFSG, such as “difficulties in internalizing environmental externalities, maturity mismatch, lack of clarity in ‘green’ definitions, information asymmetry and inadequate analytical capacity.”

Also, echoing the essence of the recommendations of the GFSG, the Leaders stated:

“efforts could be made to provide clear strategic policy signals and frameworks, promote voluntary principles for green finance, expand learning networks for capacity building, support the development of local green bond markets, promote international collaboration to facilitate cross-border investment in green bonds, encourage and facilitate knowledge sharing on environmental and financial risks, and improve the measurement of green finance activities and their impacts.”

Unfinished Journey to Changing ‘Business as Usual’

If the concept of green finance is to sustain credibility, it will have to show its capacity to move companies beyond “business as usual.” To achieve this, the practice of green finance must strike the right balance between voluntary and mandatory actions, including regulatory ones. That is why the Communiqué’s welcoming of only the GFSG’s voluntary options gives some cause for concern.

Moreover, the Leaders added that many of these options “can be addressed by options developed in collaboration with the private sector.” By developing options in collaboration with the private sector, however, options that may require public policy interventions against the wishes of the private sector will likely be deferred.

It is also unfortunate that the Communiqué fails to symmetrically underscore the valuable contribution of civil society, a critical actor without whose decentralized scrutiny and monitoring of both public and private actions, sustainability can hardly be achieved on the ground.

An example of how these tensions play out can be found in the area of green bonds, and their potential use for “green washing.” At the moment, green bonds are a sort of no one’s land where any issuer can label a certain bond issuance as “green,” and even pay some third party to “certify” them as green. In the most extreme form of this practice, bonds that financed damaging hydropower projects or blatant coal supply have been called “green.”

The GFSG rightly recognizes that a credible green bond market will require definitions and disclosure of the use of proceeds, in order to avoid such green-washing. The synthesis report refers to an emerging “ecosystem” of second-party verifiers, third-party assurance providers and even specialized services by credit rating agencies. But, how far can one hope to go without regulation and mandatory standards?

Not just any standard will make the cut. Participation of groups affected by a given project, and conformity with internationally agreed rules for due diligence procedures, are among the essential features without which a positive environmental impact will not be assured.

If green finance is to earn its name, it will have to face questions of power and justice that undergird the transition to a green economy. A green economy that lacks such an approach, for instance by not empowering affected groups, will not satisfy the three dimensions of sustainable development. The green finance exercise in the G-20, if given a chance to continue under Germany’s 2017 Presidency, is set to test and reveal the limits of what the GFSG can achieve.