Today, the global economy is emerging from its worst crisis in decades, originating in some of the world’s most sophisticated financial markets. Much has been achieved, but financial market reform remains what John Lipsky, former International Monetary Fund (IMF) first deputy managing director, calls an “unfinished business.”

Most obviously, the stability and effectiveness of key parts of the financial system remain at risk from short-termism and excessive leverage, there are new asset bubbles waiting to pop, and emerging market sluggishness and financial market volatility is exacerbating macroeconomic imbalance and instability. But more fundamentally, the financial system is not fit-for-purpose in that we have yet, as Lipsky continues, “a long way to go in designing a financial system that meets the needs of sustainable development.”

An international Inquiry commissioned by the UN Environment Programme (UNEP) has spent the last two years exploring how best to align the financial system with sustainable development goals. On 8 October, it releases its findings in a global report, titled ‘The Financial System We Need,’ at the Annual Meetings of the IMF and the World Bank in Lima, Peru. Based on 15 country studies from China to the UK, Kenya to Brazil, and France to Bangladesh, the report describes a “quiet revolution” of growing numbers of central banks, financial regulators and standard-setters seeking to take social and environmental considerations into account in their work. Drivers vary from efforts to address the financing dimensions of China’s air pollution to financial inclusion in Kenya, measures by Brazil’s central bank to ensure that the country’s natural assets are effectively valued by the financial community, and the Bank of England’s review of climate risk to the financial system.

There is no doubt that new approaches to financing sustainable development are needed. The Sustainable Development Goals (SDGs) launched recently in New York established ambitious international targets, but the underlying challenge of finance remains unaddressed.

The UN estimates that US$5-7 trillion a year is needed to finance the SDGs. Developing countries alone are facing an annual gap of US$2.5 trillion. Public finance has a role to play, but the bulk of such investment needs to be met by private finance given fiscal limits worldwide. Greening investments is core to progress towards sustainable development.

The world’s US$80 trillion annual economy creates environmental externalities valued at over US$7 trillion annually, and at current patterns of economic growth they are set to further erode global natural wealth by over 10% by 2030. Climate change is history’s greatest “market failure,” but planetary boundaries are being exceeded on many fronts.

More of yesterday’s solutions will not fix tomorrow’s problems – we need to invent new ones

The UNEP Inquiry’s timing could not be better. 2015 is a keystone year where sustainable development is in the headlines, thanks in large part to the SDGs and the forthcoming climate talks in Paris. The Financing for Development discussions, culminating in Addis Ababa this July, have also been a key enabler, in highlighting both the need and the clear gaps that conventional approaches will not close. Beyond this, however, are three other factors that make now a pivotal moment in time. First, the core of the financial crisis has passed, opening the way for some much-needed forward thinking and action. Second, technological disruption is advancing destructive creativity across the financial system, establishing conditions for innovation. And third, developing and emerging nations have an increasingly influential voice in international financial affairs, which raises the profile of sustainable development in debate about the state of the financial system.

Centrally, the Inquiry sets out a Framework for Action including measures that financial and monetary system policy and rule-makers can take to enhance the consideration of sustainable development in financial decision-making. Going forward, there is no longer any reason why the environment should not figure systematically in any consideration of financial and capital market development.

Many of the Inquiry’s suggestions can be advanced at the national level, but it also highlights the potential for international action, where progress is already being made. The Financial Stability Board, the club of central bankers established by the Group of 20 (G-20) in the wake of the financial crisis, chaired by Bank of England Governor Mark Carney, met in London recently to consider for the first time the role of central banks in addressing systemic risks of climate change. The Sustainable Banking Network, a coalition of banking regulators inspired by the China Banking Regulatory Commission’s approach to promoting green credit, has been established to advance measures to green the banking community’s US$135 trillion of assets. Guidelines have been developed to stabilize and catalyze the growing international market for green bonds.

Transitioning to an inclusive, green economy requires change on many fronts, including critical technology breakthroughs, business innovation and the smart use of public finance. It also requires that the financial system evolve to serve its core purpose of financing the real economy. The UNEP Inquiry’s report opens a new chapter in setting out how such an evolution can in practice be achieved.

The authors can be contacted at simon.zadek@unep.org or through @SimonZadek. The Inquiry’s global report, along with many underlying working papers, can be downloaded at www.unep.org/inquiry.