Global platforms to tackle global environmental challenges

One of the key themes in the COP28 conference in Dubai held this year is the creation of new mechanisms and platforms for financing environmental projects to counter climate change. Thus far it has mostly been about ad hoc efforts of countries to produce additional funds and contributions to the environmental cause. In terms of the more systemic financing trajectories for environmental projects the introduction of a global platform for trade in carbon units is yet to crystallize, with substantial fragmentation in the operation of such markets and tax regimes across countries. The search for additional investments into environmental projects has not yet exhausted all of the components of the global financial safety net. One of the more promising sources of financing may be a platform of the world’s largest Sovereign Wealth Funds (SWFs). But even more fundamentally, there may be a need to create a macroeconomic policy framework and economic policy rules that are geared towards attaining the goals of sustainable development.  

As regards the formation of a global platform for SWFs that are to coordinate investments into environmental projects and instruments, this could be potentially undertaken together with the G20 along with the International Monetary Fund (IMF). A discussion among the largest SWFs on the modalities of allocations into green instruments could be followed by the adoption of additional provisions to the Santiago principles that would deal with the issues of sustainable investments. The SWF platform could also explore such modalities as benchmarking best practices and levels of allocations for sustainability projects/instruments. The quality of the operation of such a SWF platform could be enhanced via coordination with the newly created platform for regional development banks headed by the World Bank. One of the key rationales for this World Bank-led platform was the pooling of resources for financing large scale priority projects, most notably in the environmental sphere.  

Over and above the platforms for regional development banks and sovereign wealth funds there may also be a significant role for the regional financing arrangements (RFAs) that have closely collaborated with the IMF on issues of policy coordination. The RFA/IMF platform could cooperate with the RDB/World Bank platform on issues pertaining to assessments of macroeconomic conditions (including risks and vulnerabilities) for environmental projects as well as allocations by RFAs into green projects and instruments (some of the RFAs finance such projects much like the regional development banks). Another possible global platform that could deliver an important contribution to sustainable development is that of regional Trade Arrangements (RTAs) – together with the World Trade Organization these regional blocs could explore the possibilities of coordinated reductions in import barriers for environmental goods.  

Apart from the sheer mobilization of financial resources another important track in rendering the global economy more equipped in countering climate change is the introduction of economic policy rules into the national economic policy frameworks that would prioritize superior environmental outcomes. In the budget policy domain, there may be case for “green fiscal rules” that in turn may involve the following: 

• A “floor” on the share of long-term financing allocated to environmental projects/programs 

• A “floor” on the share of the share of the sovereign fund/Stabilization fund investments into green projects/instruments 

• A measure as well as a target of an “ESG-adjusted” fiscal balance that would allow for a comparison between the headline fiscal balance figures and the evolution of the fiscal balance that considers contingent liabilities and the needed financing to attain environmental, social and governance goals 

With respect to the operation of the fiscal rule governing commodity-sourced Sovereign Wealth Funds, there may be additional rules/guidelines on the pace of the “greening” of such Funds and the share of deficit financing covered by “green bonds” and other such instruments. Indeed, the use of the Sovereign Wealth Funds as key vehicles in “green financing” is particularly important, given that the majority of such funds are accumulated on the back of high commodity prices, most notably high prices on fossil fuels. A coordinated strategy directed at increasing the share of investments undertaken by such funds into “green instruments” may introduce a link between the rate of the accumulation of these funds on the back of high oil/gas prices and the pace transferring this oil wealth towards environmental goals. In this respect, a platform that brings together the main resource-based SWFs could introduce a “net zero” benchmark for the operation of such funds, whereby increments in the effects of the accumulation of resource-based SWFs on the back of increasing oil/gas production is compensated by greater investment into environmental projects/green instruments.  

Finally, another source of greater funding for sustainability projects has to do with efficiency improvements in the environmental coordination of projects undertaken within the framework of China’s Belt and Road Initiative (BRI), the EU’s Global Gateway and the G7’s B3W. Going forward, rather than a “reactive” framework with respect to global vulnerabilities such as climate change, the institutional framework for the world economy could envisage a pro-active/ex-ante tracking and mitigation of potential risks and economic fragilities. The latter may involve threats like pandemics and climate change that have a relatively initial low probability but a very high cost for the global economy. The creation of global financing platforms that bring together regional development institutions and SWFs that are supported by multilateral organizations such as the IMF and the World Bank could be well-suited for a transition towards a greater level of preparedness of the world community to low probability high-cost threats. 

Yaroslav Lissovolik is the founder of BRICS+ Analytics and has worked in the International Monetary Fund, in Washington, where he was Advisor to the Executive Director for the Russian Federation. He has been a member of the Management Board of Deutsche Bank and Chief Economist and subsequently Managing Director of Research and Member of the Management Board at the Eurasian Development Bank (EDB). Yaroslav is a member of the Bretton Woods Committee.