We examine five broad drivers of disruptive change in the financial sector, and their implications for designing a green and inclusive system. The scale of the challenge calls for flexibility and experimentation with a diverse set of policy approaches.
To be truly effective, financial policy and regulation must be forward-looking and prepared to accept the challenge of keeping pace with disruptive innovation – both realised and potential.
Such innovations are by their nature not mainstream, and may never become so. They can be driven by top-down and centralised innovation in policy or by bottom-up and decentralised market innovation.
We identify five trends in this report which are relevant to the design of a green and inclusive financial system:
The aim of this research is not simply to compile a list of innovations or to make predictions. The question is to what extent the drivers of change identified here are relevant for the design of a sustainable financial system. We can break this down into a series of further questions:
We assessed the applicability of existing regulatory structures to the different innovation domains discussed above and mapped this against their likely scale and potential to drive systemic change. Using these three criteria we derived three different clusters:
We recommend that policymakers should focus their attention on the third cluster where the potential impact is high, but existing regulation is weak. But further regulation is not the inevitable outcome.
One common feature of these innovations is placing more market power in the hands of consumers, for example by allowing them to choose directly which projects and companies to invest in. This poses an intriguing question: Will the collective decisions of empowered individuals lead to greener and more inclusive outcomes than the collective decisions of today’s financial market professionals?
If we think they will, then we could be in the ideal position of regulation being redundant. If we are not sure, however, we need to consider what instruments can encourage more sustainable outcomes within a much more decentralised financial system.
The primary conclusion we draw for the UNEP Inquiry is that financial policy and regulation can be divided into two types:
Given the uncertainties facing the global economy and the scale of the challenge of transitioning to a green and inclusive financial system, experimentation with a diverse set of policy approaches would encourage innovation and speed of development.
This research was conducted in support of the United Nations Environment Programme (UNEP) Inquiry into the design of a sustainable financial system that can accelerate the transition to a prosperous and inclusive green economy.
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