How to lead the sustainability agenda

Reaching a high economic growth has been an historic economic policy objective in Latin America and the Caribbean (LAC). But the region's GDP per capita grew a modest 0.9% per year on average between 1980 and 2021, with a standard deviation of 2.6%. In other words, we have experienced the undesirable combination of low growth and high volatility that limits the possibilities of improving the quality of life of the people. Uncontrolled public spending, high inflation, unstable monetary policy, high exposure to external shocks, low investment, low productivity, low economic diversification, and high informality have been common in the region. The aspiration to bring the quality of life to reasonable international standards is, therefore, a dream that is still far from being fulfilled.

To break with this supposed destiny, it will be necessary, among other things, to promote economic activities with which the region has a comparative and competitive advantage and that generate many quality jobs. One of these bets is the sustainability agenda, but from a perspective that goes beyond adaptation and mitigation to climate change. After all, LAC has unparalleled natural and biological wealth. However, all this wealth hasn't been used enough to promote development.

How to advance? Among the most promising paths are scientific and technological development, innovations and new business models associated with sustainability and the so-called sustainable finances.

In fact, the region has already demonstrated its potential in science, technology and innovation, such as the ethanol engine program, the discovery of new molecules and their applications, sustainable chemicals, technologies for sustainable agriculture and mining, innovative water management and forests, among many other technologies with a high impact on economic diversification and sophistication. However, all this has taken place on a still limited scale.

In sustainable finance, there is still a long way to go. While the global market for sustainable finance is growing by leaps and bounds, only a fraction is destined for the region. According to UNCTAD, the sustainable finance market is expanding rapidly both in number of instruments and issues and in value, with the stock of sustainable financial products estimated to be $5.2 trillion in 2021, an increase of 63% compared to 2020. This includes funds, green, social and mixed sustainability bonds, voluntary carbon bonds, among other instruments. However, most of those products are domiciled and directed at assets in advanced countries.

As an example, global sustainable bond issuance exceeded US$1 trillion in 2021, but LAC accounted for only 4.4% of that amount. Most emerging economies face barriers to developing their own sustainable funds. This can be explained, at least in part, by the limited size of the markets and the perception of risk. Greenwashing is another challenge. The evidence shows that many so-called sustainable projects label themselves. While these products tend to outperform their peers in terms of sustainability, preliminary analyzes reveal poor performance and suggest that many projects may not live up to their sustainability credentials. Projects that combine environmental and social outreach have had limited alignment with local communities and the 2030 Agenda.

The relative pause in the climate change agenda of advanced countries caused by concerns on the recent fossil energy crisis is a unique opportunity for LAC to reposition itself with greater prominence on the international sustainability agenda. But what should LAC do to develop its full potential?

We need to implement an ambitious but realistic work plan. This plan should include greater investments in C,T & I oriented towards sustainability, support for startups, development of entrepreneurship and venture capital ecosystems, training, management training and collaboration with international centers of C,T & I of reference in sustainability.

The plan must also promote sustainable finance, which requires institutional and regulatory strengthening, sector-specific regulation, cadastre, governance, supervision, monitoring, auditing, certification, taxonomy, standardization, traceability, regulation of business sustainability reports, quality improvement of projects and the fight against greenwashing. It will also be important to address systemic climate risks and their impact on the financial sector, including climate transition and environmental protection in governance mandates, strategy, risk management, investment decision-making and financial disclosure practices, asset managers, banks and insurers. It will also be important to ensure coherence between sustainable finance and fiscal, technology, sector and skills development policies. All this will give greater support, security, reliability and predictability to financial instruments and will be decisive in attracting resources to the region.

Finally, it will be important to involve all stakeholders to create an ecosystem that integrates sustainability throughout the entire value chain. Given the still early stage of development of sustainable finance, policies and regulations will need to be adapted in response to eventual changes and specific situations. While sustainable financial policies and regulations must take into account the context of each country, collaboration will be important to ensure the necessary consistency with international standards. All this effort can be decisive to grow more and better and to promote quality of life in the region.