From Jennifer Forrest in Paris
Financial markets are an “amoral, money-making machine” and will need to be paid to invest more in emerging markets, Aviva’s Steve Waygood has argued.
Speaking at a conference about how to mobilise more capital for development finance in emerging markets and developing economies, Aviva Investors' chief sustainable finance officer said that, if the estimated funding gap of $4 trillion per annum to achieve the Sustainable Development Goals is to be filled, then it “needs to pay”.
“If you understand private finance properly, analytically you need to think of markets as an amoral money-making machine,” Waygood explained.
He claimed the typical financial analysts carrying out discounted cashflow analysis are unintentionally “discounting future generations” by ignoring externalities.
He also flagged the short-termism of markets as a continuing stumbling block for the development finance agenda.
He said the financial system focuses “on high frequency transactions, which mean they ignore the fact that the 2030 [development] agenda, if we don't deal with it, will lead to financial system collapse – because there is no financial system in a climate system that's collapsing [and] in a biodiversity system that's collapsing.”
“So, when you're approaching markets, don't come to us trying to negotiate with us and pluck our hearts to ask us to mobilize money! Make it pay to do the right thing, and cost to do the wrong thing. Internalize the externalities at scale, and do it within a short enough time horizon to change valuation so that capital allocation moves,” Waygood argued.
He warned that central banks and regulators are not fully taking account of the potential consequences of runaway climate change, and are not paying attention to the pressures that mass migration would put on the world in a 3oC warming scenario.
This potential displacement of people poses geopolitical risks that are “in no one's baseline evaluation survey”, he told the conference in Paris, organised by the OECD and Environmental Finance.
“By the end of the century, if you burn all the proven and probable reserves in the oil, gas and coal sector, 3°C is where we will end up. That's potentially billions of people migrating and the geopolitical risk associated with that is in no one's baseline evaluation survey.
“No central banks are looking at that. None of the financial regulators are looking at that.”
“That needs to be acknowledged and addressed,” added Waygood, who has worked at the London-listed insurer for more than a decade. “A three-degree scenario is uninsurable, therefore unbankable and uninvestable.”
The conference – Mobilising private finance towards 2030 and beyond – is being held in Paris on 4 and 5 February.