Encouraging private sector investment in sustainable development

Private sector investment in environmental infrastructure could be encouraged through the use of build-operate-transfer (BOT) arrangements. This technique holds much promise, especially in meeting the heavy investment requirements in such priority areas as power generation, water treatment and distribution, and waste disposal, as well as health and education. However, there is a need to assist developing countries to put in place the necessary legal and regulatory frameworks to accommodate the use of such mechanisms, and to assist in the training of human resources to identify, design, negotiate, implement and manage such sustainable development projects. Relevant international institutions, such as UNIDO, UNCTAD, UNDP, the World Bank and the regional development banks, could provide assistance to interested developing countries to enable them to better develop and implement such projects. Mixed public-private partnerships could offer innovative combinations of a number of financing mechanisms.

The USA and Mexico are implementing arrangements for joint investments in environment-related projects in their co mm on border region. Measures involving private investment, government guarantees and municipal bonds will be used to fund mutually agreed activities. An instrument that has been suggested (by David Lascelles of the Financial Times, among others) for directing financial markets towards environmentally sustainable investments is an environmental rating scheme. In addition to the failure to include environmental concerns into the regulatory structure already mentioned, financial markets lack a system for including different levels of environmental risk into their analysis. An environmental rating system could be based on ascertainable facts about a company's environmental performance (audits permits, record of regulatory compliance, lawsuits, known environmental liabilities etc.) and supplemented by judgements about the quality of management and environmental policy, and the company's ability to respond to problems. Such a system may be administered by a public rating agency or, preferably, privately, within enabling legislation. The attraction of such a system is that it avoids the wider distortions that a heavily fiscal approach to the environment would entail. Additionally, the development of differential pricing would pave the way for a new type of market in environmental risk management techniques which could be used by investors and lenders who were exposed to companies with environmental liabilities. The hedging instruments that would emerge would help ease the liquidity problems of markets where there is environmental exposure by making people more willing to take on risk. Companies, such as small chemical manufactures, that currently would simply choose to go bankrupt if an accident whose cost exceeded their assets occurred, can internalize the cost of environmental risk, and thus have the incentive to find technologies to reduce it.

The Global Compact established by the Secretary-General of the United Nations with the private sector provides an excellent vehicle for the development of a constructive engagement with the private sector. UNEP should continue to enhance its engagement and collaboration with the private sector and consider the relation between foreign direct investment and the environment, with a view to minimizing negative environmental implications.