China's establishment of the Asian Infrastructure Investment Bank has intensified debate about whether a new generation of development banks, led by emerging countries, is needed to ensure financing decisions account for principles of environmentally sustainable growth. Far more important, however, is whether such principles underpin developing countries' broader capital markets, which have become increasingly central to the international financial system. The answer, as of now, seems to be yes. China and other major emerging economies appear committed to designing financial systems that support inclusive and sustainable development. But they cannot go it alone. Policy-directed investment vehicles are critical to this effort. While the AIIB and the forthcoming New Development Bank, operated by the BRICS countries (Brazil, Russia, India, China and South Africa), are the most visible internationally, they are only the tip of the iceberg. Sovereign wealth funds also have a significant influence on global asset markets. Likewise, monetary authorities have been playing an increasingly active role, with the major central banks' balance sheets having expanded from about US$5.5 trillion in 2005 to US$13.9 trillion earlier this year. But such figures pale in comparison with the US$305 trillion worth of financial assets held by commercial banks, institutional investors, and other private financial institutions and individuals. How these funds are deployed will determine the shape of tomorrow's economies and the state of the environment on which they depend. Recent reports commissioned by the UN Environment Programme neatly summarise where we are with two key data points: While global investment in renewables increased by 17 per cent last year, 116 of 140 countries registered a deterioration in their stock of natural capital. In other words, financial markets are responding to environment-related risks and opportunities far too slowly to halt potentially catastrophic damage. This must change. Finance needs to be directed more rapidly and decisively away from natural-resource-intensive and polluting investments and towards green opportunities. Policy and market failures in the financial economy must be addressed as well. The OECD countries have shown less appetite to advance sustainability as a design principle of their financial systems. This contrasts with the approach of some developing economies, which not only face more immediate environmental and social challenges, but also take a "developmental" view of the financial system's role. Consider China, where a task force created by the People's Bank of China has just unveiled 14 ambitious proposals to green the country's financial system. The proposals cover four broad areas: Specialised investment vehicles to support green investment; fiscal and financial support, including interest subsidies for green loans; new financial infrastructure, including carbon markets; and legal infrastructure, including the disclosure of environmental information. Green finance is at an early stage in China, just as it is in the rest of the world. Fortunately, the movement is gaining traction in emerging countries such as Brazil, Kenya and Indonesia, as well as developed economies like Britain. China's recent move marks the beginning of a new phase of its financial-market development. The shift in developing countries can have a significant impact. China's efforts, in particular, could take the world to a tipping point. International action is vital. Progressive national leadership and international coalitions - plus more deeply engaged multilateral institutions - are needed to build a more inclusive green global financial system. Only this can effectively advance sustainable development. Ma Jun is chief economist of the research bureau of the People's Bank of China. Simon Zadek is co-director of the UNEP inquiry into design options for a sustainable financial system. Copyright: Project Syndicate