Abstract
If the free market cannot deliver a low carbon financial revolution, what sort of interventions in financial markets might be necessary to do so? Using interviews, participant observation, document analysis, and applying regulatory theory, this article argues for (i) cross cutting mechanisms designed to curb short-termism, to leverage the social license of financial institutions and to expand corporate conceptions of fiduciary duty to embrace climate change; and (ii) approaches tailored to the characteristics of each individual industry sector. Institutional investors and banks are used as case studies to highlight the importance of third-party benchmarking, expanding rights to litigate, requiring pension funds to address climate risks when making investment decisions, and disincentivizing high carbon investments by bank clients. Finally, it shows that a multi-instrumental approach can create a web of regulation that is more resilient and effective than its individual constituents. Its principal contribution is to show how Central Banks and Financial Regulators (CBFRs) might best fast-track a low-carbon financial transition.
Highlights
A rapid transition to a low carbon economy will prevent dangerous climate change and its catastrophic consequences [1]. This will require a massive shift in investment from high to low carbon assets, and initiatives to reduce the carbon-intensity of remaining high carbon activities
Perhaps the most remarkable thing about the extremely slow pace of the transition to low carbon finance is that resisting the low carbon financial revolution is irrational
This and the following section address the central normative question posed by the article: What policy instruments might best enable Central Banks and Financial Regulators (CBFRs) and third parties to incentivize financial institutions to accelerate the transition from high to low carbon investment and thereby facilitate the rapid scaling up of climate finance?
Summary
A rapid transition to a low carbon economy will prevent dangerous climate change and its catastrophic consequences [1]. Only recently has the central importance of the financial sector in facilitating a rapid and deep low carbon transition and in driving climate change action been recognized [2] Realizing this potential and scaling up ‘climate finance’—ie capital flows directed towards low-carbon and climate-resilient development interventions, including low-carbon infrastructure, renewable energy, energy efficiency, and other mitigation measures—will involve transforming a sector that has only recently begun its journey towards sustainability. Companies with the highest ESG ratings outperform the lowest-rated firms by a considerable magnitude [10] When it comes to climate change as outgoing Bank of England Governor Mark Carney has put it: “Firms that align their business models to the transition to a net zero world will be rewarded handsomely. Notwithstanding the compelling case for embracing a low-carbon economy, financial markets do not appear to be listening
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