Abstract
The finance sector’s response to pressures around climate change has emphasized disclosure, notably through the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The implicit assumption—that if risks are fully revealed, finance will respond rationally and in ways aligned with the public interest—is rooted in the “efficient market hypothesis” (EMH) applied to the finance sector and its perception of climate policy. For low carbon investment, particular hopes have been placed on the role of institutional investors, given the apparent matching of their assets and liabilities with the long timescales of climate change. We both explain theoretical frameworks (grounded in the “three domains”, namely satisficing, optimizing, and transforming) and use empirical evidence (from a survey of institutional investors), to show that the EMH is unsupported by either theory or evidence: it follows that transparency alone will be an inadequate response. To some extent, transparency can address behavioural biases (first domain characteristics), and improving pricing and market efficiency (second domain); however, the strategic (third domain) limitations of EMH are more serious. We argue that whilst transparency can help, on its own it is a very long way from an adequate response to the challenges of ‘aligning institutional climate finance’.
Highlights
Achieving the Paris climate goals is a major long-term investment challenge, requiring vast and rapid investment into low-carbon and energy efficient technology, and the alignment of the financial sector with climate goals (Art 2.1c: COP21, CP.20/CP.20 2015; Boissinot et al 2016; Jachnik et al 2019)
This paper provides a wider understanding of the conditions under which new actions and policies have to be taken to ensure long-term sustainable investing, rather than rely entirely to transparency, as assumed in the efficient market hypothesis” (EMH) and promoted in response to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations
We found that attracting greater insurer and pension fund low-carbon investment requires simultaneous policy actions accounting for behavioural practices, pricing frameworks and finance market design and structural barriers
Summary
Achieving the Paris climate goals is a major long-term investment challenge, requiring vast and rapid investment into low-carbon and energy efficient technology, and the alignment of the financial sector with climate goals (Art 2.1c: COP21, CP.20/CP.20 2015; Boissinot et al 2016; Jachnik et al 2019). The intellectual basis for believing that transparency can move large volumes of climate finance “from brown to green” resides in the assumption that markets will respond rationally to information—combining information from climate science and political declarations with concrete information (namely climate-related financial risks) on the holdings of climaterelevant assets, to change investment outlays It puts the onus on financial transparency, plus effective (“demand side”) climate policies, founded in commitments to the Paris goals and the most expected economic signal of carbon pricing. This helps to integrate current literature on low-carbon investments and institutional investment barriers, together with the core structuring arguments of its application to finance in Hall et al (2017), which to our knowledge remains the only such analysis.
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