How well are we doing?

Green finance plan

Finance

Finance

How well are we doing?

Banks and the financial sector have a key role to play in shaping green economies – both directly through their own investment decisions, and indirectly by influencing policies and regulations. A Green finance plan is essential for supporting private sector sustainability, by setting the right regulatory climate, incentivising green investment, and encouraging firms to consider sustainability while making decisions.

Policy ambition on green finance planning is distinctly average across the 20 surveyed countries, with almost all having started discussing how to integrate greener finance into their economies but no outstanding leaders taking decisive action. European countries like the United Kingdom and France - with larger financial sectors - have taken progressive positions around climate-related financial risk, supported (or led) by their central banks. Green investment frameworks are also being developed at the EU level -supporting similarly progressive policy packages being pursued by Portugal and Sweden.

Amongst countries with large fossil fuel sectors, there is a notable division between those who are prioritising green finance in order to diversify and decarbonise their domestic economies, such as the United Arab Emirates and Mongolia, and those where entrenched oil & gas sectors are blocking ambition on green finance, such as Canada or Trinidad and Tobago. Whether nascent commitments to greening investment will make a difference for high carbon economies will depend on enthusiasm and social pressure for decarbonisation spreading to financing of extraction and export of hydrocarbons.

Like virtually everything else in the response to climate change, the development of a more sustainable financial system is not moving fast enough for the world to reach net zero.

Mark Carney
Governor, Bank of England; speaking at the TCFD Summit 2019

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About this policy

Banks and the financial sector have a key role to play in shaping green economies – both directly through their own investment decisions, and indirectly by influencing policies and regulations. Finance reform via a Green finance plan can encompass a range of policies, and it is often up to central banks and regulatory authorities to take the lead by analysing environmental risks to markets, such as climate change, biodiversity collapse, or stranded assets. This can help to catalyse prudent, longer term investing that keeps market forces aligned with delivering a greener economy. Strengthening capital market and credit guidelines, and ensuring sustainability safeguards are included in investment criteria, can be especially important.

Reforming financial markets is complex and highly dependent on context. Most countries do not have powerful financial centres such as New York, London, Hong Kong or Tokyo, and so have less ability to influence international capital. Therefore, it is especially important that the governments of these centres show the most ambition: their decisions shape the playing field for everybody else.

Countries that are setting the highest standards have active and engaged central banks who are working actively to engage internationally on environmental financial risk, and are even exploring ways to penalise unsustainable investment. However, even financially peripheral economies can plan for more supportive frameworks for green investment.

Policy methodology

Case Study: France

Combining strong political commitment to green finance, and implementation of EU-level initiatives, France has developed a comprehensive approach to green finance. A strategic partnership with Sweden has brought stronger disclosure obligations for investors, climate stress testing for banks, and new green bonds. Planning has to some extent been devolved to supervisory authorities in the finance sector, with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and central banking Network for Greening the Financial System (NGFS) taking the lead. Despite growing support for green investments, France – like other green finance leaders – still lacks a structured framework for disincentivising unsustainable investments.

France Country Profile

Case Study: United Arab Emirates

The UAE has been building momentum in green finance, with the Dubai Declaration on Sustainable Finance and the State of Green Finance Report setting out clear statements of intent, and a framework to identify the contribution of financial institutions to a green economy. These ambitions remain mostly aspirational, however, as the UAE still lacks concrete targets and specific policies. A sea-change in public investment priorities is needed to give a strong signal to financial markets that the UAE means to deliver on its green finance vision, and genuinely take on the political and economic challenges of transitioning away from a fossil-fuel economy.

United Arab Emirates Country Profile