Decarbonizing Finance – Recent Developments and the Challenge Ahead

Abstract

Societies around the world are faced with a multitude of social and environmental challenges as the negative effects of human activity on the Earth’s ecosystem are becoming increasingly evident. At COP21 in Paris, 195 countries agreed to work together to limit global warming to 2°C and aim for net zero carbon emissions by the second half of the 21st century. This will require large-scale investment in renewable energy, energy efficient buildings, protection of forests, sustainable production processes and materials, and innovative solutions to social problems. Niche finance and public sector funds alone will not be sufficient to address this challenge. Thus, mainstream investment must be aligned with sustainable development – a process already under way, although hobbled by challenges such as carbon-locked legacy infrastructure, technological path dependence, financialization, lack of patient capital for innovation, and underdeveloped policy frameworks and markets for mainstreaming impact-driven investment. While the financial sector has been grappling with the environmental and social implications of climate change for at least a decade, the Paris Agreement could represent a tipping point for Sustainable Finance. However, a systemic response has been left so late that even with increased mitigation action, warming of 2°C can still be expected, leading to climate migration and growing social and political tensions. This article maps the current landscape of Sustainable Finance and key challenges that lay ahead.

Keywords: COP21, COP22, Energy Efficiency, Green Bonds, Climate Friendly Markets, Positive Impact Investing, 100% Divest Invest Movement

JEL Classification: G11, G15, A13