It takes two to dance: Institutional dynamics and climate-related financial policies

Abstract

This article studies how institutional dynamics might affect the implementation of climaterelated financial policies. First, we propose a three-dimensional framework to distinguish: i) motives for policy implementation (prudential or promotional); ii) policy instruments (informational, incentive or coercive); and iii) implementing authorities (political or delegated). Second, we use this framework to show how sustainable financial interventions in certain jurisdictions -most notably, Europe -rely solely on informational policies to achieve both promotional and prudential objectives. Policymakers in other jurisdictions -e.g., Chinaalso implement incentive or coercive financial policies to achieve promotional objectives. Third, we identify two main institutional explanations for this European 'promotional gap': i) limited control of political authorities on financial dynamics; and ii) strong powers and independence of delegated authorities. This governance configuration leads to an institutional deadlock in which only measures fitting with both political and delegated authorities' objectives can be implemented. Finally, we discuss the scenarios that might originate from the current institutional setting. We identify three possible evolutionary paths: i) a drift towards a green financial technocracy; ii) a re-politicization of delegated authorities; iii) a move towards fiscal-monetary coordination.

‘Facilitating the transition to net zero’ and institutional change in the Bank of England: Perceptions of the environmental mandate and its policy implications within the British state

“…Climate change has therefore become synonymous with ‘market failures’ and significant financial losses (BoE, 2022b). This focus has been referred to as a ‘prudential’ approach as opposed to a ‘promotional’ approach that seeks to align private finance with a low-carbon transition (Baer et al, 2021). The remit has, according to interviewees, bolstered the capacity of the Bank to manage CRFR through ‘iterative risk management enhancements’, for which ‘Pillar 2 is being used as a template’ (Interview: Monetary policy expert A, BoE, 2022c).…”

“…As such, under the new remit, the Bank looks set to continue developing its role in addressing ‘information gaps’ through CRFR assessments (under the stewardship of the FPC) and eschew any significant leadership role in instigating path-shaping economic changes that promote decarbonisation through the MPC (Baer et al, 2021; BoE, 2015; Chenet et al, 2021; Ryan-Collins, 2019). The pervasive belief among interviewees was that the democratically accountable (and more overtly political) fiscal policymakers in government must take responsibility for tackling the big issues of the day, including climate change and the transition to net zero.…”

“…The expansion of the mandate is emblematic of significant institutional evolution within the Bank, even if it is not directly a catalyst for dramatic institutional transformation. The mandate to facilitate the transition to net zero has licenced, legitimised, and promoted the pre-existing analysis of CRFR – which continues to be the lens through which Bank actors understand the issue of climate change and the need for transition (Baer et al, 2021; Chenet et al, 2021) – and the deployment of these measurements in the Bank’s operations. This is key to understanding why Bank officials lobbied the Treasury for an expanded remit.…”

“…It is in this context that we can locate the bank’s limited strategies for managing CRFR through efforts to improve the quality and transparency of information regarding CRFR and the exposure of different firms. Through developing risk assessment metrics and petitioning financial institutions to disclose their exposure, the expectation is that rectifying ‘information gaps’ will guide investors in new directions (Baer et al, 2021; Carney, 2015; Chenet et al, 2021; Stheeman, 2022). Existing institutional practice and neoclassical economic knowledge here is crucial is mediating the agenda in ways that produce this strategy of encouraging change through information provision and market mechanisms.…”

Mind the gap: Monetary policy and financial regulations for supporting green finance

“…3 Literature purposes also other classifications of policy reactions to climate-related risks. For example, Baer et al (2021) classify those policies depending on either different objectives the policy means to reach (i.e., prudential and promotional) or mechanisms (i.e., informational, incentive, or coercive).…”