The Role of Green Financial Sector Initiatives in the Low-Carbon Transition: A Theory of Change

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Cross-Border Risks of a Global Economy in Mid-Transition

“…The financial sector at large is expected to play a significant role in enabling the funding required to make the transition possible. Recent research on the role of green financial sector initiatives in the lowcarbon transition has identified four main types of policy actions that may shape the financial sector in that direction (Monasterolo et al, 2022): green regulatory policies (including green supporting factors and dirty penalizing factors), green portfolio rewards (or penalties) for financial institutions as a function of the share of lending to low-carbon activities in their portfolio, green monetary policies consisting of orienting the conventional (and more recently unconventional) daily operations of central banks according to their impact on environmental sustainability, and public co-financing of green investment. The prevailing view is that to remain effective, prudential regulation should remain risk focused and not attempt to drive investments.…”

Our Solar Future — Roadmap to Mobilize USD 1 Trillion by 2030

“…▪ Reform policies and coordinate initiatives and actions to reward green financial activities such as lending and investments in clean energy and penalize those that pollute. This may include green macroprudential policies, monetary policies, and public co-funding (Monasterolo et al 2022;D'Orazio 2021).…”

Climate Change Regulations: Bank Lending and Real Effects

“…While some policy makers are exploring the explicit use of prudential measures to direct funds away from high-carbon activities and into green sectors (Monasterolo, et al, 2022), the main objective of prudential capital requirements is to enhance the soundness and stability of financial institutions. Whether newly implemented climate-related prudential measures affect bank lending and firm activity is an open empirical question with important policy implications.…”

“…13 See Giglio, et al, (2021) for a review of this literature. 14 See Monasterolo et al, (2022) for a comprehensive review of financial sector initiatives to support the low-carbon transmission. 15 Oehmke & Opp, (2022) introduce a theoretical framework to evaluate this idea.…”