An increasing number of green finance measures are being adopted around the world by policymakers and regulators in a shift toward green finance policy and regulation that goes beyond market-driven solutions.
New figures show that there are some 684 national and sub-national policy and regulatory measures on green finance in place in 100 developed and developing countries. This represents a 264% increase since 2015.
In addition, 2021 saw a surge in green finance regulations, with 124 measures implemented globally. This reflects the awareness of governments that the financial system will need to be aligned with their net-zero commitments announced during the year. The growing number of green finance measures has been driven by renewed international cooperation, steered by the re-establishment of the G20 Sustainable Finance Study Group and the updated climate pledges announced in the lead-up to the COP26 UN Climate Change Conference in Glasgow in November 2021.
With an important shift towards regulatory reforms aimed at allocating capital towards a 1.5°C net-zero economy, green financial regulation is moving into the political sphere. This year marked a milestone in terms of issuance of national taxonomies, sending a strong signal to the market favoring a more prescriptive approach to green finance regulations. Growing issuances of sovereign green bonds in 2021 also explain the increase in capital reallocation measures.
“The increase of measures focused on directing capital towards low-carbon assets shows that governments worldwide are now adopting a more proactive approach to green finance measures, as compared to the past where measures focused mainly on transparency regimes,” said Benjamin Simmons, Head of the Green Growth Knowledge Partnership.
The limitations of a risk-based approach to effectively shifting capital and addressing market failures must be put in parallel with current market momentum, as evidenced by the increase in net-zero finance coalitions formed by the global finance community throughout the year. If carbon neutrality pledges are introduced, financial regulators and authorities will need to monitor the integrity of those pledges by holding them accountable.
The dividing line between developed and developing countries on central banks’ implication in addressing climate change is becoming porous. In 2021, some central banks in the euro zone announced the decarbonization of their monetary policy and the integration of climate change into their prudential framework.
“Over the past year, leading central banks have started to outline the role that they could play in delivering net-zero across the financial system. This now needs to become systematic,” said Nick Robins, Professor in Practice Sustainable Finance at the Grantham Research Institute of the London School of Economics.
The number of measures that affect different asset classes and focuses on multiple objectives has grown, indicating forward momentum on policy coordination. The consistency of a different set of policies is critical to achieve a net-zero future and this dynamic is starting to emerge in green finance policies. For example, climate stewardship policies have been linked to climate-related disclosure regulations.
“This integrated data about the global allocation of capital for sustainable development is invaluable. Transparent and easily accessible information through this database will help foster collaboration and policy coherence in this important area,” said Gustavo Fonseca, Director of Programs at the Global Environment Facility.
The political dynamics underpinning a more coordinated approach to green finance measures – in response to the insufficiencies and inadequacies of market-driven solutions to green the financial system – are an important caveat. As climate-related radical uncertainty intersects with non-reversible climate tipping points, regulators and supervisors need to move beyond quantitative analyses that have characterized risk-based approaches to financial measures over the past 6 years.
“To address greenwashing and the risks of regulatory gaps, it’s time for a new era of knowledge sharing and collaboration that drives capital towards delivering on the 2030 Agenda and carbon neutrality,” said Steven Stone, Deputy Director of the UNEP Economy Division.
The Green Finance Measures Database – supported by the Global Environment Facility – will be a critical tool to monitor jurisdictions’ leadership in defining market standards for climate neutrality and allow them to benchmark their green finance regulatory landscape against peers.
The Green Finance Platform (GFP) provides a clearinghouse of market, policy and regulatory innovations driving the green transformation. It focuses on sustainable finance principles, practices, and protocols for banking, investment, and insurance. The Green Finance Measures Database has received funding from the Global Environment Facility as part of the “Aligning the financial system and infrastructure investments with sustainable development - a transformational approach” project.
Find out more at www.greenfinanceplatform.org.