On September 5, the IIF published a Staff Paper "Resetting the debate on the role of private finance in the net-zero transition" discussing what mix of policy, corporate, and financial sector action is needed to enable net zero-aligned—and aligning—business opportunities to develop and be financed.
The global financial sector, non-financial firms, policymakers, regulators, and civil society broadly share a common objective of achieving a just transition towards a net-zero economy in line with science-based goals to limit global warming. However, the experience of recent years has shown the complexity of achieving climate goals.
Ambitious, consistent and credible policy measures are a fundamental pre-condition for a pro-growth net-zero transition to take shape, including for hard-to-abate sectors. While economy-wide climate policy measures, such as pricing of greenhouse gas (GHG) emissions are critical levers in the policy toolkit, they remain under-deployed and insufficiently ambitious. As a result, many policymakers, regulators, and civil society actors have focused significantly on the role of the financial sector, and in particular, on regulated private financial institutions.
While the financial industry is strongly supportive of global climate goals, it is an enabler of the transition—not its sole driver. Decarbonizing the global economy will require significant investment across a wide range of sectors and markets around the world. The financial industry can enable this investment, but capital will only move in support of net zero goals at scale when the economics make sense. The success of financial sector efforts to support the real economy transition remains fundamentally contingent on real economy dynamics; private sector financial intermediation can only support economic transformation if the business case for transition investment is strong, demand for transition finance is evident, and market signals are clear.
The Staff Paper argues that the prevailing finance-centric “theory of change” for delivering the net-zero transition across the economy—which assumes that financial sector alignment with net zero goals will have a material impact on the decarbonization trajectory of the global economy—needs to be reassessed. Moreover, the development of regulatory and supervisory approaches based on a finance-centric theory of change may impede the financial sector’s ability to support global transition.
It is time to reset the debate and foster a better understanding of an appropriate role for the private financial sector, and the implications for the international regulatory framework.
The IIF proposes three key priorities for the way forward, which are further described in the paper:
- Strengthening real economy policy frameworks and developing national-level transition strategies
- Ensuring that financial sector policy remains risk-based, and that it is not used as a substitute for broader net-zero policy measures
- Enhancing the international financial architecture in support of transition finance in EMDEs.