“This short paper outlines why the financial system has been unresponsive to climate and sustainable development imperatives. The author suggests that climate change is the ultimate market failure and outlines the toll in terms of climate-related displacement and migration, the cost of climate catastrophes, and the cost of adaptations. The author also points out the small amount of funding already committed to climate mitigation relative to the scale of this challenge, suggesting that finance needs a new “purpose” before it can align with climate finance needs.
Some positive steps have included the issuance of carbon-linked bonds, green bonds, and sustainable bonds, but the author argues that direct intervention in finance is required in order to account for negative externalities, encourage innovation, account for systemic risks, and ensure policy coherence.
Private sector-led interventions include the Task Force on Climate-Related Financial Disclosures (TFCD). But public, non-market interventions should include financial regulations, including requiring greater disclosure; judicial interventions, including shifts in fiduciary responsibility; direct financing for joint ventures and subsidies; and stronger public procurement rules that would account for climate risks and liabilities. The author argues these more forceful interventions are required in order to incentivize the finance system to fund sustainable development.”