4.4.3. Financial systems

Nadia Ameli, Hugues Chenet, Max Falkenberg, Sumit Kothari, Jamie Rickman, Francesco Lamperti

Nadia Ameli, Hugues Chenet, Max Falkenberg, Sumit Kothari, Jamie Rickman, Francesco Lamperti

Key Messages

  • The financial system must assume a central role in accelerating the shift towards a net-zero carbon economy.
  • Policy interventions can activate nonlinear changes to enable transformative shifts within and beyond the financial sector, capitalising on these dynamics. 

Recommendations

  • The role of the financial system in the transition to a net-zero economy must be clearly articulated and aligned to an industrial strategy. The rules and regulations governing the system can be adjusted accordingly.  
  • Public finance and policy support should be used to mitigate market uncertainty and encourage private investment, particularly to developing economies. Policy mixes that combine state-based and market-based instruments can initiate virtuous circles that drive innovation and reduce the overall need for public investment.
  • Prudent regulatory and financial supervision tools should be used to facilitate a managed decline in fossil fuel lending. Coordinated planning through institutions like the Net Zero Banking Alliance could help manage the transition in debt and equity markets.

Summary

As of today, the financial sector is fuelling an economy currently on a trajectory towards ~3°C by 2100. Leveraging the tipping elements inherent in financial markets will be critical to direct economies onto a net-zero emission trajectory compatible with the 1.5ºC-2°C goal of the Paris Agreement. Taken together, the mechanisms we describe in this section highlight the positive tipping points that can be triggered within the financial system and emphasise the necessity of policy interventions to activate and capitalise on these dynamics. The financial system must assume a central role in expediting the shift towards a net-zero carbon economy. For this, the alignment of expectations between investors and policymakers is key, requiring clear transition plans and strategies. Utilisation of public finance, reduction of capital costs and attainment of low-carbon investment thresholds in the Global South and Global North are also indispensable to ensure capital allocation towards where it is most needed. Coordination will be essential, to foster implementation of robust financial regulations along with industrial and climate policy. The identification of critical intervention points can lead to the amplification of sustainable investments, mitigate risks and foster transformative changes in the practices of the financial sector.

Bezos Earth Fund University of Exeter logo
Earth Commission Systems Change Lab logo Systemiq logo
Global Tipping Points logo
Share this content
Top