Moving from ambition to action toward a greener financial system

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Reaching net-zero emissions and other climate-related and environmental goals will require significant investments to enable decarbonization and innovation across all sectors of the economy. Greening the financial system is key to making these investments happen.

Many countries are still at a nascent stage of greening their financial sector—shifting to a financial system which mobilizes capital toward green objectives and addresses climate-related and environmental financial risks. Green finance—all lending and investment that contributes to these goals—has not been able to reach the scale required. Still, the policy landscape is rapidly evolving, with new initiatives and regulations emerging across the world.

Membership of the Network for Greening the Financial System (NGFS), a group of central banks and supervisors focused on developing green finance and addressing climate-related and environmental risks, has grown more than tenfold in less than four years to 90 members and 14 observers—including the World Bank Group. The Italian G20 Presidency has established the G20 Sustainable Finance Working Group and is working on a sustainable finance roadmap for a collective way forward. Also, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, is monitoring the potential implications of climate change for financial stability and is reviewing regulatory and supervisory approaches to addressing climate risks for financial institutions. All these global efforts aim to build a strong foundation for greening the financial sector, including through financial regulation, taxonomies, reporting and disclosure standards, and the development of green financial tools and instruments.

Building on this global momentum, several leading financial authorities have implemented policies and actions to amplify the role of the financial sector in achieving climate and environmental goals.  For example, South Africa published a technical paper on Financing a Sustainable Economy in 2020, which is a key driver of its broader Sustainable Finance Initiative, supporting implementation across government and the financial regulators. The Financial Superintendency of Colombia has defined the promotion of green finance and the management of environmental and climate risk as strategic objectives. The country has published several key documents, including the Green Bond Guidance and Regulation, and will shortly issue specific guidance on climate-related risk management, governance, and disclosure for the banking sector.

Sharing lessons and best practices on green finance will help countries move from ambition to large-scale action. Knowledge sharing and cooperation across countries will be instrumental in delivering an internationally harmonized approach to greening financial sectors globally, and it will help ensure that finance is flowing to where it is most urgently needed.

However, for many countries just getting started on their green finance journey, the landscape could be challenging to navigate. Emerging markets and developing countries may encounter specific challenges to building a financial system that encourages climate-friendly investment. Countries may struggle to set long-term credible strategies and there may be misalignment between financial sector policies and climate and environmental objectives. Local capital markets are often underdeveloped, a constraint to all finance, including sustainable bond markets. This approach might therefore require a different course from that followed by advanced economies with diversified financial centers.

Careful consideration of local circumstances will be instrumental in prioritizing and developing the appropriate country approach. For example, in many emerging market and developing economies, the banking sector is of particular importance which may warrant prioritization of specific toolkits that target banks.

Against this backdrop, the World Bank published the Toolkits for Policymakers to Green the Financial System, to guide authorities as they develop a greener financial sector. The report provides a menu of options that authorities could consider to scale-up green investments, stimulate local green finance markets, and enhance climate-related and environmental risk management. It summarizes the main characteristics of each approach, provides key actions to drive implementation, and references publications that provide more detailed guidance. The toolkits are grouped into six categories, each designed to achieve different outcomes (Figure 1).


Figure 1: Overview Toolkits for Greening the Financial System
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Figure 1, Green finance


A wave of change is coming that could transform the financial sector, which could in turn have a profound impact on how we shift the real economy toward net zero and other climate and environmental goals.  The World Bank Group will continue to support client countries as they create an enabling environment to mobilize green finance and manage climate-related and environmental risks. Developing practical guidance, such as these toolkits, will allow us to move from ambition to action, as more and more countries set sail to green their financial sector. 

For more information, watch the launch of the report at the Innovate4Climate event, which took place in May 2021.

Authors

Jean Pesme

Global Director of Finance

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