The necessary transformation of the financial system
The PA Art. 2.1(c) creates a collective responsibility to restructure the entire financial system. The current move on sustainable finance is a positive trend, which improves the potential contribution of the financial sector for climate change mitigation and overall sustainability but is insufficient to result in alignment with the Paris Agreement climate target, which means full decarbonisation of the economy by 2050-2070.
Finance cannot limit itself to the aim of growing the “green” niches. It must address simultaneously the problem of “brown” and stop financing and invest- ing in the carbon-intensive assets that are not compatible with Paris pathways.
Policymakers should challenge their current approaches to both accelerate the pace and increase the ambition of the transformation of the financial sector, in order to fix finance against its incapacity to deal with long term public interest and common goods such as a stable climate.
Most of the effort has been based on the tenet of market efficiency, while markets seem unable to anticipate and mitigate climate change in the face of the tragedy of the horizon. Self-regulation and disclosure are the principal provisions of sustainable finance frameworks, especially in Europe, but more pivotal propositions are on the table, targeting market short-termism, prudential rules, fiduciary duty, or accounting rules. Central banks and financial regulation are already used in some emerging economies to directly orient financial flows towards their green economic priorities.
Finance must be reconciled with the long term, and financial regulators must have a clear mandate to do ‘whatever it takes’ to save the climate, in articulation with governmental policies.