Can the Financial Sector Protect the Climate? The Potential of Sustainable Finance

Abstract

Climate policy aims to reduce emissions by redirecting investment from emission-intensive toward carbon-neutral assets. One key instrument, carbon pricing, guides investors and asset managers by lowering the return of fossil fuel-related assets. This chapter reviews three key mechanisms on how sustainable finance can support climate policy: first, providing investors with the necessary information to factor climate risk into their investment and portfolio decisions; second, building awareness for sustainable investing by differentiated means for institutional investors and retail investors; and, finally, addressing the cost of capital as an obstacle to low-carbon investments. For each, we critically review opportunities and shortcomings based on recent research and draw up recommendations for investors and policymakers.