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The Politics of Climate Finance and Policy Initiatives to Promote Sustainable Finance and Address ESG Issues

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Sustainable Finance and ESG

Abstract

This chapter examines the international and national efforts to expand green financing during the last decades. As a result, it addresses climate finance politics and policy measures, such as the Paris Agreement and the EU Action Plan on sustainable finance, and academic evidence on the impact of these initiatives on financial markets, including green bond market growth. According to the study, several “policy areas” still need to be enhanced, requiring international cooperation and further action at the country level to ensure a low-carbon transition. The establishment of standardized and mandatory disclosure rules, the adoption of internationally agreed-upon taxonomies of economic activity, and the promotion of climate-aligned financial metrics are all major areas for improvement.

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Notes

  1. 1.

    They cite a lack of quantitative incentives, most for-profit firms’ inability to absorb environmental externalities, poor, or intangible returns to corporate social responsibility efforts, commercial banks and other mainstream perceptions of high risks of low-carbon technology, a mismatch between long-term payback periods and the short-term horizons of most private investors, a lack of information to evaluate projects, and a lack of information to evaluate projects as examples.

  2. 2.

    In particular, the acronym ESG frames the notion in terms of material risks posed by the environmental and social factors to businesses.

  3. 3.

    As an example, consider that in 2020, the UN Principles for Responsible Investment (PRI) had over 3000 signatories, representing more than USD 100 trillion in assets under management.

  4. 4.

    The GRI was founded in 1997 by the non-profit organization Ceres (previously the Coalition for Environmentally Responsible Economies) and Tellus Institute in the United States, supported by the United Nations Environment Programme (UNEP). Despite its independence, the GRI remains a UNEP collaborating center and collaborates with the United Nations Global Compact.

  5. 5.

    On January 31, 1999, then-UN Secretary-General Kofi Annan unveiled the UN Global Compact in a speech to the World Economic Forum, and it was formally launched on July 26, 2000. The UN General Assembly has designated the Global Compact Office as an entity that “promotes responsible business practices and UN principles throughout the global business sector and the UN System”. Along with the Principles for Responsible Investment (PRI), the United Nations Environment Programme Finance Initiative (UNEP-FI), and the United Nations Conference on Trade and Development, the UN Global Compact is a founding member of the United Nations Sustainable Stock Exchanges (SSE) initiative.

  6. 6.

    The EPs, formally launched in Washington, DC, on June 4, 2003, were built on the International Finance Corporation’s existing environmental and social policy frameworks. The EPs are a risk management methodology used by financial institutions in project finance to determine, assess, and manage environmental and social risk. Its primary goal is to provide minimal due diligence to facilitate prudent risk decision-making. They have been officially endorsed by 116 financial institutions in 37 countries (as of March 2021), covering the majority of international Project Finance debt in emerging and established economies. The EPs apply globally to all industry sectors and four financial products, namely, (1) Advisory Services for Project Finance, (2) Funding for projects, (3) Corporate Loans for Projects, and (4) Bridge Loans.

  7. 7.

    These objectives are—in turn—supported by ten actions, which include: (i) establishing an EU classification system for sustainable activities; (ii) creating standards and labels for green financial products; (iii) fostering investment in sustainable projects; (iv) incorporating sustainability when providing financial advice; (v) developing sustainability benchmarks; (vi) better-integrating sustainability in ratings and market research; (vii) clarifying institutional investors’ and asset managers’ duties; (viii) incorporating sustainability into prudential requirements; (ix) strengthening sustainability disclosure and accounting rule-making; and (x) fostering sustainable corporate governance and attenuating short-termism in capital markets.

  8. 8.

    Among EU countries, we note that France was the first country to issue a sovereign green bond in 2017; nevertheless, it does not have a sustainable finance taxonomy per se (OECD, 2020b).

  9. 9.

    Legal and regulatory costs, as well as the cost of data collecting and processing deriving from mandatory disclosure requirements, may worsen these issues by putting financial burdens on companies.

  10. 10.

    Green bonds are frequently referred to as climate bonds because they concentrate on GHG mitigation; however, the prevalent market nomenclature is “green”.

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Authors and Affiliations

  1. Chair of Macroeconomics, Ruhr-Universität Bochum, Bochum, North Rhine-Westphalia, Germany

    Paola D’Orazio

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  1. Paola D’Orazio
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Correspondence to Paola D’Orazio .

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Editors and Affiliations

  1. Department of Economics, University of Crete, Rethymno, Greece

    Chrysovalantis Gaganis

  2. Montpellier Business School, Montpellier, France

    Fotios Pasiouras

  3. School of Accounting, Economics and Finance, University of Portsmouth, Portsmouth, UK

    Menelaos Tasiou

  4. School of Production Engineering and Management, Technical University of Crete, Chania, Greece

    Constantin Zopounidis

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D’Orazio, P. (2023). The Politics of Climate Finance and Policy Initiatives to Promote Sustainable Finance and Address ESG Issues. In: Gaganis, C., Pasiouras, F., Tasiou, M., Zopounidis, C. (eds) Sustainable Finance and ESG. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-24283-0_7

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  • DOI: https://doi.org/10.1007/978-3-031-24283-0_7

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