Breaking the Code

The debate over whether private financial institutions should play a proactive role in the low-carbon transition is coming to a close, and significant efforts to define what this role should be in practice have begun.

While the financial sector has initiated broad efforts to consider climate risks, asset owners and lenders representing tens of trillions in assets are moving beyond such considerations to make good on their commitments to align their portfolios with the Paris Agreement. Policymakers across the globe are establishing taxonomies and strenuous climate benchmarks to better direct capital toward sustainable activities and investor expectations of “impact” are increasing. Financial regulators are moving to ensure markets are pricing climate risks effectively and financial supervisors are increasing scrutiny of banks and insurers.

This evolving landscape is difficult to navigate for financial institutions and climate initiatives alike. Yet doing so is crucial for understanding what is being asked of the financial sector, how structural barriers (and sometimes legal obligations) limit its ability to influence the real economy, and which initiatives are working to overcome these barriers to better enable financial institutions.

This report takes stock of the regulatory and policy efforts, market trends, and voluntary initiatives actively shaping the role of private financial institutions in supporting decarbonization of the real economy. It clarifies what is being asked of the financial sector today and what may be needed to ensure that the actions taken by the financial sector in support of decarbonization are effective and that expectations are realistic.