Sustainable Finance and the Banks

This paper reviews the growing literature on sustainable finance. The empirical evidence on the key issues is very mixed with the results from ESG literature that are especially problematic. The results from the literature on banks and climate change more specifically are clearer with good indications that banks will provide firms with the finance for innovation and its diffusion. Voluntary commitments by banks to operate to reach net zero carbon emissions by 2050 do not appear to be effective and in the transition to a low carbon economy it is not clear that banks are reallocating funds to low carbon sectors or that they are charging higher interest rates to high polluting firms. The evidence on how banks deal with the physical risks from climate change is more encouraging in these respects. The literature on central banking and monetary policy generally advocates a return to policies of the 1950s-70s with an emphasis on directed credit, preferential interest rates, reserve requirements, capital and liquidity ratios to promote green finance, but the financial stability-related literature recognizes clearly the need for central banks to be prudent and incorporate climate risks into their operations and policy frameworks.