Greening Finance? What Institutional Options for a Sustainable Transition?

Abstract

Research on sustainability and energy transition aims to identify the structural changes that should occur and how they could be achieved and managed to render society more viable. Institutions are the providers of an appropriate environment that should offer those conditions and allow citizens to undertake activities that meet both individual and societal goals. Climate emergency and transition constraints recast economic and political structures and put institutions under pressure in the face of global risks. Two of them, climate risks and financial risks, can be regarded as sources of systemic risk since they determine the conditions of viability of our economies and societies. This article argues that an appropriate institutional reform is required to frame macroprudential policies for financial regulation and tackle climate change by greening finance and containing climate-related financial risks. The article then assesses the scope of a macro-regulatory institutional framework to provide relevant support for sustainable finance and financial markets to improve our ability to secure a viable future for our societies. Long-term sustainable financial tools for financing the transition require definancialization of the economy to prevent the perversion of financial practices that undermine societal sustainability and sabotage financing resources that a greener future inevitably needs.

Keywords:

• climate finance
• eco-transition
• financial macro-regulation
• institutions

JEL Classification Codes:

• E02
• E44
• G18
• Q54

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 In a more comprehensive way, the flagship report of the International Energy Agency (IEA 2021) points also to the risks of mismatches between energy supply and demand resulting of a lack of appropriate investment signals, insufficient technological progress, poorly designed policies or bottlenecks arising from a lack of infrastructure since the world should move now towards net zero emissions.

2 In a sufficient quantity and quality.

3 Olson ([1965] 2002, 2) argues that “unless the number of individuals is quite small or unless there is coercion or some special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests.”

4 Hardin (1968, 1247) points to the role of coercive rules in the relationship between responsibility and engagements: “social arrangements that produce responsibility are arrangements that create coercion […].”

5 Polycentricity is a system made up by many formally independent centers of decision that enter, however, into diverse contractual and cooperative relations with some central mechanisms to resolve possible conflicts (V. Ostrom, Tiebout, and Warren 1961, 831–832).

6 Commons include: natural resources, areas of fishing, air, along with balanced governance of food, water, energy, and minerals, in addition to environmental preservation (Hardin 1968; Ostrom [1990] 2008).

7 They are not normal goods but rather Polanyi’s fictitious commodities.

8 Another perspective may consist of comparing promotional and preventive approaches. See Baer, Campiglio and Deyris 2021.

Additional information

Notes on contributors

Faruk Ülgen

Faruk Ülgen is Professor of Economics, Centre of Research in Economics of Grenoble (CREG), Université Grenoble Alpes, Grenoble INP, 38000 Grenoble, France.