What role for financial regulation to help the low-carbon transition?States and more generally public authorities will not finance the transition to a low-carbon and climate-resilient economy on their own. Private financial actors have a key role to play and, over the past decades, they have taken numerous initiatives to promote "responsible investment" and "sustainable finance". However, the impact of these initiatives is far from commensurate with the climate challenge, , and financial regulation must play a role. This I4CE study analyses the different objectives that regulators can pursue to help the financial sector respond to the climate urgency, and provides an overview of the instruments at their disposal. It also highlights the challenges of implementing these instruments and identifies those that need to be used in the short term and those that need more time to be implemented.
Integrating Climate-related Risks into Banks’ Capital RequirementsClimate change dynamics are on a trajectory of intensification which may require the use of new and notable measures. The Paris Agreement recognized the urgency of directing financial flows toward low carbon activities and climate-resilient development. However, the latest special Intergovernmental Panel on Climate Change (IPCC) report 1 stated that to limit global warming to 1.5oC, the financial resources directed to green activities are by far insufficient and investments on carbon intensive projects are still far too high. At the same time, climate-related risks continue to potentially endanger the stability of the financial sector and they are only marginally addressed by Basel III capital requirements.