Last month the Institute of International Finance (IIF) published a very thoughtful staff paper titled “Resetting the Debate on the Role of Private Finance in the NZ Transition.” The views of the IIF are important. It is the global association of the financial industry, with about 400 members (including commercial and investment banks, asset managers, insurance companies, professional services firms, exchanges, sovereign wealth funds, hedge funds, central banks and development banks) from more than 60 countries. “Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth.” Given the central importance of the role the financial sector plays in climate change I was very interested in reading this report.

The report begins with eight key messages to policymakers:

• It is essential to achieve a just transition towards a net-zero economy to limit global warming.
• Policy measures are a fundamental pre-condition for a pro-growth, net-zero transition.
• Decarbonization will be enormously expensive, and the financial sector can support this but only when the economics make sense.
• These realities are not always reflected in what people expect from the financial sector.
• The prevailing finance-centric “theory of change” for the net-zero transition needs to be reassessed.
• Regulatory and supervisory approaches based on this theory of change can actually impede what the financial sector can do.
• Of special concern are these three trends:

1. Differences in approaches to transition finance
2. Conflation of financial sector activities to support the transition with climate-related financial risk
3. Overreliance on metrics based on financed emissions as risk indicators

• It’s time to reset the debate on what needs to be done to enable net zero-aligned business opportunities to develop and be financed.
• The emphasis should be on scaling up transition activity and demand for transition finance across the real economy.

The IIF then proposes three key priorities for moving forward:

1. Strengthening real economy policy frameworks and developing national-level transition strategies

2. Ensuring that financial sector policy remains risk-based, and that it is not used as a substitute for broader net-zero policy measures

3. Enhancing the international financial architecture in support of transition finance in EMDEs.

This is a seminal report, and I couldn’t agree with it more. With respect to the IIF’s point about the “conflation of financial sector activities to support the transition with climate-related financial risk” I’ve written about this problem. I think that “climate risk is financial risk” has become a sloppy, hand-waving invocation for a range of activities like some shareholder proposals and castigating investors who do not support them.

Multi colored abstract opening doors on grassy field on sunny summer day. (3d render) Getty

I’ve also written about some high-level differences between liberals and conservatives about how to deal with climate change. The former see the financial sector as leading the energy transition, a fundamental problem addressed by this report. The latter place more emphasis on technology and innovation in the real economy across a broad range of technologies beyond renewables, such as carbon capture utilization and storage (and see this interview with Claude LeTourneau, the CEO of Svante), direct air capture (see Part 1 and Part 2 interviews I did with Brian Marrs of Microsoft), geothermal, and small modular reactors. Neither side—and it’s admittedly an oversimplification to state this in a binary way—has all the right answers. Rather, it’s important that those with different theories of change work together to create stable, bipartisan solutions to create the appropriate regulatory environment that the IIF is calling for.

In that spirit, I’d like to give some examples of where these bipartisan conversations would be useful, although admittedly difficult to and to varying degrees. I will focus on a few examples of organizations—two of which are associations of financial institutions and two of which are NGOs—that strike me as being grounded in the “finance-centric” theory of change. I suspect that engagement with the investor associations will be easier than the NGOs but that doesn’t mean the effort shouldn’t be made.

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