Governments and financial institutions continue to enable practices that harm society and the environment, misuse valuable financial resources, distort the market and expose those institutions to financial risks. Such investments need to be redirected to more sustainable activities.
Capital flows will shift as governments and the private sector invest in the green economy, creating goods and services that cut demand for high-carbon technologies. Public and private financial institutions should also be challenged to constrain the availability of financing for harmful activities by setting clear engagement policies and stringent criteria for screening and divestment. These measures should raise the cost of capital for harmful activities — the expected risk and return to investors and lenders — and, over time, reduce the amount of capital available for them.
While subsidies explicitly use government resources that are not otherwise commercially available, public financial institutions can also perpetuate harmful practices through the use of financing that is offered on commercial terms. Harmful public investments do not happen in a vacuum: they are often the result of political lobbying. The world's largest corporate greenhouse gas (GHG) emitters and their industry associations use political spending to influence policies that preserve government support and impede climate policy. Therefore, political spending that props up harmful industries and delays climate action needs to be highlighted and phased out.
Ultimately, financial decisions to undertake unsustainable activities are made at the corporate level. This includes, for instance, capital investments to build a coal plant (capital expenditures or “capex”) or to maintain that plant and buy more coal to operate it (operating expenditures or “opex”). Investors in these companies can influence those decisions. Achieving a sustainable future will require changing company-wide capex decisions in the most climate-relevant sectors.
Eliminating harmful financing by disinvesting or changing the behavior of investee companies not only reduces societal harm, but also presents opportunities for public and private financial institutions to eliminate their exposure to climate-related risks and expands the availability of resources to scale public and private investments for more sustainable activities.
