## Clean and Green Finance: A new sustainable financial system can secure a net zero future for the world

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**Canonical URL:** [Clean and Green Finance: A new sustainable financial system can secure a net zero future for the world](https://www.imf.org/-/media/files/publications/fandd/article/2021/september/mark-carney-net-zero-climate-change.pdf)

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### Key innovations from Paris and the Net Zero imperative
- Three Paris innovations highlighted:
  - Setting the objective of less than 2 degrees Celsius warming, with the stretch objective of 1.5 degrees.
  - Voluntary country plans (NDCs) that are objectively aggregated to assess outcomes.
  - Involvement of the private sector and non-state actors so solutions are bottom up as well as top down.
- Sober reality and required emissions trajectory:
  - Last year it was estimated that the world’s temperature would rise above 3 degrees Celsius by the end of the century.
  - Emissions need to fall by 7 percent a year over the course of this decade.
  - Many countries met the 7 percent fall last year only because large swaths of the economy were shut down.

### Financial system foundations: disclosure and risk management
- Disclosure developments:
  - The Task Force on Climate-related Financial Disclosures (TCFD) moved from concept to broad demand: over 2,000 major companies around the world are responding.
  - Coverage remains limited and reporting incomplete, particularly of critical forward-looking metrics.
  - Recommendation: governments should make TCFD disclosures mandatory and support the International Financial Reporting Standards Foundation’s intention to establish an International Sustainability Standards Board to produce a climate disclosure standard based on the TCFD.
- Risk management and supervisory progress:
  - The Network for Greening the Financial System (NGFS) grew from 8 founding members to more than 90 authorities covering over 80 percent of global emissions.
  - Central banks in countries with 50 percent of global emissions are beginning to conduct climate stress tests of their financial systems.
  - COP26 priorities: embed supervisory expectations for climate risk management and ramp up climate stress testing.

### Commitment, alignment, and engagement via GFANZ
- Commitments:
  - Net zero objectives of countries advanced from 30 percent of emissions when the UK and Italy assumed the COP presidency to over 70 percent today.
  - GFANZ (Glasgow Financial Alliance for Net Zero) was created to meet investment needs that could total over $100 trillion over the next three decades.
  - GFANZ brings together over 250 financial institutions responsible for $80 trillion in assets and is anchored in COP’s Race to Zero.
  - By Glasgow, all major financial firms should decide whether to join GFANZ.
- Alignment and policy interactions:
  - Alignment entails defining best-practice net zero plans for companies and financial institutions and assessing portfolios relative to net zero pathways.
  - Central banks (notably the European Central Bank and the Bank of England) are examining how to revise monetary policy operations to be more consistent with legislated climate objectives and policies.
  - Forward-looking climate disclosure, net zero plans, and portfolio alignment metrics will pull forward investment, especially with credible and predictable climate policies like carbon pricing.

### Developing economies and financing needs
- Scale of investment required:
  - Most estimates suggest over a trillion dollars in additional investment annually for decades will be needed to build green energy in emerging market and developing economies.
  - Multilateral development banks (MDBs) have mobilized only $11 billion in 2018 to date.
- Four initiatives to orchestrate a step change in financing capacity:
  - Private commitments: A GFANZ working group will secure commitments of significant private financing capacity for net zero projects in emerging market and developing economies.
  - Public facilities: MDBs should identify and be prepared to dramatically scale up blended finance vehicles, instruments, and facilities.
  - Country platforms: Build public–private country platforms (examples include Global Investors for Sustainable Development and the Climate Finance Leadership Initiative) that integrate Paris-aligned NDCs to attract private capital at scale; projects certified as Paris-aligned are more likely to attract private capital and face lower project risks, including regulatory changes.
  - High-integrity market for carbon credits: enable buyers to compensate or neutralize continuing emissions while reducing absolute emissions as the primary corporate responsibility.

### Policy and market actions to scale carbon markets and private finance
- Carbon markets and standards:
  - Over 1,600 companies have committed to science-based targets.
  - The private sector Taskforce on Scaling Voluntary Carbon Markets comprises 250 organizations and has published final recommendations to develop and rapidly scale a global carbon market with high integrity, transparency, and credibility.
  - The market for carbon credits is currently small, fragmented, and of uneven quality but could grow to over $150 billion a year.
  - High-emission-reduction projects will predominantly be in emerging market and developing economies, with co-benefits for biodiversity and UN Sustainable Development Goals.
- Role of financial centers and market infrastructure:
  - Two of the world’s largest financial centers—London and Singapore—are stepping up to implement Taskforce recommendations.
  - The combination of disclosure, net zero plans, portfolio alignment metrics, and credible climate policy can align trillions of dollars of capital across all economies.

### Promising progress — key statistics and milestones
- Emissions trajectory and targets:
  - Emissions need to fall by 7 percent a year over the course of this decade.
  - Last year it was estimated that the world’s temperature would rise above 3 degrees Celsius by the end of the century.
- Declarations, memberships, and commitments:
  - Net zero coverage advanced from 30% to over 70% of emissions covered by net zero targets.
  - GFANZ: over 250 financial institutions; $80trn in assets; financial commitments to net zero through GFANZ.
  - TCFD: over 2,000 companies responding.
  - NGFS: more than 90 authorities covering over 80 percent of global emissions.
  - Central banks in countries with 50 percent of global emissions are conducting climate stress tests.
  - Over 1,600 companies committed to science-based targets.
  - Taskforce on Scaling Voluntary Carbon Markets: 250 organizations.
- Financing figures:
  - Investment needs could total over $100 trillion over the next three decades.
  - Developing economies need over a trillion dollars in additional investment annually for decades.
  - MDBs mobilized $11 billion in 2018.
  - Potential carbon credit market size: over $150 billion a year.

*Mark Carney, "Clean and Green Finance," Finance & Development, September 2021.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2021/september/mark-carney-net-zero-climate-change.pdf_