Transforming the finance system to enable the achievement of the Paris Agreement

Abstract

A realignment of the financial system is a critical enabler of the sectoral transitions required to address the current climate crises. Article 2.1(c) of the Paris Agreement calls for this and establishes a new objective for all countries to make finance flows consistent with low-carbon and climate-resilient development pathways (United Nations Framework on Climate Change Convention [UNFCCC] 2015). In contrast to the mobilization of climate finance for developing countries under the UNFCCC (article 9), another key goal, the climate consistency of finance flows represents a new purpose that relies on support and action to transform the global financial system (Zamarioli et al. 2021). This chapter therefore focuses on a transformation of the financial system that engages all relevant actors, including governments, central banks, commercial banks and institutional investors. The success of the transformation can ultimately be measured based on two indicators: a rapid increase in investments in low-carbon assets worldwide and a rapid decrease in investments in greenhouse gas (GHG)-intensive assets. Although this has significance for all sectors, examples in this chapter focus on the energy sector, where literature on finance and transformation is emerging (Steffen and Schmidt 2021).