Projekt "Climate change and global finance at the crossroads: Policy challenges, politico-economic dynamics, and sustainable transformation"

Title of the project: Climate change and global finance at the crossroads: Policy challenges, politico-economic dynamics, and sustainable transformation

Financed by:
Federal Ministry of Education and Research (BMBF), Bonn, under the programme “Climate Protection & Finance (KlimFi)”, reference 01LA2207A

Project lead:
Prof. Dr. Joscha Wullweber, Heisenberg-Professor

Project team:
Nicolas Aguila; Riccardo Baioni; Jan Fichtner; Paula Haufe; Simon Schairer; Janina Urban

Cooperation partner:
Institut für ökologische Wirtschaftsforschung: IÖW - Berlin

Summary of the project:

Humanity is facing a millennium challenge: the transformation of state, industry, and society towards zero CO2 emissions in the next 20 to 30 years. This goal can only be achieved if appropriate financial resources are available. The financial sector, however, is struggling to steer financial flows towards sustainable investments. Although the risk is extremely high that CO2 intensive assets will lose much of their value in future years, they still generate too much profit in the near term to expect financial players not to continue investing heavily in them. It is therefore crucial for public authorities and civil society to create incentive structures and regulatory corridors to effectively motivate the financial industry to strengthen their efforts toward solutions that will limit the causes of climate change.

Such a transformation, however, cannot be realized simply by redirecting a few investments, or developing a number of new technologies. In the field of climate governance and global finance, we are dealing with a complex collective action problem that urgently requires close coordination of efforts between and among a large variety of actors and institutions including central banks, governments, and their ministries, the various players in the financial sectors, civil society, the international research community, and international regulative bodies. It is precisely because climate policies and measures leading to sustainable finance are so complex that the domain in which they are shaped is so difficult to regulate and coordinate.

Policies mitigating climate change can only be successful if they can rely on a strong, sustainably-oriented financial sector. Studies have overwhelmingly demonstrated that a change in investment behaviour is not based on functionalities, but rather on economic interest, profit-maximizing behaviour, social pressure, and politico-economic structures. Available knowledge on how to regulate and incentivize financial actors to move towards more sustainable finance, however, is very limited. The research project will work toward offering a broader, deeper, and more differentiated analysis precisely of this question. Overall, it will lead to a deeper understanding of the interplay and reflexive dynamics between the financial sector on the one hand, and government bodies, central banks, and civil society on the other, and the impact, implications, and efficacy of government policy and regulation on investment behaviour. In this way, the research findings will contribute to the development of a more informed framework for restructuring the financial sector towards sustainable finance.

The aim of the project is:
(a) to develop an interdisciplinary and multi-method analytical framework appropriate for studying the connections between the financial sector and climate change,

(b) to apply this framework to obtain, process, and analyse relevant data in this connection

(c) to evaluate the internal financial market dynamics and the responsiveness of financial actors related to (c1) regulations, (c2) climate/fiscal policy, (c3) monetary policy, and (c4) civil society demands and campaigns,

(d) to examine the interplay and reflexivity of each of these areas with and among one another, and, on the basis of the prospective findings,

(e) to draft realistic proposals for policy instruments and strategies designed to incentivize the financial sector towards sustainable investments, and

(f) to make concrete policy recommendations (policy mixes) on ways to accelerate the transition to a low carbon financial system.

The project is subdivided into four work packages (WPs):

WP 1: Financial actors and logics of sustainable finance: impediments and positive drivers towards sustainable finance

WP 1 will scrutinize the interests, investment strategies, and resonance of financial players insofar as they relate to climate finance and policies. It will differentiate between (a) those actors who block or even actively oppose sustainable transition (carbon finance), (b) those who are undecided but potential supporters, and (c) those who have already begun to invest in sustainable production, and, accordingly, who fulfill, or can fulfill, a pioneering role (climate finance). WP 1 will also explore the logics and structures in the financial system which enable, disenable, guide, and frame investment behaviour and strategies. The overall research goal of WP 1 is to develop a taxonomy of parameters and indicators that point to impediments as well as positive drivers towards sustainable finance

WP 2: Central bank policies, government climate/fiscal policies, and the financial sector

WP 2 will analyse the main state players that have a direct impact on the financial sector: central banks, financial regulators and public development banks. The focus is on the EU and here in particular Germany, and on the USA and Great Britain as a source of comparison. WP 2 will systematically explore which monetary policies and financial regulations have proven to be successful and which have had little or no effect. The task of WP 2 will also be to identify and analyse how current governance processes shape the investment strategies of financial actors, including to investigate the interplay between national, supranational, and international policies. The idea here is to discern positive, neutral as well as negative policy effects with the aim of developing criteria for effective policy tools so as to provide a robust basis for recommending additional policy programs to foster sustainable finance.

WP 3: Civil society and climate finance

WP3 will analyse the role of interactions between civil society and climate finance actors as a potential driving force for the transition to sustainable finance. WP 3 aims to disentangle, systematize and more closely examine channels of civil society’s influence on the financial market and sustainable finance. WP 3 will conduct an analysis of civil society campaigns, including NGO activities that have had a sustainable financial effect, the role of the media in changing financial strategies, and the interplay between civil society actors, state policies, and the financial sector.

WP 4: Project management, Policy Innovation Lab (PIL), stakeholder dialogues, and public outreach.

WP 4 will be responsible for tracking and managing the project as a whole. In addition, it will coordinate the Policy Innovation Lab (PIL), an advisory body that comprises important policy makers, financial sector representatives, civil society actors, and researchers. The representatives of these institutions will be involved in project development from the outset and will accompany the project in a critical advisory capacity during every project component and stage. The close contact and collaboration between the Policy Innovation Lab and the project team, and the continual dialogue with and among the various stakeholders will also ensure broad stakeholder participation. In this regard, WP4 will organize two stakeholder roundtables with German and international stakeholders.

Publications (peer-reviewed, open access)

Aguila, Nicolás/ Wullweber, Joscha (2024): Greener and cheaper: Green monetary policy in the era of inflation and high interest rates, in: Euroasian Economic Review, DOI: 10.1007/s40822-024-00266-y. https://doi.org/10.1007/s40822-024-00266-y
Aguila, Nicolás/ Wullweber, Joscha (2024): Legitimising green monetary policies: Market liberalism, layered central banking, and the ECB’s ongoing discursive shift from environmental risks to price stability, in: Journal of European Public Policy, DOI: 10.1080/13501763.2024.2317969. https://www.tandfonline.com/doi/full/10.1080/13501763.2024.2317969
Aguila, Nicolás/ Haufe, Paula/ Wullweber, Joscha (2024): The Ecor as Global Money: Towards a Green Bretton Woods System to finance sustainable and just transformation, in: Sustainability Science, DOI: 10.1007/s11625-024-01484-8. https://link.springer.com/article/10.1007/s11625-024-01484-8