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Getting Finance Onside for Climate

With too much of the financial industry still funding long-term investments in the fossil-fuel sector, it is clear that a more robust government intervention is needed. Here is what policymakers can do to move the dial in a meaningful way.

NEW YORK – The world has finally awoken to the existential imperative of securing a rapid transition to a green economy. Finance will play a pivotal role in that process. But while financial institutions have made a big show of doing their part – issuing green bonds and installing green lightbulbs – far too many continue to provide capital to the fossil-fuel industry and support other parts of the economy that are incompatible with a green transition.

Such financing actively fuels the climate crisis. Many of these investments are long-lived. Discovering, developing, and fully exploiting a new oil field takes decades, stretching well beyond the horizon in which the world must become carbon neutral to prevent catastrophic levels of warming. As such, these projects almost certainly will become “stranded assets”: holdings that have lost their value and usefulness amid the fight to save the planet.

These losses pose a risk to the investor and, potentially, to the economic system and the planet. Because most owners of stranded assets will selfishly fight to exploit their holdings no matter what, financing for these investments creates an adverse political dynamic. There are powerful lobbies committed to fighting the green transition, lest they be the ones left holding the bag. Moreover, if the transition succeeds, these same groups will demand compensation – effectively “socializing” the downside risk of investments that never should have been undertaken in the first place. If history is any guide, they will succeed in making themselves whole.

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