Systematic review of the effectiveness of green financial policies in re-directing finance flows in line with the Paris Agreement

Reaching a pathway towards net zero GHG emissions requires massive investments in low-carbon infrastructure. At the same time, it is crucial to rapidly transition finance away from fossil assets. Accordingly, the redirection of finance flows is a key objective of the Paris Agreement (Art. 2.1c). Over the last decade, countries have started to enact policies to influence financial actors to this end, with 136 such “green financial policies” reported as of 2019 in the OECD alone (cf. Steffen 2021 ERL). While it is generally agreed that such green financial policies can complement “real economy” policies like carbon pricing, technology subsidies, or energy sector regulation, the actual impact of financial policy interventions is poorly understood. Conceptual studies suggest a variety of potential outcomes: Effects on firms’ emission intensity, re-allocation of capital between high-carbon/low-carbon firms, and also intermediate outcomes that eventually lead to a change in emission intensity or capital allocation (e.g., quality of climate-related financial disclosures, mark-ups/discounts in the cost of capital). An increasing body of primary empirical research evaluates past interventions, with numerous studies studying especially disclosure requirements, green state investment banks, and interventions by central banks. However, the piecemeal evidence base has not been synthesized so far, making it hard to derive learnings that apply across regional and time-specific contexts. To fill this gap, we conduct a systematic review of green financial policy effectiveness in OECD countries. As a first step, we present a rigorous qualitative synthesis of evidence concerning impact channels and outcome measures (drawing on both empirical studies and computational modeling studies). Building on its result, the second step uses empirical literature only and conducts a quantitative meta-analysis concerning the impact of climate-related disclosure requirements, and green state investment banks. We also derive important research gaps and avenues forward for green financial policy analysis.