Designing Better Green Finance: Insights for the Next Generation of Sustainable Investment

With only 24% of greenhouse gases subject to a price and net carbon pricing of only $4 per ton of CO2, the world is quickly depleting the carbon budget needed to limit global warming to 1.5 degrees Celsius. Climate finance is essential for achieving the Paris Agreement's goals, but effectively scaling up investments requires understanding how financial markets interact with these regulations and addressing barriers like greenwashing and misaligned incentives.

In this Policy Research Talk, Federica Zeni will highlight new research insights that can help global stakeholders design better regulatory and financial mechanisms to reduce carbon emissions and promote sustainable investments. Recent literature tackles three critical questions around green finance:

1.    Carbon-contingent financing like sustainability-linked bonds can potentially serve as a substitute for carbon taxes—but may do so at the cost of reducing political support for carbon taxes. How can governments and other stakeholders manage this trade-off?

2.    Global banks are major players in many low- and middle-income countries. How do they respond when host countries increase their commitment to climate policies?

3.    What factors are driving the growth of sustainability-linked debt, a relatively new class of green debt instruments that first emerged in 2018 alongside more established instruments like green bonds?

In answering these questions, Zeni will also point to ways that policy makers and regulators can better address the complex trade-offs involved in designing more effective green finance.   

Resources:

• The Optimal Design of Green Securities 
  Adelina Barbalau, Federica Zeni, SSRN, September 2024
• Reducing Carbon using Regulatory and Financial Market Tools
  Franklin Allen Adelina Barbalau Federica Zeni, Policy Research Working Paper 10539, August 2023
• Global Bank Lending under Climate Policy
  Asli Demirguc-Kunt, Alvaro Pedraza, Fredy Pulga, Claudia Ruiz-Ortega, Policy Research Working Paper 10266, December 2022

The monthly Policy Research Talks showcase the latest findings of the World Bank’s research department, challenge and contribute to the institution’s intellectual climate, and re-examine conventional wisdom in current development theories and practice. These talks facilitate a dialogue between researchers and operational staff and inform World Bank operations both globally and within partner countries. Read More »