How to boost international private climate finance

The role of central banks, financial regulators and sectoral coalitions
Research paper ISBN: 978 1 78413 560 7 DOI: 10.55317/9781784135607
Photo of the headquarters of Bank Negara Malaysia in Kuala Lumpur

Lilia Caiado Couto

Former Research Fellow, Global Economy and Finance Programme

This paper explores the potentially critical role of central banks, financial regulators and finance industry coalitions in stimulating private cross-border climate-related investment flows – particularly into developing economies. The transition to a ‘net zero’ emissions global economy will require massive investment in low-carbon assets over the coming decades, accompanied by a reallocation of capital from high-carbon assets.

For such financial flows to occur, institutional investors will need greater clarity on how net zero portfolio alignment is defined and measured, and on the climate risk characteristics of specific financial instruments. Among other measures, central banks and financial regulators can aid this process by developing more uniform reporting standards for climate investments.

Financial authorities can also encourage portfolio realignment by increasing capital requirements for loans associated with high-emissions investments, and similarly by adjusting collateral rules for high-emissions assets. In addition, central banks may be able to play an ‘active’ role in reshaping markets, for example by giving preference to net zero-compliant assets in their own bond holdings and foreign reserves.