It has been 40 years since global warming became widely known and more than a decade since the Principles for Responsible Investment were created and the first green bonds issued. Yet capital markets are still supporting an unsustainable economy, with greenhouse gas emissions accelerating climate change.
The key issue, according to Ladislau Dowbor, is that “creating systemic disaster is more profitable than going according to long term basic sustainability demands, and money just flows to where it pays more.” Against this background, the question boils down to carrots and sticks: sticks of legal constrains, stress testing and regulations; and carrots of incentives, including (carbon) price signals.
Another argument often used is that financial firms do not have enough information to make sustainable choices. However, companies have been disclosing large amounts of environmental information for years. Even worse, as pointed out by Kara Tan Bhala, “finance players knew about the devastating planetary effects of carbon emissions in the early twenty-first century. Despite this knowledge, the industry has funded fossil fuels globally for the past twenty years.” This may lead to the conclusion that “the financial system can and should be held morally responsible for the dismal progress in mitigating climate change.” The question remains, more responsible than the other stakeholders or as much as the rest.
However, the responsibility of the „financial system as such“ for climate deterioration is difficult to settle, as explained by Etienne Perrot: “the IPCC has clearly established the consequences of global warming (the principle of affectability inherent in any responsibility), but the search for the link between cause and effect brings to light a number of actors, including governments, consumers, business leaders, professional unions, etc.” In other words, responsibility is split between different players and across different sectors, which leads Valerio Bruno to consider that “the financial sector per se should not be seen as more responsible, legally or morally, than any other comparable sectors”.
Ultimately, what is required may be a change of approach: climate change should not be viewed as a market failure anymore but as a systemic challenge calling for an unprecedented level of commitment and coordination between multiple actors (private and public) and instruments (eg. carbon pricing, stress testing, regulations, education). A first step in this direction would be a globally coordinated trend to steadily increase the carbon price, but who is going to foot the bill? Paradoxically, the answer seems to be “not me”.

The responsibility of the „financial system as such“ for climate deterioration is difficult to establish.The IPCC has clearly established the consequences of global warming (the principle of affectability inherent in any responsibility), but the search for the link between cause and effect (principle of imputability) brings to light a number of actors, including governments, consumers, business leaders, professional unions, etc. Legal responsibility (principle of judiciability) requires the establishment of binding regulations. This is in the hands of the legislator (e.g. carbon tax or a ban on financing research and extraction of fossil fuels). While waiting for such regulations, the moral responsibility of the actors remains, which comes up against the contradictory logic of their particular socio-political situations. For the most pugnacious among these actors, remains discernment.

Etienne Perrot
Jesuit, Dr. Economics sciences, editorial board of the magazine Choisir (Geneva), editorial adviser of the journal Études (Paris)

Whatever the responsibilities for the past, financial institutions can play a decisive role in changing the state of affairs from now on, especially by supporting the elaboration and promoting as quickly as possible the adoption of new reporting standards, through which environmental costs are integrated into profit and loss accounting. Their support will also be useful for the adoption of effective carbon pricing, a necessary step which will not be easily understood by voters. This will translate into new credit criteria. A dose of technocratic discernment and governance is needed, in which the financial system plays the role of an indispensable transmitter. Financial leaders world-wide are prepared for that, they must be encouraged – and perhaps legally forced – by Governments.

Domingo Sugranyes
Director of a seminar on ethics and technology at Pablo VI Foundation, past Executive Vice-Chairman of MAPFRE international insurance group

If the market economy is to do its job correctly, every beneficiary of a good or service should pay what it costs to provide it, otherwise someone who has not benefited will have to pay. It is also a founding principle of the Protestant ethic: as Calvin said, “whatever means we use to enrich ourselves at the expense of others count as theft”. The short answer to the question is therefore to apply the Polluter-pays Principle: it is fundamental, more far-reaching than its misleadingly narrow name. Countless international conventions – e.g. the Rio Declaration, Principle 16 – already require it.

Edouard Dommen
Specialist in economic ethics, former university professor and researcher in UNCTAD and president of Geneva’s Ecumenical Workshop in Theology.

A policy operating through the financial system can only be a second best, less effective than a direct pricing of pollution. Regulators should ensure that financial intermediaries take due account of climate risk, for instance via stress testing scenarios. Political authorities could also edict guidelines applicable to the financial entities in their jurisdictions (including pension funds) on what sectors or firms should be avoided in investment decisions. Public authorities can play a coordination role by issuing official labels on various investment options. Private investors can also exert pressure on the providers of investments vehicles to offer options with limited climate footprint, a process that is already well underway.

Cédric Tille
Professor of macroeconomics at the Graduate Institute of International and Development Studies in Geneva

In the light of immediate and mid-term social and environmental challenges, as proxied through the 17 Sustainable Development Goals, moral justice requires and society is entitled that the USD 250 trillion+ investment industry, directing capital flows and providing incentives, should make changes 1) towards a more precise and enforced stakeholder governance, 2) towards roles and language fitting these times, 3) towards a more complete information sharing for society at large, 4) towards a real positive investment impact and 5) towards undoing injustice. This while the regulatory regime a) enforces equality, b) redefines fiduciary duties and c) bans green washing. This is not esoteric and can be implemented by the financial, legal and education systems now.

Eelco Fiole
Investment governance expert, board director and adjunct professor of Finance Ethics in Lausanne and Neuchatel

The key issue is that creating systemic disaster is more profitable than going according to long term basic sustainability demands, and money just flows to where it pays more. Free markets in times of corporate giants, massive-impact technologies, immaterial money and High Frequency Trading are creating chaos. The present reward system is wrong: corporate managers raise their bonuses if they improve dividends, not systemic sustainability.  And institutional investors just move ahead to where dividends are higher. A global new deal is long overdue. Make it green, too. The way it is, wrongdoing is getting the best rewards.

Ladislau Dowbor
Economist, professor at the Catholic University of São Paulo, consultant to a number of international agencies

For the financial sector, major components of the policy program are the subject of proposed changes in regulation and other actions, some now broadly accepted and others more controversial. The first set includes the improved measures of climate risk for the costs and prices on which accounting and regulatory policies are based, improved disclosures to investors and supervisors, and inclusion of targets for lowering climate risks in conditions for the provision of financing. The second set would involve extending stress testing for financial institutions to longer horizons to include the impact of climate risks as well as incorporating such risks in the macroeconomic models which serve as the basis of monetary policy. Both of the latter have aroused concerns regarding the reliability of currently available models for such purposes.

Andrew Cornford
Counsellor, Observatoire de la Finance; past staff member of UNCTAD, with special responsibility for financial regulation and international trade in financial services

The financial system can and should be held morally responsible for the dismal progress in mitigating climate change. Let’s say finance players first knew about the devastating planetary effects of carbon emissions in the early twenty-first century (although, don’t they arrogate to themselves extraordinary intelligence and learning?). Despite this knowledge, the industry has funded fossil fuels globally for the past twenty years. To continue an act despite knowing it causes harm is to act unethically. Pricing carbon and using carbon markets may move an industry driven by market forces to get on the side of the planet. Developing a new theory of finance, climate finance, call it CliFin, that incorporates carbon into models and demotes profit maximization may be another way.

Kara Tan Bhala
President and Founder of Seven Pillars Institute for Global Finance and Ethics

The financial sector per se, or its main players, should not be seen as more responsible, legally or morally, than any other comparable sectors. When the financial sector engages a wide range of stakeholders, it has demonstrated capable of developing tools having great impact in containing climate warming, as the ESG (Environmental, Social, and Governance) criteria and related funds. On the contrary, when the initiative is left in the hands of private individuals, from the great hi-tech gurus to the case of the cryptocurrency Bitcoin, huge inefficiencies are mistakenly tolerated to the wildest speculation. The impact of the financial sector can well play a positive role, provided it includes a wide range of actors and is not left in the hands of private initiative alone.

Valerio Bruno
Researcher in politics and Senior Research Fellow at the Centre for Analysis of the Radical Right (CARR)