Finance and decarbonisation: why equity markets do it better

From the European Central Bank:

This article provides evidence that economies receiving more funding from stock markets than credit markets generate less carbon. Increasing the equity financing share to one-half globally would reduce aggregate per capita carbon emissions by about one-quarter of the Paris Agreement commitment. Our findings call for supporting equity-based initiatives rather than policies aimed at decarbonising the European economy through the banking sector.

Financial markets and global warming

The 2015 Paris Climate Conference firmly put at the heart of the debate on environmental degradation a sector of the economy that may surprise some readers: finance. Accordingly, the leaders of the G20 stated their intention to fund low-carbon infrastructure and other climate solutions by scaling up so-called green finance initiatives. Key examples are the burgeoning market for green bonds, whose issuance reached USD 48 billion in the first quarter of 2019[2], and the creation of a green credit department by the largest financial institution in the world, the Industrial and Commercial Bank of China.

Somewhat paradoxically, the interest in green finance has also laid bare our limited understanding of the relationship between traditional finance and the environment. Yet it is important for us to understand that relationship, because most of the global transition to a low-carbon economy will need to be funded by the private financial sector if international climate goals are to be met on time (UNEP, 2011). Are expanding financial markets detrimental to the environment? Do they cause harm, for instance, by fuelling economic growth and the concomitant emission of pollutants? Or, do they steer economies towards sustainable growth by favouring green sectors over so-called brown ones? And is there a difference in this regard between credit markets and equity markets? Do they have the same impact on environmental degradation, or does it make economic sense to stimulate one segment of the financial system at the expense of the other?

We explore those questions in this article, which is based on a recent ECB working paper (De Haas and Popov, 2019). Here, as in the working paper, we present novel evidence that, when it comes to addressing climate change, not all financial markets are created equal. As it turns out, stock markets are superior to banks in decarbonising the economy. As we show, for a given level of economic development, financial development, and environmental protection, economies generate fewer carbon emissions per capita if they receive relatively more of their funding from stock markets than from credit markets.”

Continue reading here.

Posted by at 9:17 AM

Labels: Energy & Climate Change


Subscribe to: Posts