Lay the foundations of a sustainable financial system

Capital markets must align with the Paris Agreement goals to effectively transition to a net-zero, resilient economy, in which the environmental risks to both people and planet are embedded.

The financial system has a pivotal role to play in achieving the goals of the Paris Agreement. Its full potential needs to be harnessed to serve as an engine in the global economy’s transition towards a low carbon economy and sustainable development. Multiple sources show that climate change and environmental degradation are systemic risks and so these risks must be considered as material and must be well embedded in the financial system.

The financial system is changing. Financial actors are beginning to realise the pivotal role of finance in enabling and accelerating the transition to net-zero in line with the Paris goals. A systemic shift is needed to green the financial system: no major G7 stock indexes are currently on the 2°C pathway, much less the 1.5°C that is so urgently needed.

Governments must ensure that public spending and fiscal policies are aligned with resilient, net-zero ambitions and public investments support and catalyse private sector initiatives. Regulators must ensure that capital markets reflect the relevance of the risks posed by environmental degradation on both people and planet. Financial market regulators, central banks and supervisors must allow actors to intervene to manage, supervise and regulate financial markets.

The costs of inaction in the long-term for financial actors, against taking concrete action to align with net-zero now, are exponential and incomparable. CDP analysis shows that for financial institutions alone, the opportunities of financing the transition to a low carbon, deforestation-free, water-secure future amount to some US$2.9 trillion. Conversely, the financial impact of risks from deforestation alone is estimated to be US$53.1 billion, and for water resources, water-related opportunities amount to US$711 billion, with the cost of inaction being over five times higher. The opportunities of green and sustainable finance are clear and well-understood by financial actors who are already implementing science-based action and leading the transition towards a net-zero economy.

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