INTERNALIZING CLIMATE MITIGATION FOR FINANCIAL POLICY-MAKERS

The document examines the disconnect between financial policy-making and environmental goals, arguing that the global financial system is structurally biased toward fossil fuels and against renewables and energy efficiency. It asserts that greening the financial system fits within the mandates of central banks and regulators—including objectives like financial stability, investor protection, and growth. The author proposes a framework for financial policy-makers, especially in China, involving mandatory carbon exposure disclosure, carbon stress tests, and the assessment of carbon risk as a systemic threat. Additionally, the paper advocates for 'interventionist' policies, such as preferential risk weights and lending quotas for green investments, noting that such measures are already used by major central banks in both OECD and emerging economies to support other sectors.

• The global financial system is systematically biased against green investments and in favour of fossil fuels, driven by short-termism, misaligned incentives, and a failure to price carbon risk.
• Financial policy-makers often incorrectly believe that climate action falls outside their mandates, whereas the author argues it is essential for achieving core objectives such as economic growth, stability, and security.
• Energy-efficiency investments are chronically underfunded despite potentially offering double or triple-digit returns, due to their incremental nature and the difficulty for the financial sector to monetize them as standalone categories.
• The author proposes that China implement mandatory disclosure of carbon and environmental exposure for all listed firms and financial institutions to reduce information asymmetries.
• To increase the perceived risk of carbon exposure, the author recommends that China introduce mandatory, publicly disclosed carbon stress tests for banks, insurance firms, and asset managers.
• Carbon risk may pose a systemic threat to financial stability because the potential for large, widespread, and sudden losses could trigger a 'fire sale externality' as institutions rush to exit carbon-intensive assets.
• The author challenges the notion that only emerging market central banks are 'interventionist,' providing evidence that major OECD central banks use similar sectoral preferences for SMEs and housing.
• Specific 'interventionist' measures to green the financial system could include preferential risk weights, lower capital requirements, and mandatory lending quotas for green investments.

APA

KAPOOR, S. (n.d.). INTERNALIZING CLIMATE MITIGATION FOR FINANCIAL POLICY-MAKERS. International Institute for Sustainable Development. https://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-chapter-8.pdf

Chicago

KAPOOR, SONY. INTERNALIZING CLIMATE MITIGATION FOR FINANCIAL POLICY-MAKERS. International Institute for Sustainable Development, n.d. https://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-chapter-8.pdf.

Wikipedia

{{cite report |last1=KAPOOR |first1=SONY |title=INTERNALIZING CLIMATE MITIGATION FOR FINANCIAL POLICY-MAKERS |publisher=International Institute for Sustainable Development |url=https://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-chapter-8.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{kapoorndinternalizing, author = {KAPOOR, SONY}, title = {{INTERNALIZING CLIMATE MITIGATION FOR FINANCIAL POLICY-MAKERS}}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-chapter-8.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }