Only a rapid transition to a low carbon economy will prevent dangerous climate change and its catastrophic consequences. Achieving such a transition will require vast amounts of finance (some US$7.7 trillion per year) for climate action: finance which only the private sector has the ability to provide. But scaling up climate finance — for low-carbon infrastructure, renewable energy, energy efficiency and other mitigation measures — would involve transforming a finance sector that has only recently begun its journey towards sustainability.

What might precipitate a shift in risk perceptions such that institutional investors become willing to invest in low carbon projects to scale? How might a wide range of financial institutions be incentivised to address climate risks across the financial system as a matter of enlightened self-interest? Front and centre in catalyzing a low carbon financial revolution will be regulation and governance.

The Climate Finance Initiative, located within the world-renowned School of Regulation and Global Governance (RegNet) in the Australian National University’s College of Asia and the Pacific, aims to play a leading role in research, policy engagement and capacity building on its two core streams of research: climate finance regulation and climate finance governance within the region.

How reconfigured regulation could facilitate the transition

Climate finance regulation: As the global financial crisis made clear, financial markets require regulation because left underregulated, they can cause profound economic and social harm. In the case of climate finance, reconfigured regulation could play crucial roles in: promoting financial stability during a low carbon transition; protecting investors from market failure; informing the market and reducing systemic climate related risk; incentivising financial institutions to factor climate risks in their decision making; and directing capital flows to meet climate objectives.

Not governments alone, but other non-state ‘governors’

Climate finance governance (social steering): Governments are not necessarily the key actors in managing events and markets —non-state actors, amongst others, may be equally important ‘governors’. Not only do governments sometimes lack the political will or capacity to achieve ambitious climate mitigation goals but the amount of money that will be required far exceeds that which governments alone might credibly provide. Institutional investors have capacities that governments lack and can play pivotal roles in climate governance through their ability to provide capital to finance the transition to a low-carbon economy and by various other means. Now is a particularly important time to harness those capacities and shape the roles that institutional investors might play in climate change mitigation.

However, currently, many financial market regulators, particularly in Asia and the Pacific, have only recently begun to think about these issues, or to ask what sort of compliance and enforcement mechanisms are likely to be most effective, efficient and equitable in delivering on their intended policy goals. Empirical and theoretical studies of climate finance are also nascent. Equally, there has been little attention given to the role that other ‘governors’, might play in fast tracking a climate finance revolution, not least those of a range of third parties such bond rating agencies, financial NGOs, independent auditors, who might, for example, act surrogate regulators.