The Green Investment State: Public Finance Leads as First Mover in Greening the Financial Sector

Facilitating a shift towards a low-carbon, sustainable economy demands vast amounts of funding towards investments and credit that closes the green funding gap. Green bonds are a way for private and public actors to finance environmentally-friendly projects and serve as a “good” financial innovation able to crowd-in mainstream finance. Although green bonds accounted for less than 1 percent of the global bond market in 2018, green bonds have been identified as the key financial instrument able of financing green investments in the transition to a low-carbon world.

But what is the added value of the state as a green investor vis-à-vis private actors?

In a new working paper, Mathilde Amalie Olstad, Maja Grahn and Cornel Ban find conclusive evidence of the active role of the public sector in greening financial markets through green bond issuances.

Although European issuers looms large, the authors find a clear dominance by Chinese issuers – both private and public – in the green bonds market. Furthermore, public banks did not just ‘talk the talk.’ They also actively addressed the gap in the financial markets for green assets, as showed by the greater strategic incorporation of climate risk in operations by public banks. In other words, the paper found a positive relationship between the banks’ acknowledgement of climate risk in their corporate discourse and their allocation of green bonds in the total loan portfolio.

The findings challenge the widespread reliance in public policy circles on strictly market-led solutions to the challenges of the ongoing climate crisis. Through public financial institutions, such as public development banks and other entities, states act as key green entrepreneurs in an immature green economy.

The state is an under-appreciated actor in closing the green funding gap via green bond issuance. By drawing on an original dataset processed using content and regression analysis, the authors find national and international public issuers both take climate risk seriously in their communication and, critically, ‘put their money where their mouth is,’ by allocating funds towards green initiatives. Indeed, public development banks act as enablers and frontrunners of green finance and are actively seeking synergies with the private financial sector to address the funding gap. Their findings confirm the robustness of the argument that a ‘green entrepreneurial state’ is a reliable first mover not just in innovation and production, but also in the generation’s challenge to prevent a climate catastrophe.