SUSTAINABLE FOR

.
1 5°C

FINANCE POLICIES

1.5°C

FINANCE POLICIESSUSTAINABLE FORSummary
This guide provides a toolkit of 101 policy levers available
to government, regulator, and central bank policy makers tofacilitate the transition to net zero.
The climate transition challenge is encapsulated by 1.5°C. Behind thenumber is a wealth of clear scientific evidence that shows it is a goal wecannot miss.
To reach 1.5°C society must undergo a transition. The transition willoffer technological, industrial, and economic opportunities, but themost important opportunity will be political. The climate challenge offersa political opportunity to steer the real and financial economy
towards a green future.
The green transition will bring economic development, energy sovereignty,
and job creation.
Investors have been supporting the transition since 2007, and appetite is
growing as illustrated by the rapid expansion of the green bond market,
see Figure 1. By greening development plans and investments, global
policymakers can harness this momentum and leverage private capital
flows to fund infrastructure and development.

Figure 1: annual GSS+ bond issuance
1200
1000
800

There is a wealth of policies that can be implemented to direct capital
to meet sustainable development needs and deliver climate mitigation
and resilience, represented by three pillars:
SPEED: ensure rapid action by all decision makers,
STEER: tilt the whole economy to transition,
SIMPLIFY: clarify and streamline sustainable investment.

Speed: ensure rapid action.
A rapid and smooth transition enables climate
mitigation and resilience activities to occur alongside
and within economic development. It will alsoenable growth as a rapid and smooth transition will
increase stability, secure voter buy-in and encourage
investment.

Policy 1. Align development strategies with climate targets andcapture sustainable finance flows to fund economic development.
The starting point for these policies is robust national and sectoral emissions
budgets, aligned with the 1.5°C global carbon budget. This provides
certainty on the speed and depth of transition, encouraging decisionmakers
to secure first-mover advantages in the new net-zero economy.

Policy 3. A coordinated sustainable finance roadmap ensures
Green

SocialSLB

Transitionalignment between all government departments, the central bank, andregulators. This also provides investor certainty on policy introduction.

Sustainability

Policy 78. Global collaboration and coordinated action is key toenabling speed of action and facilitating cross-border investment flows.

600

Steer: tilt economy todeliver transition.

USD Billions

400
200
0
<2015 2016

2017

2018

2019

2020

2021

2022

Source: Climate Bonds Initiative

Without rapid climate action, countries will experience a risingcost of capital and stunted growth.
A slow transition will be more expensive than a rapid one. According
to the latest research, rapid transition will be economically beneficial due
to lower costs of renewable energy technologies compared to fossil fuels
without even accounting for avoided costs of climate damages or otherclimate policy co-benefits.1
Physical climate risk exposure has increased the cost of capital in vulnerable
countries, costing the Vulnerable 20 (V20) nations USD62bn in higher
external interest payments over 10 years.2 Transition risks are materialising
for the 20 sovereigns with the highest ratio of net fossil fuel exports to GDP.
These suffered a median net credit rating downgrade of 1.6 notches 20152020 and two defaulted.3

Policymakers can ensure a smooth, rapid transition andsafeguard development priorities.
Despite the narrowing window to meet 1.5°C, maintaining ambition is
crucial to limiting climate change as much as possible. Investment can bechannelled to transition with many different instruments in all areas ofdecision making. Awareness of this variety can increase policy ambition.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Investment decisions are driven by risk-returnevaluation. By proper integration of climaterelated risks and opportunities, traditional
investment models can be turned to deliver
climate goals and stable and resilient returns.
Policies which tilt investment away from high-risk carbon-intensive andtowards green and sustainable investments can insulate economies fromclimate-related risks and open up green development opportunities.
Redistribution of capital requires a shift in perspective. Recognitionof the risks of high-carbon investment will enable its rapid decline andredeployment to sustainable investments. Fossil fuel expansion mustcease immediately, as highlighted by the IEA Net Zero Roadmap, and many
existing plants must undergo early retirement if we are to meet 1.5°C.4

Incorporate transition risk andopportunity into investment
decisions.
Exposing climate risk will bring clarity to thegreen investment opportunities. These policies
can also help insulate government and central bankportfolios from climate-related risks.

Policy 94. Require investors and corporates to publish transition
plans, as required in UK sustainability disclosures.5 This step can prompt
immediate action. The government can then introduce risk tools for longterm assessment of transition plans and their impact on exposure. Basingthese on robust standards such as the Climate Bonds transition and entity
criteria will ensure credibility and speed of transition.62

Policy 6. Stop subsidising fossil fuels and damaging ecosystem

practices which distort perceptions of climate-related risk. This also frees
up a significant level of government spending, which can be reoriented
towards transition. Targeted support can prevent adverse impacts on
low-income groups.

Policy 81. Central banks recognise climate risk as a risk tofinancial stability and address it across prudential and monetary
policy. Many policies can be adapted to incorporate climate risk
considerations without waiting for disclosure and stress testing evidence.

Policy 88. Central banks adjust risk weightings for capital andreserve requirements and collateral frameworks to incorporate climate
risks.7 This will help insulate the balance sheet from climate-related risk andencourage financial institutions to green their capital allocation.

Policy 8. Carbon pricing reform, removing free allowances andlimiting purchase of carbon credits, will ensure that pricing can forcechange. High and stable carbon prices will ensure investor confidence inthe price signal. Overreliance on carbon pricing could hinder transition if itdelays implementation of other mitigation policies.8 Particularly in emerging
markets (EM), non-price instruments may better overcome political
economy restraints and avoid regressive impacts on consumers.9

policy risk hedging can protect from negative market fluctuations and canfurther increase financing flows, especially important in EM where access tolong-term capital is limited.

Policy 45. Targeted subsidies are crucial to enable costcompetitivity of specific green technologies and to enable industrial
transition. Accelerated depreciation can reduce upfront cost of green
infrastructure investments.

Policy 22. Establish preferential green trade windows, with low

tariffs for low-carbon trade. This can compensate for CBAM limitations andfacilitate the flow of capital to EM, crucial to the success of the global transition.

Simplify: streamline
sustainable investment.
To ensure capital moves to green at scale,policymakers can simplify decision-making andstreamline investment processes.

Policy 97. Establish science-based green

whereby imports are subject to local carbon pricing are important to avoid
relocation of high-carbon activities to countries without pricing schemes.10

standards or taxonomies to provide clarity on what a sustainable
investment is and identify green investment opportunities. Includingtransition standards provides guidance on how to decarbonise high-carbon
activities and enables financing of these activities’ transition. Aligning withinternational taxonomies and standards will also enable international
private finance flows.11

Policy 37. Establish energy transition mechanisms to fund early

Policy 33. Minimise potential bottlenecks to investment by

Policy 21. Adopt carbon border adjustment mechanisms (CBAM),

retirement of fossil fuel assets and their replacement with renewables
installations. Energy transition mechanisms can address the financial risks ofcontinued fossil fuel assets operation and create just transition opportunities.

Derisk green opportunities toensure speed of growth.
While investment will eventually flow togreen, risk sharing and diversification will
speed this up, maximising investment opportunities
and ensuring climate targets are met. Derisking
also ensures investment flows meet sustainable
development needs.
Global capital flows are large, but risk appetite is low. Policymakers canmobilise private finance to support higher-risk projects, whether nascenttechnologies or in EM.

Policy 10. Encourage the use of green and sustainable financial

instruments through subsidies and incentives which reduce the cost ofgreen capital and ensure attractive returns.

fast-tracking permits for green projects, such as renewable energy
deployment, and developing regular and replicable auctions.

Policy 101. Green bond segments and fast tracking makes

investing in and issuing sustainable instruments easier. This can help
overcome inertia.

Policy 59. Carbon credit trade threatens the transition if used

to offset avoidable emissions. Market reform can identify qualified offset
purchasers and ensure credits are only reserved for residual emissions.
Reform can also focus on preserving high-carbon stocks. This will facilitate
growth of legitimate carbon credits to fund crucial conservation.

Policy 14. Kickstart change with a sovereign

green bond programme. Sovereign green, social, sustainability, andsustainability-linked bond (GSS+) issuance provides a clear demonstration tomarket of the pricing and visibility benefits of green bonds, acting as a guidefor potential issuers. It draws international investors into the local market.
It also enables funding of key government expenditures and encourages
government departments to grow their pipeline of eligible expenditures.

Policy 18. Project guarantees and credit enhancement provide

investors with greater certainty of returns, thereby enabling private
investment into projects that would otherwise be viewed as too risky. Asmuch of the capital available for transition is highly risk averse, guarantees
are crucial to channel investment to higher-risk projects.

Policy 11. Green bond guarantees can encourage green bondissuance over vanilla and attract international investment.

Policy 13. DM to EM sovereign-to-sovereign guarantees canderisk local currency sovereign issuance and decrease the cost ofcapital for EM sovereigns.

Policy 19. Increase blended finance provision. Public investment

can facilitate the flow of capital to riskier projects by absorbing the higherrisk (junior capital) portion and offering the lower-risk (senior capital)
portion to private investors in blended finance deals. This leverages
concessional financing to reduce a project’s credit risk, allowing for greater
mobilisation of private capital. Including other de-risking facilities such as

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative3

101 policy ideas fora sustainable financepolicy package
Department/
policymaker

Speed: ensure rapid
actionHead ofgovernment
Fiscal policy

1. Development plansincorporating climate
3. Sustainable financeroadmap
4. Sustainable central
bank mandate/remit

Development
finance policy

15. Climate bank

Trade policy
Infrastructure
policyEnergy policy
Buildings andurban policy
Industrial
policy35. Climate-sensitive
urban development
strategies
43. Sectoral emissions
targets

5. Green public investment
management
6. Fossil fuel subsidy phaseout
7. Environmental tax reform
8. Carbon pricing
9. Green sovereign wealth fund16. 1.5˚C-aligned finance mandate
21. Carbon border adjustment
mechanism
24. Climate risk integration in
infrastructure management
28. RE auction requirements
29. Fossil fuel plant decommissioning
30. Energy transition mechanisms
36. Renewable energy requirements
37. Green mortgage schemes
38. Land value capture

50. ICE phaseout strategy

Environmental
policy54. Conservation value in mitigation andadaptation plans
55. NBS investment strategy
56. Nature-related risk and opportunity
disclosure
61. Subsidy reform
62. Green preferential tax policy

Social policy

Health policy

60. Rural development
strategies integratingclimate & biodiversity
64. Climate risk
communication
65. Climate and social
priority alignment
69. Climate change
health impact assessment

Defence policy
Justice
International
relationsMonetary
policy76. Environmental law
enforcement
78. International
collaboration

Prudential
regulation
Supervisors
and regulators

91. Climate
consideration
requirements
92. Regulatory KPIs

FINANCE POLICIESSteer: tilt economy to deliver transition
Incorporate transition risk andDerisk green opportunities
opportunity
2. Climate target laws

Transport
policyAgricultural
policySUSTAINABLE FOR

66. Gender inclusion in climate finance

70. Climate action plans including
health benefits
72. Climate risks in defence strategies
73. Resilience to volatility
74. Conflict prevention
77. Climate litigation risk mitigation

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Simplify: streamline
sustainable investment

10. Tax incentives
11. Green guarantees
12. Green finance subsidies
13. Sovereign-to-sovereign guarantees

14. GSS+ sovereignissuance

17. Grant finance
18. Guarantees & credit enhancement
19. Blended finance
22. Green trade window
23. Green export finance
25. Priority infrastructure strategy
26. Hydrogen clusters
31. Targeted feed-in tariffs
32. Carbon contracts for difference

20. Green finance facilities

39. Incentive schemes
40. Green municipal bond issuance
44. Targeted R&D
45. Sectoral subsidies and guarantees
46. Green PE and VC support
47. Green public procurement
48. CCS strategy
51. EV incentives
52. Green public transport procurement
53. SAF mandates
57. Payments for ecosystem services

27. Green PPP framework
33. Streamlined RE permits
34. Distributed RE
standards
41. Buildings standards
42. Green planningpermission fast tracks
49. Transition standards
and roadmaps

58. Nature-based metrics
for financial instruments
59. Carbon credit market
reform

63. Loans and grants for resilience
67. Green development hubs
68. Net zero jobs strategy
71. GSS+ issuance funding
health
75. Defence spending decarbonisation

79. Climate diplomacy
81. Green asset purchases
82. Green foreign exchange reserves
83. Collateral framework adjustment
84. Climate-tilted credit operations
86. Stress testing
87. Climate disclosure requirements
88. Capital & reserve requirements
89. Carbon capital buffer
93. Climate disclosure requirements
94. Transition plan assessment
95. Stock exchange listing requirements
96. Rating agency climate assessment
disclosure requirements

1.5°C

80. Capacity building
85. Green credit guidance

90. Sustainable financeresearch & analysis

97. Standards
98. GSS+ bond guidelines
99. Green regulatory
sandboxes
100. Green securitisation
framework
101. Stock exchange green
bond segment

4Table of contents

List of Acronyms

Summary 2

ASEANContext: the need for
rapid climate action 6

CB
CBAM

Central government policymakers 8
Head of government 8
Fiscal policy 8
Development finance policy 13
Trade policy 14
Infrastructure policy 15
Energy policy 16
Buildings and urban policy 19
Industrial policy 20
Transport policy 22
Environmental policy 22
Agricultural policy 24
Social policy 25
Health policy 26
Defence and security 26
Justice 27
International relations 27
Central banks and regulators 29
Monetary policy 29
Prudential regulation 30
Supervisors and regulators 32
The way forward 35
Endnotes 36

CCfD
CCS
CO2
DFI
DM
DRE
ECB
EM
ESG
ETS
FI
FiT
GDP
GHG
GSS+
IEA
IPCC
IPSF
KPI
MDB
MoF

Association of South-East
Asian Nations
Central bank
Carbon border adjustment
mechanism
Carbon contract for difference
Carbon capture and storage
Carbon dioxide
Development finance institution
Developed Market
Distributed renewable energy
European Central Bank
Emerging Market
Environmental, Socialand Governance
Emissions trading scheme
Financial institution
Feed-in-tariff
Gross domestic productGreenhouse gas
Green, social, sustainability
and sustainability-linked
International Energy Agency
Intergovernmental Panel on
Climate ChangeInternational Platform on
Sustainable Finance
Key Performance Indicator
Multilateral development bankMinistry of Finance

NBS
NDB
NDCs
NGFS

Nature-based solutions
National development bank
Nationally Determined Contributions
Network for Greening the
Financial System
OECD
Organisation for Economic
Co-operation and Development
PBOC
People’s Bank of ChinaPE
Private Equity
PES
Payments for ecosystem services
PPP
Public-private partnership
R&D
Research and development
RE
Renewable Energy
SLB
Sustainability-linked bond
TCFD
Taskforce on Climate-related
Financial Disclosures
TNFD
Taskforce on Climate-related
Financial Disclosures
UNFCCC United Nations Framework
Convention on Climate Change
UoP
Use of proceeds
V20
The Vulnerable Twenty Group
VC
Venture capital
VCM
Voluntary carbon market

The world of sustainable finance
SUSTAINABLE FINANCE
Contributes to climate mitigation and adaptation, wider environmental protection (e.g.,
biodiversity, water quality), and/or social development.
GREEN FINANCE
Supports activities which contributeto climate and other environmental
objectives.
CLIMATE FINANCE
Supports climate mitigation
and/or adaptation.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

TRANSITION FINANCE
Supports an entity or activity’stransition to net-zero alignmentand climate resilience.
SOCIAL FINANCE
Supports social
development and equality.

5

Context: the need for rapid climate action
The impacts of climate change andenvironmental degradation on our economies
are hugely complex. They are widespread,heterogeneous and will result in dangerous
feedback loops and amplifiers.

Figure 2: Transmission pathways of climate-related risks
Sources of variability
Geographic heterogeneity

The Intergovernmental Panel on Climate
Change (IPCC) asserts that human-induced
climate change is already resulting in severe
physical hazards. Limiting warming to 1.5°C
is necessary to avoid catastrophic human,
ecosystem, and financial impacts. Whilst the
1.5°C goal is still within reach, the window tomeet it is shrinking.12

Delayed and uncoordinated action posessignificant risks to growth.
All policy decisions now need to be taken in
the context of rapid climate change, and rapid

Acute

Microeconomic

Credit risk
• Defaults• Collateral
depreciation

Climate risk drivers impact
households, businesses and stateowned entities• Property damage and businessdisruption• Asset stranding• Changing demand and costs• Loss of income

Technology
development

Market risk
• Repricing of assets
Underwriting risk
• Insurance losses• Increasing
insurance gap

Macroeconomic

Sentimentchange• Investor• Consumer

National• Sector stagnation• Price shifts, Productivity changes• Government tax base & borrowing
requirement

Operational risk
• Supply chain
disruption• Facility closure
Liquidity risk
• Increased demand
for liquidity• Refinancing risk

International• Exchange rates• Sovereign credit rating
Climate and economy
feedbacks

Economy and financial
system feedbacks

Figure 3: Annual CO2 emissions and global temperature change
under NGFS orderly and disorderly transition scenarios
1.8

45000

1.6

35000
Global Temperature
Change, Delayed transition

1.4

25000

Global Temperature
Change, Net Zero 2050

1.2
1.0

15000

CO2 Emissions, Delayed Transition

5000

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

00

95

21

90

20

85

20

80

20

75

20

70

20

65

20

60

20

55

transition – while physical climate risks are
emerging even faster than expected, so too are
climate policies and their ramifications. In allareas of responsibility, policymakers need to
expect volatility.

20

50

20

45

20

40

20

35

20

30

20

25

20

20

20

20

20

20

-15000

15

0.6

10

-5000

05

0.8

Mt CO2/yr

CO2 Emissions, Net Zero 2050

20

Current climate policies and government
commitments are inadequate. Policies
implemented up to the end of 2020 result in
global warming of 3.2°C by 2100.17 At thesetemperatures, climate extremes and sea level
rise will threaten human health and economic
functioning. In addition, without biodiversity
and ecosystem protection, marine and terrestrial
carbon sinks are at risk, with potential for greaterlevels of atmospheric carbon dioxide (CO2) andwarming. Physical and economic feedback loops,
such as destabilisation of the ice sheets causing
catastrophic melting or lending restrictions
reducing adaptive capacity, could further
increase severity of impacts.18

Financialrisks

Policy change

Temperature Change °C

Transition risks will have an impact asinternational lenders look to reduce their fossil
fuel exposure. Climate change stranded-asset
risk is material for sovereign creditworthinessand ratings. Major fossil fuel exporting
sovereigns suffered a median net downgrade of
1.6 notches in 2015-2020 and two defaulted.15
The Australian Treasury attributes its net-zerodecision partly to concerns about potential
penalties for its cost of capital, arguing thatwithout such a plan and consequential accessto capital markets now focusing on green, itsborrowing costs could increase by 100 to 300
basis points.16

Economic transmission
channels

Transitionrisk

In addition to economic losses from climate
hazards, countries may see rising costs ofborrowing, limiting growth. Physical risk
exposure has already increased cost of capitalin vulnerable countries – by 117bp in the V20,
costing USD62bn in higher external interest
payments over 10 years.14

Mitigants

Physicalrisk
Chronic

Climate-related risks are transmitted through themicro and macroeconomy to pose a financial
risk, see Figure 2. Unmitigated climate change
could cost the global economy USD178tn overthe next 50 years.13

Amplifiers

Delayed action, i.e., after 2030, will require much
more severe policies to limit carbon emissions,sudden technology shifts and likely see thecarbon budget exceeded before emissions fall.
This disorderly transition increases both physicaland transition risks, see Figure 3.19
6

Rapid transition is essential to minimising
this volatility. An orderly transition sees early
introduction of climate policies, with a gradualramp up in stringency. By immediately reducing
carbon emissions, physical climate hazards arelessened, as are transition risks.

Current investment allocation
models underestimate climate
risks and opportunities.
All countries will need to leverage a significant
level of private investment to close the netzero investment gap; estimates suggest thatclimate finance needs to increase sixfold to overUSD4tn by 2030, see Figure 4.20
There is sufficient global capital and liquidity
to close these investment gaps; the global
bond market alone is approximately USD130tn
outstanding.21 However, market failures in therisk-opportunity assessments that underly
investment allocation mean that these currently
result in investment flows being dominated byfossil fuels and other carbon-intensive sectors.
Backwards looking or short-term assessments
overvalue fossil fuel investments, due to theirstrong historical performance.
Demand for green investments is high but
investor risk appetite is also too low for manyof the key sustainable investments thatare essential to transition, such as those ininnovative technologies or emerging markets.
Without policy intervention to reduce risk,
global financial markets will not deliver deep
decarbonisation and certain regions may be left
behind in transition.

Complex sustainable
investment processes
could hinder transition.
Lack of clarity over what are credible green
and sustainable investments can disincentivise
investors due to greenwashing fears or lackof capacity to assess investment credibility.
Additional regulations and due diligence forsustainable investment and overcomplexity ofclimate and sustainable finance policies could
also present a barrier to action.

Figure 4: The net zero investment gap
6000
Actual

5000

Required

4000
3000
2000
USD Billions

At the national level, delayed action could
erode growth opportunities and increase costs
for a country. This is because other countries’
action on climate change will attract greater
investment, reshape supply chains, and reducefossil fuel demand.

Actualclimate finance

1000

Future climate finance necessary
to maintain 1.5°C pathway

0
2010

2020

simplicity be prioritised in all policies, but
policymakers will also need to facilitate
investment by providing guidance and bycreating scalable financial structures.

An economy-wide sustainablefinance package can help
meet 1.5°C.
This report outlines how a sustainable finance policy
package, implemented across the government andregulators, can address these issues.
1. Avoiding delayed transition risks: policies toensure rapid action by all decision makers.
2. Addressing climate risk and opportunity
underestimation: policy to steer the economy
to transition, by incorporating climate risks
and opportunities and derisking green
opportunities.
3. Reducing complexity: policy to simplify
sustainable investment processes.
Sustainable finance policy recommendations
are made for government policy makers, bydepartment, central banks, and regulators. Withineach section, they are organised by the above
highlighted ambitions to speed, steer, andsimplify investment.
The table on page 4 provides an overview ofthe policy recommendations, following thesame structure.

Sustainable investment can require more workthan high-carbon due to additional regulations
and due diligence. This discourages those
without a specific green investment mandate. If
sustainable investments are substantially more
complicated than high-carbon investments,
capital will not move at scale. Not only must

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

2030

2040

2050

A scientific foundation forclimate finance policies.
Before implementing a policy framework to green
investment flows and align their economies
with a 1.5°C future, policymakers need toknow what they are aiming for. This requires
science-based emissions reduction targets; a
net-zero target, and interim goals that reflect thenational carbon budget. Short-term emissions
reduction targets are crucial to ensure the rapid
decarbonisation that must occur this decade tolimit warming to 1.5°C.22
According to the IPCC, emissions associatedwith the full implementation of Nationally
Determined Contributions (NDCs) as announced
before COP26 will likely warm the planet morethan 1.5°C. In addition, current implemented
policies will likely result in still higher emissions– suggesting an implementation gap. Therefore,
governments need to both increase the ambition
of NDCs and implement more stringent
policies to meet them.
Climate policies lag behind the scientificunderstanding of what is required to avoid
catastrophic climate change. Policymakers andscientists need to find modes of collaboration toensure science informs the policy-making process.
Climate finance can help governments increase
the ambition of their NDCs. The policies
outlined below will enable policymakers toreorient existing investment flows to align witha 1.5°C future and to harness private finance tomeet decarbonisation needs.
Accompanying emissions targets with sectoral
emissions budgets, in line with the IPCC
carbon budget for 1.5°C, will drive corporate andinvestor decarbonisation pathways and transition
planning. These sector budgets can then inform
sectoral policies.

7Central government policymakers
Head of government
The transition to net zero will
involve a significant transformationof all elements of the global
economy. Securing public support
for the transition is crucial toenabling the smooth implementation of thepolicies set out below. It requires awarenessof both the threats of climate change and theopportunities offered by the transition, creating
an understanding of how socioeconomic
development requires climate action. The
political levers to do this will vary between
countries. For example, some EM may emphasise
development benefits and wealth creation oftransition, whereas other countries may highlightthe impact of climate change on human health.23

POLICY 1.
Development plansincorporating climate
Climate adaptation andmitigation are closely linked with
development pathways. Incorporatingclimate goals into national development
plans will embed climate action acrossall sectors. In particular, this can ensure
adaptation and resilience are embedded indevelopment. For example, Nepal’s national
development plan for 2019/20-2023/24, reflects
its climate change goals closely. Key elementsof its NDC, such as accelerating renewableenergy investments, scaling up electric vehicles
and associated infrastructure, development ofelectric rail network, and forest conservation, arewell integrated in the Plan. Climate adaptationconsiderations are also explicitly addressed in
relevant sectors.24
Developing specific climate adaptation plans canalso help address the investment gap seen foradaptation and resilience. The UNFCCC Cancun
Adaptation Framework established a process thatenables Parties to formulate and implement national
adaptation plans. This enables the identificationof medium- and long-term adaptation needs anddevelopment of strategies to address these.25
Government leadership and policy units canwork to coordinate action across government,
not just to provide direction but also to ensure
coherency of policymaking.26 They can promote
intra- and interdepartmental policy coherence andcoordination, and interagency policy coordination.
Several governments have created “superministries” to better formalise internal coordinationand overcome tensions between departments.
This can also streamline policymaking, reconcilingthose with the same objectives to ensure there are
not multiple policies working to enable the same
capital flows. For example, Denmark is undertaking
a net zero review in every government ministry.

This position of oversight means government
leaders hold responsibility for ensuring sufficientambition in policies and NDCs, following thescience, as outlined above. They should also
ensure commitments are followed through andnot watered down or delayed.

POLICY 2.
Climate target laws
Policy certainty is crucial toderisking green investments.
Putting climate targets into law provides
confidence in the stickiness of these and otherclimate commitments, reducing the likelihoodthat such targets may be reversed with a change
in administration. In addition, phaseout plans
for temporary policies such as subsidies to bringgreen technology costs in line with high-carbon
technology costs must be clearly communicated.
The UK independent net-zero review highlighted
the common need for ‘clarity, certainty,
consistency, and continuity from government,’
and a stable long-term investment plan.27

Fiscal policy
Fiscal policies are key todecarbonisation as they influence
all areas of the economy. Allocationof government expenditure,
implementation of taxation, andstructuring of government borrowing can tilt theeconomy towards green and sustainable growth.
The Ministry of Finance (MoF) decides fiscal policy,
provides financial oversight, and determines
financial strategy. Embedding climate change in
the MoF mandate and enacting key legislationsuch as climate laws are key to mainstreaming
climate action in all functions of the MoF.28
The Coalition of Finance Ministers for Climate
Change emphasises the importance of long-term
strategies to mainstream climate into economic
and financial policy.29 Sovereign issuance can alsoenable ministry coordination, due to the need tocollaborate on green expenditure identification.

POLICY 3.
Sustainable financeroadmap
The strategic role of the MoF
is key to coordinating whole government
action on climate change. This is important toprevent inefficiencies and ensure sufficient speedof action. While cross-government alignment willstem from top-level decisionmakers, the MoF
can ensure day-to-day coordination, for example
through oversight of ministerial and sub-national
government budgets.
The MoF, with the support of the central bankand regulators, can create a sustainable finance

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiativeroadmap, providing direction to ministries,
regulators, and other related entities. In certain
contexts, the regulator may be better positioned
to lead on roadmap development than the MoF.
Such a roadmap can provide clear market signals
on the introduction of policies, providing investor
certainty and long-term clarity.
Roadmaps can be highly complex. For example,
the UK’s Green Finance Strategy aims to
not only green the financial system but also
increase financing flows to green technologies,
incorporating the UK Industrial Strategy
and international commitments.30 However,they can also have a narrower focus, such as
Brazil’s Roadmap for implementation of TCFD
recommendations.31 NGOs and consultancy
firms are often enlisted to develop roadmaps. EM
governments’ sustainable finance roadmaps areoften developed with multilateral developmentbank (MDB) or foreign government support, suchas the Philippines Roadmap.32
Roadmaps can also help all stakeholders to
see the bigger picture and galvanise action,
overcoming inertia and short-termism thatcan stifle action on climate change. A roadmap
can ensure coordination – see for example, the EU
Action Plan on Financing Sustainable Growth (now
Renewed Sustainable Finance Strategy); which
aimed to coordinate the introduction of the Green
Taxonomy and corporate and financial disclosure
regulations.33 The Green Finance Platformand UNDP Financial Center for Sustainability’s
Sustainable Finance Diagnostic Toolkit could be
used to kickstart roadmap development.34
Aligning and embedding sustainable financeroadmaps in long term investment anddevelopment strategies will further ensure
coordination, enable the government to leverage
private capital to deliver development and embedsustainability in wider development plans.

POLICY 4.
Sustainable central bankmandate/remit
The MoF also tends to set the mandate andremit of the central bank. Most central bankmandates are to maintain price or financial stability,
and this can be seen as limiting their ability toaddress climate risks. The MoF can clarify the
mandate, to make clear that climate-related risks
are in a central bank’s remit and impact financial
stability. In 2021, the UK Treasury clarified the
Bank of England’s role in supporting the transition
to a net-zero economy.35 In response, the Bank
committed to greening its Corporate Bond
Purchase Facility, reducing carbon intensity by
25% by 2025 and aligning it with net zero by
2050, stating that the remit change enabled thismonetary policy update.36

8

The MoF could also set a secondary mandate,of sustainable development or other suchclimate-aligned objective. Such secondary
mandates are common among EM central banks.
There is precedent for mandate change in theface of huge financial risk. Before the GFC, very
few G20 central banks had a financial stability
mandate. Most had a singular, price stability
mandate. By 2020, most had a double or multiple
mandate, with a significant uptake of financial
stability objectives.37

POLICY 5. Green
public investment
management
By aligning all elements of thebudget with the decarbonisation pathway,
expenditure can be insulated from climaterelated risks, targeted to overcome challengesof transition, and ensure efficient integration ofenvironmental and development priorities.
Increasing levels of green public investment will beneeded to deliver climate mitigation and adaptation
goals. Green public investment management ensuresinvestment is best targeted to climate change
needs. This requires five key elements:• Climate-focused national planning: aligningsectoral plans and associated portfolios withclimate objectives.
• Public sector coordination: across all public
sector institutions and any joint ventures withprivate actors.

• Ensuring climate adaptation andmitigation assessments are included inproject appraisal and selection.
• Budgeting for and reporting on green
investment in the annual budget: tagging
climate expenditures, etc.
• Incorporating climate risks in natural
disaster risk management strategies and fiscal
risk analysis.38
These are covered by many of the policies
outlined in this report. This approach ensures
climate action is consistent and aligned andcan help governments identify where public
investment is most needed, i.e., where private
finance cannot be leveraged. National green
standards and/or taxonomy (policy 97) can beused to direct green public investment. The
EU Recovery and Resilience Fund Regulation
required that member states’ Recovery and
Resilience Plans do not lead to significant harmto the EU Taxonomy’s environmental objectives.39
Green budget tagging can be used to assessbudget alignment with climate commitments. It
can also be carried out as part of the process ofsovereign green bond issuance, to identify eligible
use of proceeds for the bond. In 2020, France
was the first country to carry out green budget
tagging, as part of the OECD Paris Collaborativeon Green Budgeting. Environmental expenditures
came to EUR52.8bn of EUR574.2bn budget andtax expenditures.40 While tagging can inform
policymakers and monitor action, it does not

Figure 5: Green Public Financial Management – integrating climate
considerations throughout the budget cycle
Fiscal transparency
BUDGET CYCLE
Control and audit• Parliamentary oversight• Climate watchdogs• Ex post green audits

Strategic planningand fiscal framework• Green objectives and targets• Green-responsive macro-fiscal
framework• Long-term fiscal sustainability
analysis

LEGAL FRAME WORK
Budget execution andplanning• Green performance monitoring• Tracking green expenditure• Classifying and tagging green
expenditure

Budget preparations• Green impact assessments
and cost benefit analysis• Green-responive programmes
budgeting• Green spending review

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

drive action. Green budgeting can use the resultsof this assessment to improve the alignmentof expenditure with environmental goals andfor ex-post reviews of climate outcomes ofgovernment expenditure. This is often in the formof environmental impact assessments.
Green public financial management adapts
existing public financial management
practices to support climate-sensitive
policies. This gradually promotes climatesensitive fiscal policies throughout and beyond
the budget cycle, see Figure 5.
By looking to green all elements of financial
policymaking, this can also help ensure fiscal
efficiency, ensuring greatest environmental
returns of policies. It could also highlight fiscal
inefficiencies, such as maintaining fossil fuelsubsidies while implementing carbon pricing.
Effective implementation requires politicalbacking for the reform with the MoF taking on astrong stewardship role.41
These three approaches have strong
complementarity and overlap. Public investment
needs and institutional strengths will determine
which is used.

POLICY 6.
Fossil fuel subsidy phaseout
Phaseout of fossil fuel subsidies
ensures clarity of signals on climate,disincentivises fossil fuel investment,
and frees up budgetary space for otherinvestments. Government support forfossil fuels (budgetary transfers and tax
breaks linked to production and use) rose
above USD1tn in 2022, driven by highfossil fuel prices.42 Impact of phaseout willvary widely depending on each country’s
circumstances. A clear phaseout plan,
including reallocation and transition
support, is important to prevent economic
shocks from the removal of subsidies, andensure buy-in from the population.
Additional support may be required for themost vulnerable, as low-income households
spend a larger proportion of their income on
fuel. Kazakhstan’s sudden halting of liquified
petroleum gas subsidies was met with massprotests, with the government resigning threedays later. In contrast, Singapore eliminatedpetrol subsidies in 2015, at a time of low
fuel prices and reallocated the spending tosocial development. This demonstrates theneed for clear communication of timelinesof phase out and its social benefits andreallocation of spending.43 Given current andlikely sustained elevated fuel prices, phaseout plans require mitigatory measures tominimise adverse social impacts.

9

POLICY 7.
Environmental tax reform
The transition will impact fossil fuelproduction and consumption tax revenues.
In some countries, fossil fuel production tax
revenues account for over 50% of government
revenues. The decline of these revenues could
also be exacerbated by price shocks. Carbon
taxation cannot be relied on to substitute theserevenues, as these tax incomes should tend
towards zero as the transition progresses. Tax
systems will need to be redesigned, and newrevenue sources explored as green technologies
become competitive and mainstreamed.44
Environmental tax reform (ETR) is closely related
to carbon pricing. It involves the introduction ofenvironmental taxes on pollution, energy and/or
resources, and the introduction of expenditurepolicies. This both discourages environmentally
damaging activities and raises revenue forpublic investment. ETR is particularly well
suited to developing countries as it can havea “triple bottom line” effect: cutting pollution,
generating and funding development and raising
economic activity. It can be used to facilitate aJust Transition, mitigating climate impact whilst
raising welfare.45
Governments can receive policy-based loans fromdevelopment banks to support policy reform or
institutional changes. Inter-American Development
Bank provides financing to modernize fiscal
policy as well as sector-specific reform.46

POLICY 8.
Carbon pricing
Carbon pricing, through a carbon tax
or emissions trading scheme (ETS) is
implemented to capture the external cost ofgreenhouse gas (GHG) emissions and charge
this to emitters. This can improve the businesscase for green technologies and incentivise
emissions reductions. The OECD has calculated
that introducing a EUR10/tCO2 carbon pricecould reduce a country’s emissions by 7%.47
By covering all sectors, it will incentivise action
across the economy.
Design of the pricing instrument will impact pricestability and value. A carbon price that is stable
and high enough to prompt action will encourageclean investment. Carbon price volatility will
discourage green investment. Therefore, ahybrid approach to carbon pricing, such as an
ETS with a fixed price floor, emissions cap, andprice ceiling, can increase emissions reduction
certainty and provide predictable prices. For
example, a carbon price floor was introduced in
the UK in 2013, requiring power generators to pay
a minimum carbon price.48
Concerns over carbon leakage, the relocationof carbon-intensive industries to avoid pricing,have been a barrier to carbon price introduction.

While many jurisdictions have provided free
emissions credits to certain industries, thisweakens the price signal. Instead of issuing freeallowances or exempting certain industries frompricing, governments can address carbon leakage
through carbon border adjustment mechanisms(policy 21). Clear roadmaps for phaseout of freeallowances and/or extension of pricing to othersectors will provide certainty and increase the
incentives to invest in green.
An international carbon price floor has also
been proposed by IMF staff, suggesting a floor of
USD25-75/tCO2 by 2030, depending on their levelof economic development.49 This would provide
long-term green investment certainty globallyand help to address carbon leakage concerns.
It is important not to be over-reliant on
carbon pricing to drive transition. Other
policies are required to overcome market failures
and problems of inertia, increase the green asset
pipeline and channel funding to transition thewhole economy. Accompanying carbon pricing
with policies such as fossil fuel phaseout strategies
will also prevent incremental change in responseto the carbon price and provide a clear signal
on the future of the carbon price. Particularly forEM, non-price instruments such as standards,
regulations and subsidies may be more effective
in overcoming market failures and in developing
infrastructure. They can also overcome EM
political economy constraints as costs to citizens
are less visible and less regressive than pricing.50
An exclusive focus on carbon pricing may also
even delay the deployment of other mitigation
policies, increasing the cost of transition.51

POLICY 9.
Green sovereign wealth funds
Tilting government asset holdings, such as
sovereign wealth funds, to green will not
only increase financing of the sustainabletransition, but also improve the resilienceof these funds to climate-related risks.
Sovereign wealth funds are created to facilitate
intergenerational transfer of wealth. The negative
climate impacts on future generations give thesefunds a clear motive to green their portfolios.
Increasing green and sustainable investment
allocation of these funds can also provide an
example to private investors.
Governments are increasingly diversifying therevenues of these funds away from oil and gas
assets. New Zealand’s sovereign wealth fund has
reduced its emissions intensity by 50%, and in
2022 shifted 40% of its holdings to Paris-aligned
indices, committing to a 7% annual CO2e
reduction.52 Norway’s sovereign wealth fund,which owns 1.5% of the world’s listed assets,
introduced an environmental mandate program
investing in green bonds, but has since removed
it, instead committing to reduce the climate risk ofthe entire fund.53 3/4 of the International Forum of

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Sustainable Wealth Funds have only 10% holdings
in climate-related strategies. Introducing net-zerotargets for their sovereign wealth funds is a clear
opportunity for governments to help fund their
net-zero transition.54
Beyond reducing the carbon intensityof sovereign wealth funds, they can beleveraged for strategic long-term investmentin the net-zero transition. Such funds could
be partially dedicated to or fully transformed
into environmental trust funds, dedicated toproviding long-term investment in net zeroaligned projects. These funds could be used tofinance PPPs, discounted loans, tax exemptions,blended finance or other government
expenditures for the transition outlined in thisreport. Sovereign wealth funds therefore canuse historic fossil fuel incomes to facilitate thetransition to net zero. Governments can alsoestablish new funds to encourage action. In
2005, Korea’s MoF established the Korea Fundof Funds. This provides seed funding to local
fund managers to boost SME and venture capital
investments.55 A MoF could set up a similar fundto prioritise sustainable investments.

POLICY 10.
Tax incentives
Tax incentives can be used toincrease green and sustainable
investment. For example, by making the interest
from green bond holdings tax-exempt. This
could follow the model of tax exemption for US
municipal bonds. Tax credit bonds could also beused; bond investors receive tax credits insteadof interest payments, so issuers do not have to
pay interest on their green bond issuances. These
incentives can help tilt investment to green andthe resulting increase in investor interest anddemand will encourage issuers to issue green
bonds. Luxembourg reduces the subscription tax
rate for investment funds according to their levelof EU Taxonomy alignment.
Accelerated depreciation for green infrastructure
can decrease the upfront cost of green
investments by allowing greater tax deductions
in early years of an asset. For example, India
introduced an accelerated depreciation tax
benefit for RE developers 1994-2012 and again
in 2014. To ensure impact of such policies, tax
incentives should be linked to performance. The
India policy rewarded capacity additions, notgeneration increase, which encouraged inefficientinstallations. Policies should also support wider
infrastructure, such as transmission, and include
clear phaseout plans as technologies mature andrequire less risk mitigation.56
Policy risk insurance can be provided to improve
the investibility of projects. Policy supports suchas tax incentives carry a removal risk. As this risk
is posed by the public sector, the public sector iswell placed to insure against it.

10

Guarantees do hold a liability risk and requiresufficient balance sheet liquidity to ensure MoF’s
ability to fulfil the guarantee if called upon. The MoF
will need to minimize the potential large liabilities
of such guarantees, particularly in EM countries.
Robust monitoring mechanisms can ensure thatguarantees and other blending mechanisms do
not exceed balance sheet capacity.57

POLICY 12.
Green finance subsidies
The government can also provide subsidies
to green bond issuers. Interest rate subsidies,or stamp duty exemptions could be applied togreen bond issuance. However, such a policy faces
a risk of subsidy allocation being dominated bylarge corporates which do not require subsidies.
Reserving such polices for where it is most needed,
i.e., SMEs, ensures the efficacy of such spending.

POLICY 14.
GSS+
sovereign issuance
Sovereign bond issuance isan important function of the MoF and canprovide long-dated funding, particularly
well-suited to the infrastructure andother long-term capital investments
needed for transition.
GSS+ sovereign issuance allows governments
to leverage private finance to overcome the net
zero financing gap. In addition, proceeds often
fund expenditures linked to policy measures
such as grants, subsidies, and tax credits whichleverage even more private investment. Greenbonds attract a wider investor base thanstandard issuance (i.e., vanilla). This can also
lead to tighter primary market pricing, also
known as a greenium, offering issuers lower
borrowing costs. By the end of 2022, Climate
Bonds had recorded sovereign GSS+ bonds from43 countries, many of which had issued multiple
times, and under multiple thematic labels.
The Climate Bonds Sovereign GSS Bond Survey
identified catalysing a local GSS+ bond market
as both a motivation for, and an outcome

POLICY 13.
Sovereign-to-sovereign green
guarantees
The high investment risk and low credit
ratings of some sovereign issuance can beaddressed by sovereign-to-sovereign green
guarantees, provided by developed market(DM) governments on EM green sovereignissuance. These could follow the model of MDB
guarantees to sovereign issuance. DM sovereigns
could leverage their own balance sheet andcredit score to de-risk investment in EM sovereign
green bonds. A guarantee from a sovereign
with a strong balance sheet and credit score
would increase investor confidence, and de-risk
the issuance, enabling risk-averse institutional
investors to purchase the EM green bond. This
would optimise balance sheet capacity, as

of issuing. Sovereign green bonds provide
benchmark pricing and liquidity for corporate
issuers, enabling them to estimate demandand pricing for their bonds, and inform size of
issuance. In 2021, the UK issued its debut green
gilt and saw 79% growth in corporate green bondissuance the same year. Another key motivation is
to diversify the investor base, while many issuers

capital would be tied up for a shorter amount oftime than with a standard loan. This would also
decrease the cost of capital for the EM sovereign,
as such bonds would likely receive higher
valuations. Guaranteeing local currency issuance
would also provide resilience to (USD) exchange
rate volatility.
Guarantees can also be accompanied by capacity
building. Guarantors can share their own
experience in developing green bond frameworks
and provide assurance to international investors.
The US government has provided guarantees onsovereign bond issuance. For example, in 2017it provided a 100% guarantee of the repaymentof principal and interest for a USD1bn Iraqi
sovereign bond, as part of a wider international
assistance package.61 Such guarantees havehistorically included conditionality, therefore agreen sovereign guarantee program could bevery similar to this precedent.62
The MoF is well positioned to overcome a major
constraint to sustainable investment, which is alack of investible projects. Identifying/creatinga pipeline of green investments is important forsovereign green bond issuance, but can also bedone strategically for blended finance, MDB or
private investment. The MoF can coordinate withother government departments to establish thispipeline. The MoF is also able to negotiate costefficient financing from MDBs which can kick start
blended financing solutions for the market.

reported reputational and visibility benefits.
Both DM and EM issuers found the benefits tooutweigh the challenges of issuance.63
Sovereign issuance increases transparency, as
it involves green budget tagging and can reveal
gaps in policy, for example, Chile’s issuanceprompted an improvement in building codes.

Figure 6: Total GSS+ sovereign debt issued/year, and % labelled debt
of global sovereign issuance125

1.0
Total GSS+ sovereign debt

100

0.8

% GSS+ of sovereign issuance

75

0.6

50

0.4

25

0.2

0

0
2016

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

2017

2018

2019

2020

2021

Percentage %The MoF can derisk green bond issuanceby providing green sovereign guarantees.
Partial risk guarantees, or “wrappers”, lend thegovernment credit rating to the issuance while
liquidity guarantees allow the extension of debt
tenor. This enables access to institutional investors
and lowers the cost of borrowing, thereby
encouraging private sector green bond issuanceover vanilla issuance. Multi-sovereign guarantees
such as through the Global Climate Partnership
Fund can also achieve higher leverage ratios.

Subsidies can also cover the cost of verificationand external review. While these costs are asmall portion of issuance for large issuers, thesemight be a barrier to smaller issuers. Several
local governments in China have introduced
green bond subsidies, as part of the People’s
Bank of China (PBOC) green finance pilot zones.58
Singapore’s Green and Sustainability-Linked Loan
Grant Scheme covers the cost of assessment
and verification and up to 60% of the cost offramework development.59 HKMA co-funds half of
eligible expenses (up to HKD2.5m) for a first-timeissuer, and 100% (up to HKD800,000) for green
loan borrowers or repeat issuers.60

USD Billions

POLICY 11.
Green sovereign guarantees

2022

11

Social, sustainable, and sustainability-linked
issuance has seen substantial growth in EM,
see Figure 7. Sustainable bonds combine
green and social expenditures, helping totackle the perception that green transition
could hinder economic development. For
example, Thailand’s TBH50bn (USD1.6bn)
sustainability bond funded both theconstruction of an electrified rail line of
the Bangkok metro and social projects,
including the COVID-19 Rehabilitation Package
supporting employment.64 Sustainability
bonds can fund important social infrastructure
but also enable communication of thedevelopmental benefits of green investment
and transition.
Countries without sufficient green
expenditures could issue sustainabilitylinked bonds (SLBs). Rather than funding
specific expenditures, SLBs are linked to aset of KPIs, motivated by a coupon change
contingent on whether those KPIs are met.
The World Bank has issued guidance onsovereign SLB design.65
Chile issued the first-ever sovereign SLB in
March 2022. The USD2bn deal used the KPIs
recommended by the World Bank. They target
emissions reduction of 15.4%, a peak by 2030
and a 60% renewable energy (RE) installedcapacity by 2032. If these KPIs are not met,
coupon step ups of 6.25bp and 12.5bp from2030/2032 will be triggered.66 Chile’s emissions
reduction targets are aligned with its NDC anda below 2°C scenario but require an increasein ambition to align with a 1.5°C pathway.
Establishing meaningful KPIs gives credibility to
the SLB’s ambition.
MDBs and other actors can support sovereignissuance at all stages of the process. Climate
Bonds Initiative supported the developmentof Italy’s and Chile’s green bond frameworks
and eligible expenditure identification.67 TheWorld Bank’s support of the 2018 USD15m
Seychelles blue bond included a partial credit
guarantee of USD5m and a loan to covertransaction costs. It also connected Seychelles
with banks and investors.68
GSS+ bond issuance can fund adaptation andresilience which are mostly publicly funded.
Resilience investments tend not to directly generate
income but result in significant savings due to
avoided damage from climate hazards. 90.6%
of proceeds from Fiji’s 2017 green bond werededicated to adaptation, with climate resiliencecited as the driving cause of the issuance. Use ofproceeds (UoP) included reconstruction of schools
damaged by 2016’s Tropical Cyclone Winston,
agricultural resilience to drought and flood, andadaptation research.69 A sovereign could issue a
resilience bond, a green bond dedicated exclusively
to resilience funding. The EBRD issued the first
resilience bond in 2019, and as of February 2023
a sovereign had yet to do so70 Sovereign issuancecould also fund ecosystem protection which does
not often generate direct income streams but
provides important benefits of enhanced carbon
sinks, natural hazard protection and economic cobenefits. See Environmental policy for more.

Figure 7: Total developed and emerging market sovereign GSS issuanceSocial 0.4bn

Sustainability 2.5bn

Developed
MarketSustainability
37.7bnGreen
236.9bnGreen
26.4bnEmerging
MarketSocial16.3bnResilience investments and green bondUoP can be guided by the Climate Bonds
Climate Resilience Principles, as usedby the EBRD for their 2019 bond.71 These
high-level Principles will soon be followed bya Resilience Taxonomy, providing granular
guidance on what is a credible resilient
investment for green issuance.
The Coalition for Climate Resilient Investment
has developed the Jamaica Systemic Risk
Assessment Tool, enabling analysis of climate
risks and future impacts, to establish future
economic losses. This quantification canhelp make the case for investment in resilient
infrastructure and activities and encourage
private investment in resilience.72
A highly indebted MoF may be unwilling toissue more government debt and further
increase their debt to GDP ratio and associatedrisks. It could instead restructure existing debt
as an SLB, bringing clear accountability andtransparency to a country’s progress towards
the achievement of its NDCs, and possibly
securing more favourable interest rates.
The European Commission’s plans for reformof EU economic frameworks to reduce debt
levels aim to ensure sustainable growth. MS
will need to define medium-term investment
priorities.73 Requiring these to favour green
will help embed climate priorities in long term
economic frameworks.
MoF could also investigate the possibility ofdebt for nature swaps, to reduce their debt
to GDP ratio, while also meeting their climate
goals. A creditor country agrees to write off
a portion of debt on the condition that the
debtor country carries out conservation
activities. This can prevent environmental
damage occurring in debtor countries as they
increase exports of natural resources to pay
off their debt.74 Debt-for-nature swaps can be
multilateral or involve an NGO. For example,
Belize made a USD553m debt for nature swap
in 2021, buying back its debt at a significant
discount in exchange for increasing marine
conservation efforts. This reduced external
debt by 30% of GDP and was financed by ablue bond issued by The Nature Conservancy
and insured by the US International
Development Finance Corporation.75

SLB 3.5bn

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative12

Development
finance policy
National development banks (NDBs)
are state-owned banks that provide
financing to further the country’s
economic development. The MoF
or another relevant department
oversees the NDB. They can help ensure ambition
on climate, by prioritising sustainability and climatetransition in their development strategies.76
Development finance plays an important rolein supporting socioeconomic development
and widening access to finance. Public financial
institution investments total USD2.2tn annually,
offering cheaper financing and wider technicalassistance to governments and the private
sector. They have unique abilities to support thetransition to a 1.5°C world and are increasingly
focusing on enabling sustainable development
and meeting the SDGs.77

POLICY 15.
Climate bankdevelopment
To align development financewith a 1.5°C pathway, policymakers canestablish or transform NDBs into green/climate
banks, integrating climate goals into theirdevelopmental goals. These can help meet the
specific financing requirements of the net-zerotransition and send a signal of national intent toalign all investment with net zero. For example,
the European Investment Bank’s Climate Bank
Roadmap 2021-2025 aligns the bank with the EU’s
climate commitments, establishing it as Europe’s
climate bank. It set out two objectives, to dedicate
50% of its overall lending activity to climate actionand environmental sustainability by 2025 (achievedin 2021), and to ensure “all financing activities arealigned to the goals and principles of the Paris
Agreement by the end of 2020”.78
A roadmap can also be established to alignNDBs with NDCs, to decarbonise lending andscale up sustainable financing while still fundingsocial development.

POLICY 16.
1.5°C-aligned
finance mandate
Policymakers can mandate
NDBs to dedicate an increasing proportionof funding to green and set clear deadlines
for ending financing of fossil fuels and otherdamaging practices. This also prevents shocks
from sudden withdrawal of funding. To aligndevelopment with 1.5°C, development financecan be guided by a national Taxonomy, or the
MDBs and IDFC’s joint Common Principles
for Climate Mitigation Finance Tracking.79 For
example, the EIB’s green activities are defined by
the 1st Delegated Act of the EU Taxonomy.80

POLICY 19.
Blended finance
Blended finance is an important toolas the structure provides support fromthe beginning to the end of a project.
Concessional financing is provided to reduce,
but not eliminate, a project’s investment riskthat could otherwise prevent commercialbank lending.
In blending, development finance can provide
grants of capital (either refundable or gifted)
and/or equipment and training. These grants
significantly reduce project risk for the commercial
lender. To further reduce risk, the blended
finance deal could also involve a guarantee.
Development finance will be critical to financing
adaptation. Climate finance is currently dominatedby mitigation, 65% in 2021.81 Increasing thefinancing going to adaptation and embedding
climate resilience requirements into all projects
will deliver global adaptation and insulate
development finance investments from climaterelated risks. The African Development Bank’s
Adaptation Benefits Mechanism allows Adaptation
project developers to sign off-take agreementsfor payment upon delivery of certified adaptation
benefits and use those agreements as collateral
for raising finance. This provides an additional
revenue stream to finance adaptation.82

POLICY 17.
Grant finance
Development finance isoften concessional, althoughdevelopment finance institutions (DFIs) are
now increasing blended finance provision
to leverage greater levels of private finance.
Grant financing remains key to fund high-risk
projects and those without clear revenue flows,
and to avoid increasing the debt burden of highly
indebted countries.
Development finance can increasingly mobilise
private capital for transition. DFIs traditionallyhold infrastructure assets to maturity, with around
USD60bn of such assets on their books. However,once such assets become operational, investment
risk is lower and potentially attractive to private
investors.83 Financial innovation would allow DFIs
to sell assets to private investors, freeing up balance
sheet space to enable greater green lending, similar
to many commercial banks’ business models.84
To facilitate this, new projects could be designed
to be easily distributed to third parties.85

De-risking facilities paired with otherblended finance instruments can further
increase financing flows. Alongside private
liquidity provision and development banks’risk transfer, government can provide freemarket risk hedging (i.e., interest rate risk,
foreign exchange risk). These are crucial forlarge-scale transition financing, especially inemerging markets with limited access to longterm capital, providing long-term financing
and protection from negative market
fluctuations. Underwriting specific risks suchas project completion or political instability
can ease high risk premiums for
EM investment.86

first loss guarantees, subordinated debt lending,or non-honouring of financial obligation
guarantees. Guarantees provide investors withgreater certainty of returns, thereby enabling
private investment into projects that would
otherwise be viewed as too risky.

POLICY 20.
Green financefacilities
To accelerate sustainable
investment, blended finance needs tobecome large-scale and repetitive. By
establishing templates and frameworks for green
blended finance deals, blended finance provision
can be accelerated.
Many DFIs provide specific green guarantee
facilities. A green guarantee facility can scale
up de-risking provision, streamlining decisionmaking compared to project-by-project
allocation. For example, Asian Development
Bank’s Pacific Renewable Energy Programme
provides partial risk guarantees and lettersof credit facility to enable private sector
investment in Pacific Island renewable power
projects.87 The Green Guarantee Company’s
guarantee criteria are aligned with Climate
Bonds Standards.88 Using science-based criteria
can streamline transaction selection and ensure
project credibility.
Development finance can be invested in green
aggregation facilities (warehouses/conduit
entities) that can package assets and provide
standards around contracts and loans acceptedfor packaging. Such aggregation facilities candrive the standardisation of contracts andcredibility of green loans by setting out minimum
requirements for green securitisation.

POLICY 18.
Guarantees and credit
enhancement
Guarantees and credit enhancement area key tool to maximise DFI balance sheets
and mobilise private finance. Tools include

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative13

Trade policy
Green trade policies can be
implemented by departments or
ministries of trade and coordinatedwith domestic fiscal policy. They
are needed to meet rising demand
for green technologies and energy, prevent theexport of carbon-intensive industries to lessregulated markets, and embed just transition
principles in these new green trade flows.

POLICY 21.
Carbon borderadjustment
mechanisms
Carbon pricing has not been implemented
globally, and the price of carbon varies
significantly between jurisdictions, see
Figure 8. To prevent carbon leakage – therelocation of carbon-intensive activities to avoid
carbon pricing, governments can introduce
carbon border adjustment mechanisms (CBAMs),
also known as carbon equalisation measures.
A CBAM applies local carbon pricing
to imports of carbon-intensive goods,
accounting for any pricing applied in the
country of production. This allows full
implementation of local carbon pricing,
without impacting competitiveness. It also
incentivises global action; export countries toimplement their own carbon pricing schemes
to capture the revenue, and exporters to reducecarbon emissions. Turkey’s climate envoy statedthat the EU CBAM proposal encouraged thecountry to ratify the Paris climate accord.89
The EU CBAM is intended to substitute thefree allowances of the ETS and prevent relocationof high emitters.90 EU importers should be subject

to payments from 2026, with free allowances
phased out by 2035.91 To maximise impact,
the scope should be widened to cover more
sectors and include indirect emissions. Faster
phase out of free allowances would accelerateindustrial decarbonisation.
Criticism of CBAMs includes allegations that they
are discriminatory against emerging economies.92
To address this and better ensure that CBAMs
result in global real economy change, revenue
can be allocated to Just Transition spending.93
To ensure CBAMs do not result in trade wars, theyshould take explicit and implicit local carbon
pricing into account when setting the border tax.
An international framework for carbon bordertaxes would also assist with this.94

POLICY 22.
Green trade window
Green technologies should
be prioritised for tariff
reductions, and not included in trade
sanctions whenever possible. Import tariffs
on competing products could protect nascentgreen technologies.95 However, protectionist
tariffs would hinder the global transition, andlikely increase costs for all – see for example the2012 solar technology duty increases between
America and China.96 They could result in 25%
higher prices for solar modules in 2030.
Ministries of trade could establish a green
trade window, providing preferential
treatment for the international flow ofgreen goods, services and capital andstimulating green capital and trade flows.
This could compensate for any CBAM-induced
trade curtailments. Reducing tariffs onenvironmentally friendly goods and services
would also help incentivise decarbonisationand improve the competitiveness of goods suchas green steel.
The Asia- Pacific Economic Cooperation forum
has reduced tariffs on green products. World
Trade Organisation members are engaged innegotiations to establish an Environmental Goods
Agreement (EGA) to eliminate tariffs on importantenvironmental goods such as in renewableenergy generation, improve energy and resource
efficiency; reduce pollution; manage waste andmonitor environmental quality.97
Green hydrogen holds great potential forrenewable energy trade. The global hydrogenmarket could reach USD2.5tn by 2050.98 Many DM
transition strategies include significant hydrogen
imports to enable decarbonisation of their hardto-abate sectors. For example, the EU Hydrogen
Strategy sees 40 GW of its 82 GW of plannedelectrolysers planned in the EU Neighbourhood.
40 GW of electrolysers would require 77 GW RE
capacity compared to a total 2021 capacity in
Ukraine and North Africa of 22 GW.99
This poses a risk that exports cannibalise muchof these countries’ RE expansion. Green hydrogenproduction for export would likely provide
companies with the highest economic returns
on their electricity. This would substantially slow
the transition of the local electricity grid awayfrom fossil-based generation. Trade agreements
for hydrogen will need to tackle the politicaland technical challenges for EM posed byincreasing RE to meet domestic demand andexport hydrogen. Trade agreements can include
strict criteria, including lifecycle emissions
intensity and additionality of RE supply. They
can also specify allocation of RE, water andFigure 8: Global carbon pricing coverage

ETS or carbon tax
implemented
Carbon tax scheduled
Subnational ETS
Subnational ETS or carbon
tax scheduled or underconsideration

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Source: Data from the World Bank, updated 1 April 2022,
https://carbonpricingdashboard.worldbank.org/

14

other resources between local consumption andexports to ensure contribution to local transitionand prevent conflicts of interest.100

from infrastructure construction and operations.104
Infrastructure investments need to be innovative,
low-carbon, energy-efficient, and resilient.

Embedding climate and environmental standards
in trade policies will help create an evenplaying field between domestic production andimports and discourage ecologically damaging
production in export countries.

Sustainable infrastructure could match
institutional investors’ appetite for long-term,
stable green investments. Private investment
could meet around half of the USD3tn global
infrastructure financing gap, and, but highupfront capital requirements present a barrier
to this.105 Infrastructure investment currently
accounts for a very small portion of institutional
investors’ asset allocation.

POLICY 23.
Green export finance
Official finance (export financeand development finance) is key toaddressing market gaps by financing
less commercially attractive investments
such as long-term infrastructure.
Export credit agencies facilitate domestic
companies’ access to international markets byproviding loans, guarantees and other instruments
to reduce the risk of exporting goods and services.
A government can exclude fossil fuel activities
from trade finance instruments and end overseas
export credit fossil fuel funding. Many export
credit agencies abide by the voluntary rules of
the OECD Arrangement on Officially Supported
Export Credits.101 This prohibits support for
unabated coal-fired power plants. Extending theserestrictions to oil and gas export finance is key toensuring alignment with the Paris Agreement.102The
rules could also be adjusted to enable morefavourable conditions for 1.5°C-aligned lending
and investments. UK Export Finance’s Transition
Export Development Guarantee was introduced
to enable the end of international support forfossil fuels. The loan interest rate is linked to thecompany’s transition plan, similarly to that of asustainability-linked loan.103
By prioritising green projects for these
trade finance instruments or setting
preferential terms for green projects,
DM export credit agencies can support
overseas energy transitions, see Figure
9. These efforts can also complement
overseas development aid. Some countries,e.g, China’s Belt and Road Initiative, alreadycombine development and export finance.
Development aid could be used to fundpilot renewable energy projects and criticalinfrastructure, to prove the case to investors.
The export credit agency could then provide aguarantee to further de-risk the investment andleverage private investment. This also frees up
development aid for adaptation and higher-risk
investments.

POLICY 24.
Climate risk
integration in
infrastructure
management

To ensure climate risks are addressed andmanaged, the ministry can include climate
risks and outcomes in project appraisal andselection. Ensuring all infrastructure plans assessclimate-related risk, regardless of whether they
are intended to be a green investment, will help
better align public investment with climate goals
and ensure climate resilience. The UK Department
of Business, Energy and Industrial Strategy
provides guidance on assessing energy use and
GHG emissions of proposals in construction andoperation.107 Similarly, PPP evaluation should
also include climate assessments.

POLICY 25.
Priority infrastructure
strategy

To ensure resilience to climate-related
hazards, governments will need to address
climate risk in infrastructure development
and management, and in national disasterrisk planning and insurance. For example,
Indonesia has put in place a State Asset
Insurance Policy program to insure public assets
against climate and disaster risks as part of its
National Disaster Risk Financing and Insurance
strategy. This will cover highly exposed buildings,
bridges, transportation, and other government
properties located in disaster-prone areas with asignificant contribution to public services.106
Immediately ensuring infrastructure resilienceand including mitigation strategies in planningis particularly crucial given the long lifetimesof public assets. This means governments
likely have just one investment cycle to ensure
resilience or avoid carbon lock-in.

A net-zero energy system will havevery different infrastructure needs from current
energy systems. Variable renewable energy supply
will increase energy storage requirements, while
greater electrification will increase demandson the electricity grid. New patterns of energy
imports will also emerge, including cross-borderelectricity lines and hydrogen and synthetic
fuel trade. In addition, energy infrastructure willneed resilience as increasing climate extremes
increase likelihood of grid failures.
A clear framework and delivery planfor net zero infrastructure will generate
investor confidence for renewable energy
investments and provide the confidence
in energy security required for fossil fuelphaseout plans.
The public sector can direct investment andprevent possible bottlenecks by prioritisingcertain infrastructure projects for investment.

Figure 9: Export Credit Finance for international energy transitions

MDB
support

Overseas development
aid funding RE
infrastructure

Private investment with export
credit agency guarantee
funding RE installation

Critical infrastructure
improving investibility

Derisks investment and enables
learning curve

Local RE investment
supported by guarantees

Conditionality of guarantee
facilitates just transition: local
employment, education andsupply chain development

Local investment funding
RE installation

Private investment funding
RE installation without need forguarantee

Infrastructure policy
The need to build new or
replace ageing infrastructureoffers an opportunity for deep
decarbonisation – approximately
70% of global GHG emissions are

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative15

A key infrastructure that may be on suchpriority lists is grid interconnectors and sectoralconnectors. Ensuring grid interoperability is
crucial to enabling increased RE penetration andhelping guarantee investor returns as it allows
the cross-border trade of energy. Power-to-X (PtX)
technologies convert renewable electricity into
synthetic fuels (green hydrogen, e-methanol,
green ammonia). These can not only decarbonise
energy-intensive industries such as aviation but
also provide grid balancing. Green hydrogen,stored in underground caverns or old fossil gas
fields (geological storage) could provide long-term
grid balancing for VRE. Batteries may be morecompetitive for short-term balancing, however
public support for both will not only scale nascenttechnologies, but also address investor concerns
over variable renewable energy supply.

POLICY 26.
Hydrogen clusters
To decarbonise energy uses which cannot beelectrified, and to provide energy storage,
net-zero energy mixes will include hydrogenat a far greater magnitude than it is today.
Total global hydrogen use is expected to grow 5-7
times, to account for 15-20% of energy demandand global hydrogen investment 2020-50
could total USD15tn.109 To kickstart a hydrogen
economy, governments can establish hydrogenclusters: areas where hydrogen production andconsumption are developed together, ensuring
demand and supply scale together.
Co-locating supply and demand overcomes the
specific challenges of the hydrogen value chain.
Simultaneous development of production,
storage, transport, and use provides demand andtransport certainty, derisking investment. Clusters
can be established with simplified planningpermissions, overcoming authorisation issues,and supported by subsidies such as on electricity
tariffs. Infrastructure clusters can enable thecodevelopment of other green technologies suchas carbon capture and storage (CCS) and lowcarbon cement production.

POLICY 27.
Green PPP framework
Governments can establish aframework for public-private
partnerships (PPPs) to leverage private
finance for infrastructure projects. PPPs are

Figure 10: Annual RE investment needs in various climate mitigation
scenarios, compared to current investment levels
BNEF Green
Scenario
1800

1896

1500

1200

Annual investment / USD Billions

The EU’s Projects of Common Interest (PCIs)
receive accelerated permitting and are also
eligible for financial assistance under theConnecting Europe Facility budget for Energy.
PCI allocation is prioritised by those projects thathave the greatest net zero contribution.108 Thisis a particularly relevant example to countries
with privatised energy infrastructure provision,
allowing energy ministries to steer private
investment to meet specific needs.

Annual investment
requirements

Increase
relative to2021 (%)

IRENA IEA NZ
1.5°C Scenario
Scenario(+217%)

900

600

BNEF Red
Scenario

Current (2021)
annual RE investment(+418%)(+186%)

1161
1046(+109%)

763
300
316

345

366

2019

2020

2021

0
2030

Source: REN21, 2022. Renewables 2022: Global Status Report, https://www.ren21.net/reports/global-status-report/

a valuable tool for developing sustainable andresilient critical transition infrastructure, providing
financial value for the taxpayers and diversifying
risk allocation. Climate change impacts can be
integrated into contractual KPIs and project
design.110 Involving the private sector can also allowknowledge sharing and increase transparency andaccountability among stakeholders.111 A PPP legal
framework is needed to establish good investment
planning processes that prioritize projects basedon development needs and contribution to thegreen transition. The framework can also limit fiscal
risks from high levels of PPP liabilities, for example,
Uruguay’s PPP law caps total liabilities to 7% of
GDP.112 To ensure a successful PPP framework,a dedicated agency in the form of a PPP unit orsecretariat can be established for an efficient rollout of a PPP programme.
PPPs are often highly bespoke and slow todevelop, focusing on single asset creation.
Scaling green PPPs can create a pipeline ofbankable infrastructure projects that canhelp deliver regional infrastructure needs. By
developing a robust PPP model for a single deal
and then replicating it, this approach spreads
costs, enhances impact, and encourages
programmatic, competitive tendering. This
creates new markets and enables faster delivery
and lower prices. For example, the IFC’s NubianSuns project financed 13 solar PV projects in
Egypt, assembling 18 developers and 11 FIs bytaking a programmatic approach to financing.
Multiple transactions were consolidated into a
streamlined standardised process, resulting insignificant cost efficiencies, see also policy 20.113

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Energy policy
1.5°C-aligned energy systems will
require a significant increase in RE
investment, see Figure 10.
Currently, investment flows are dominated byfossil fuels, see Figure 11. Capital reallocation
to RE is crucial to success of transition and willprotect investors from stranded asset risks.
Overall additional energy investment will bearound 5%/year.114
Coherent and stable long-term energy policy is
one of the most important ways for the ministry
to increase investment in RE. Targets for RE
penetration, both near- and long-term, will help
provide investor certainty. However, further
enabling policies are required to enable thesetargets to be met to ensure fossil fuel investments
are rapidly wound down. While targets havespread to many markets, other implementing
policies have not seen the same growth.
As outlined above, phasing out fossil fuel subsidies
and implementing carbon pricing are crucial to
improving the competitiveness of RE with fossilbased energy production. A RE-based energy
system will be markedly different from a fossilbased one, strategic energy policy will facilitatea smooth transition, ensuring adequate energy
supply, transmission, distribution, and storage.
The energy transition investment gap is also
widening. Policymakers will need to focus on
enabling capital flows to developing countries, whichcurrently attract 12x less investment per MtCO2e.115

16Figure 11: Global energy supply investment by sector
Fuel supply

Electricity

Oil and gas
UpstreamMid/downstream

Coal supply

Low-carbon
fuels

Renewable
power

500

Fossil fuelpower

NuclearElectricity
networks andbattery storage

300
200
100
0

20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E
20
20
20
21
20
22
E

USD Billions (2021)

400

Source: International Energy Agency, 2022. World Energy Investment 2022

Energy use is also not just electricity – electricity
accounts for 17% of global energy use. Whileelectricity production is still dominated by fossil
fuels, transport and heating and cooling are evenmore so, see Figure 12, and will require targeted
policy to accelerate decarbonisation.

kickstarting a local green infrastructure economy.
For example, Turkish large-scale renewable energy
auctions require the construction of local production
facilities.117 Local circumstances will need careful
evaluation to ensure such requirements do nothinder RE production.

POLICY 28.
Renewable energy
auction requirements

Including a maximum size constraint for someauctions will enable small-scale and distributed
production participation which would otherwise
be outcompeted by larger companies.118 This
produces a portfolio effect, reducing the riskof projects not coming online.119 This canalso enable growth of more distributed RE
systems which will reduce grid congestion andimbalance and minimise land use impacts andgenerate community support, as smaller-scaleinstallations will have less impact on land-use.

Renewable energy auctions
enable policymakers to procure RE atcompetitive prices and provide investors
with revenue certainty. While they are one of
the most effective policies to boost renewables
investment in EM, they are present in only
50% of the markets.116 Auction requirements
can be adjusted to maximise the investment’s
impact and fully address climate risks. Lifecycle
emissions requirements can limit the emissions
impact of construction and circular economy
requirements can reduce demand for materials
and ensure the use of recycled materials.
Requiring the use of local workforce and local supply
chains could enable local support for development,
and can ensure a multiplier effect of the investment,

POLICY 29.
Fossil fuel plant
decommissioning
The long lifetimes of fossil fuelinfrastructure mean many plants will need
early decommissioning if we are to meet
2030 and 2050 climate targets.120 In addition,
many existing fossil fuel reserves will need to

Figure 12: Renewable Energy in Total Final Energy Consumption,
by Final Energy Use, 2019

51%

Heating and coolingTransport

32%

Power17%

28.0%
Renewableenergy11.2%
Renewableenergy3.7%

RenewableenergyREN21, 2022. Renewables 2022: Global Status Report, https://www.ren21.net/reports/global-status-report/

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

be left in the ground.121 According to the IEA,
achieving 1.5°C requires advanced economies tophase out unabated coal generation by 2030 andthe rest of the world by 2040.122 Over the last ten
years, the fossil fuel share of the global energy
mix has remained consistent. This is despite it
being cheaper in over half of the world to build
new wind or solar than to continue operating
existing coal plants.123 For RE ramp up tomaterially reduce emissions, fossil fuels must be
rapidly phased out. Phaseout will also improve
RE investibility as it will reduce market saturation.
While financing the phaseout of fossil fuelassets is expensive, there are likely greater costs
associated with a sudden disorderly transition
away from fossil fuels or asset stranding once
decarbonisation deadlines materialise.
Fossil fuel assets can be repurposed for a netzero economy. Fossil-fired power plants’ gridconnections can be utilised for RE installations orhydrogen electrolysers. Bangladesh’s Mujib Climate
Prosperity Plan aims to convert existing coal andfossil gas plants to become energy hubs, converted
to either green hydrogen, waste-to-energy, or
biomass plants. In 2021, Bangladesh rejected
proposals to build 10 new coal-fired power plants.124
By transitioning fossil fuel workforces,
governments can facilitate economic development
and minimise resistance to transition. For example,
Scotland provided GBP12m for an Oil and Gas
Transition Training Fund, re-skilling workers forcareers in wind power. The US Inflation Reduction
Act provides additional incentives for clean energy
projects located in energy communities, including
coal communities.125
US coal phaseout is supported by securitisation
mechanisms in Wisconsin, Michigan, and New
Mexico. This refinances the existing customer
obligation to pay the utility’s return on equity anddebt with a low-interest bond. The utilities canthen invest in RE with the cost savings invested
into just transition programmes.126

17

POLICY 30.
Energy transition
mechanisms
Energy transition mechanisms arefinancial mechanisms to support anorderly and accelerated fossil fuelphaseout; winding down fossil fuel assets
and their obligations, supporting the justtransition, and enabling the buildout ofrenewable energy assets and infrastructure.
Asian Development Bank’s pilot Energy
Transition Mechanism uses public and private
financing to buy and retire or repurpose coalplants in Indonesia, the Philippines and Viet
Nam.127 Climate Investment Funds’ Accelerating
Coal Transition investment programme
combines concessional financing with technicalassistance to de-risk and pilot investments tophase out coal, repurposing or decommissioning
coal assets, and creating social protection
programs. This will enable a just transition fromcoal power in EM starting with South Africa, India,
Indonesia, and the Philippines.128 South Africa’s
USD8.5bn Just Energy Transition Partnership
Investment Plan is funded by the UK, EU, US,
France, and Germany. However, only 3% of thefunds will be delivered as grants, raising concerns
over the impact on the country’s debt burden,
and whether this offers better terms than raisingmoney on international markets.129
Such mechanisms can also be expanded for thephaseout of other fossil fuel plants and assets –gas-fired power, and distribution infrastructure.

POLICY 31.
Targeted feed-in-tariffs
For innovative and early-stage
technologies, feed-in-tariffs(FiTs) can enable economic viability by
reducing investment risk and ensuring
stable returns.134 FiTs overcome the pricedifferential between green and high-carbon
production and were instrumental to wind andsolar scaling – the German FiT is credited withenabling the global solar PV learning curve.
However, they are a high-cost policy and areincreasingly replaced by instruments which alsoenable competitive pricing – such as contracts fordifference or auctioning.135
Germany’s FiT was introduced in 2000 andincreased the RE share in the electricity mix,
from 6% to 35% in 2020. This model has been
replicated in 80 other countries. The fixed priceand guaranteed returns encouraged smallscale RE development and led to a boom inenergy cooperatives. This model enabled amore decentralised and democratic transition
than an auction-based system and generated
citizen support for the transition despitehigh costs. The updated national renewable

These mechanisms will need careful regulation,
to ensure phased-out plants are not replaced by
new fossil fuel assets. One way to ensure impact
is to require entity-level transition plans from theutilities, aligned with the Climate Bonds Credible
Transition Principles, see Figure 14.130 Plant age
eligibility restrictions can also ensure funding is
not absorbed by plants already near the end of
economic life.131
To prevent unwanted fossil fuels being taken
up by non-power sectors, it is important toinclude all sectors in phaseout commitments
and energy transition mechanisms.132
Fossil fuel phaseout is hindered by the Energy
Charter Treaty which allows foreign investors
in the energy sector to sue their host States
when policy measures and other State action
affect their interests.133 In 2021, German energy
company RWE used the Treaty to file a EUR1.4bncompensation claim with the Netherlands
over its coal phase-out plan. There is also asunset clause to the Treaty so existing fossil fuelinvestments would still be protected for 20 years
following a country’s withdrawal. The Treaty iscurrently undergoing a modernisation process,signatories could propose amendments such as
excluding new fossil fuel investments from theprotection clause. The 53 signatories will need toconsider whether withdrawal or amendment of
the Treaty will give them the greatest security intheir fossil fuel phaseout plans.

energy law established a new FiT for rooftop
solar installations to encourage increased
installations to feed directly into the gridconsumption.136 This demonstrates how FiTs canbe targeted to nascent technologies and smallscale renewables.137
In comparison, Spain’s 2007-8 FiT paid solar
power producers a very high rate in comparison
to electricity prices and did not include a
step-down mechanism to reduce the subsidy
in line with falling technology costs. The FiT
was also not funded by consumers, and instead
effectively deficit funded. When the government
suddenly cut FiTs for new wind and solar, andcut the tariff paid to existing producers, thiscreated a boom-and-bust cycle, particularly
harming the solar PV industry. 2708 MW of solar
PV were installed in 2008 and 0 MW in 2009.
This also hugely damaged investor confidence
in RE policy, a critical factor for national RE
scaling. FiTs therefore require cost containment
measures, to ensure the subsidy stays withinbudgetary means, avoidance of retroactive
policy changes and independent regulation toensure appropriate levels of support.138

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

POLICY 32.
Carbon contracts for difference
Carbon contracts for difference (CCfDs)
provide low-carbon producers with revenue
certainty, by guaranteeing a fixed carbon
price, the strike price. The difference between
the strike price and actual price will be paidby the government to the producer if strikeprice is lower than actual, and vice versa if it ishigher. This long-term price hedging derisks theinvestment. They can be applied to electricity
generators and low-carbon industry such as
steel.139 Unlike feed-in tariffs, CCfDs are auctioned
to ensure competitive pricing.
The UK contract for difference (CfD) scheme forlow-carbon electricity generation establishes
a 15-year period of payments based on the
difference between the production cost of lowcarbon energy and average energy prices. This
provides direct protection to developers fromvolatile wholesale prices, a critical issue when
considering projects with high upfront costs
and long lifetimes. Additionally, they protect
consumers from paying a premium to suppliers
when electricity prices are high. The competitive
nature of the programme means the strike pricedecreases over time, reflecting and incentivisingdecreasing technology costs. The scheme
is funded by a levy on electricity suppliers(the Supplier Obligation), and so provides anadditional transition incentive.140
If technology agnostic, CCfDs’ contribution toscaling innovative technologies may be limited
as auctions may be dominated by maturetechnologies. For this reason, Germany isalready planning pilot CCfDs to promote greenhydrogen in the hard-to-abate sectors of steel
and chemicals.141
Long-term tax credits could provide income
security for RE developers, matching thelongevity of RE projects. For example, the US
Inflation Reduction Act reinstates and expands
existing production and investment tax credits
for wind, solar and energy storage with a 10-yeartime horizon. Previous US tax credits were shortterm and inconsistent, resulting in high levels of
uncertainty. This new tax credit scheme shouldovercome such issues.142
Another low-cost policy is the introductionof quotas or renewable energy portfolio
standards. This will encourage RE investment
from large incumbents however this might
incentivise incremental over transformationalchange which can increase the cost of transition.
The EU has recently reduced its biofuels quotas
and set limits on how much first-generation
biofuels with high indirect land use change(ILUC) risk) can count towards renewables
targets.143 First-generation biofuels are produced
from agricultural feedstocks, whereas second
generation is from waste. Unless carefully
regulated, biofuel production can lead to18

indirect land use change (ILUC); expansion ofagricultural land, impacting biodiversity andcarbon sinks. It can also threaten food security
by increasing demand for grain, and possiblyoffering higher returns.
Quotas could encourage gas blending; mixing
a certain proportion of low-carbon hydrogen,or other low-carbon gas, into the fossil gas
supply. This requires infrastructure retrofit athydrogen volumes over 10%, while the lower
energy density of hydrogen means a 5% blend
by volume would only displace 1.6% of fossil
gas supply.144 Combustion of hydrogen fordomestic heating or electricity generation
results in energy losses of around 30% during
the conversion process from electricity tohydrogen.145 Hydrogen is better reserved
for uses where direct electrification is notpossible, such as industrial, high-temperature,processes.146 Quotas could result in the cost of
implementation being passed on to consumers,
hindering just transition efforts.

POLICY 33.
Streamlined renewableenergy permits
Easing permitting processes
for renewable energy installations is a
low-cost and quick-to-implement policy toaccelerate renewable energy investment.
For example, EU emergency regulation eased RE
permitting to accelerate the REPowerEU Plan totransition away from reliance on Russian fossil
gas imports.147

POLICY 34.
Distributed renewable energy
standards
For many emerging economies, the energy
transition will consist of decarbonisinglocal energy production and addressing
energy poverty (defined as the lack of access tosustainable modern energy services and products
or spending, or as the need to spend 10% ofincome on fuel148). This requires investment in
distributed renewable energy (DRE). Financial
aggregation can enable private investment inthese projects, providing capital for DRE andenabling investor portfolio diversification.
Establishing an asset-backed securities (ABS)
market in EM will help with this. 149 Standardisationof DRE and mini-grid investments will also
increase scalability and facilitate aggregation.
Aggregation may need to be combinedwith other de-risking mechanisms such asconcessional financing, guarantees andsubsidies. DFIs will be crucial in enabling thedevelopment of such a programme. UNDP has
set out a Derisking Renewable Energy Investment
framework – a set of policy instruments for the
public sector to reduce, transfer or compensate
for investment risks.150

DRE can also enable decarbonisation incountries with high grid penetration, providing
flexibility to meet increasing electrification.
Net metering (whereby consumers cansell RE back into the grid) is a key policy todrive deployment of small-scale solar but
is available in less than half of markets.151
Digitalisation will help integrate DRE into thegrid, enabling grid operators to monitor andinfluence their operation, reducing congestion.
Flexible electricity tariff design can encourage
DRE owners to operate these resources inconsideration of grid requirements.152

POLICY 36.
Renewable energy
requirements

Buildings andurban policy

New buildings provide an opportunity forhigh ambition. Governments can set Energy
Performance Certificate (EPC) and renewableenergy use requirements for new buildings. The
recast of the EU Energy Performance of Buildings
Directive (EPBD) requires new residentialbuildings to be net-zero from 2030 and new
public buildings by 2028.156 All new buildings
and major renovations will be required to installsolar generation.157 This can be strengthened by
immediately prohibiting the supply of fossil fuels
to new buildings.

Cities have the potential to enablehigh levels of energy efficiency,
and lower carbon intensity ofmany activities, through theagglomeration and concentrationof populations and economic activity. However,urban development can be sprawling, resourceand carbon-intensive and highly vulnerable
to climate hazards. 70% of GHG emissions areassociated with urban areas. Robust sustainableurban planning can ensure green urban growth
and attract sustainable investment to funddevelopment and tackle social inequalities.153
In buildings policy, there is the opportunity
to both meet the transition and alleviateenergy poverty, by investing in building energy
efficiency and RE heating and cooling solutions.
Policy responsibility will sit with a dedicateddepartment or with departments of infrastructureand energy.

POLICY 35.
Climate-sensitive
urban development
strategies
To ensure compatibility of urban
development with 1.5°C, climate risks andopportunities need to be fully assessed inall development plans. This includes bothassessment of physical risks under 1.5°C ofwarming, and assessment of transition risk in a
net zero economy.
Integrating climate considerations in urban
development strategies will ensure resilient
and resource-efficient urbanisation. The
speed of urbanisation makes this a priority toensure development of resilient and wellfunctioning cities.
Governments can reallocate funding away fromhigh-carbon and sprawling urban development
towards sustainable urban infrastructure. Thiscan quickly reorient urban investment towards a
low-carbon and climate resilient model.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Heating and cooling accountfor 51% of energy use, but only 11.2% is
met by RE.154 Fossil fuel phaseout schemes
send a clear market signal. Denmark banned
the installation of fossil gas or oil boilers in
2013, while in the Netherlands, new buildings
have been banned from accessing the gas gridsince 2018.155 These will need to be phased infor existing buildings, accompanied by financial
support such as boiler scrappage schemes.

POLICY 37.
Green mortgage schemes
Lenders can be encouraged to provide green
mortgage through preferential treatment
given their lower risk, see policy 88.158 Green
mortgage schemes offer more favourable
lending conditions against houses with a certain
level of energy efficiency or for green energy
interventions. Regulations requiring lenders todisclose the energy efficiency of their mortgage
books could also incentivize them to offer green
mortgages to improve this metric. The small sizeof green building investments is mismatchedwith the investment appetite of sustainableinstitutional investment flows. Aggregating andscaling these small investments, into green
mortgage-backed securities and other products
will enable institutional investor participation.

POLICY 38.
Land value captureLand value capture can be used to fundthe expansion of urban infrastructure
by monetising the increase in land value
in the catchment area of new transport
infrastructure. It involves selling land or retailspace above public transport infrastructure (busdepots, train stations etc). This model can enable
investment by authorities that lack the sufficient
tax base to fund significant CAPEX or ensure
more predictable income from the investment
than passenger fares. Land value capture has
been successfully implemented in DM and EM
cities. While many metro systems operate at aloss, Hong Kong’s Mass Transit Railway (MTR)
is self-sustaining. Under the ‘rail plus property’

19model, MRT is granted land development rights
at stations and depots on a new rail line. It
partners with developers to build properties andreceives a share of the profits. MTR also pays thegovernment a land premium. This model reduces
investment risks for the government, keeps
transport affordable, and enables condensed
urban planning.159

POLICY 39.
Incentive schemes
Governments can provide direct
incentives for energy efficiency
interventions through tax relief schemesor providing discounted loans for energy
efficiency measures. For example, Italy’s 2019
Ecobonus and 2021 Superbonus tax relief scheme
triggered a 500% increase in home renovationsin 2020-2021.160 However, it is available for any
energy efficiency measure, regardless of efficiency
gains made, whereas the EU Taxonomy requires
building retrofits to make a significant contribution
to energy savings to qualify as green.
Costs of energy efficiency measures or RE
installation can also be reduced if they are
implemented neighbourhood wide. This also
reduces the administrative burden on property
owners and increases uptake. Making incentive
schemes available to group applications or
councils can enable this.
To leverage private capital for retrofitting andsimplify retrofit adoption, property assessedclean energy (PACE) programmes can beestablished. The PACE provider issues ABS to
fund retrofitting, with loan repayments attachedto the property tax bill. The US PACE programme
funds both commercial and residential
retrofitting, removing upfront financing costs. 161
Governments can also encourage district
heating, which can be more energy efficient than

POLICY 40.
Green municipal bondissuance
While private investment can be to fundkey sustainable urban infrastructure,
many projects may remain unappealing as
private investors cannot capture projects’
positive externalities. Public funding
remains a crucial factor for sustainable urban
development. Increasingly, responsibility forraising capital for infrastructure is shifting
to municipality rather than state or national
government, which may not have the ability
to raise taxes or access debt capital markets.
Central government or development banks
can enable municipal green bond issuancethrough efforts to improve municipality
creditworthiness and reduce investment risk,such as risk by centralising and ring-fencing

individual home heating. Germany is planninga subsidy scheme for efficient heating grids
to incentivise the switch to district heating,support the switch to renewable energy carriers
and improve the use of waste heat.162 Such
schemes can also be linked to community DRE
development, see policy 34.

POLICY 41.
Energy standards
Buildings account for a large
proportion of labelled andunlabelled capital markets, accounting for
29% of green bonds, USD146.9bn, issued
in 2021.165 Policy can facilitate debt financing
of green buildings through securitisation
frameworks, see policy 100, and standards
development – for both energy efficiency
interventions and new buildings. This can also
ensure adequate ambition from investments ingreen buildings and infrastructure. Governments
can require a certain reduction in energy use or
set a threshold for energy efficiency measuresto qualify for support programmes or green
mortgages. Accompanying standards with clear
energy efficiency labelling can ensure visibility ofgreen investments and ease decision-making.
Complex contracting for energy efficiency
projects can create mistrust among end users anddiscourage bank lending for these projects. Clearand standardised energy performance contracts canstreamline the investment process and encouragebank lending and create opportunities for scaling.

POLICY 42.
Green planning permission
fast tracks
Transparent and consistent bidding
processes for projects will encourage
investment while easing planning permission

revenue collection and establishing financing
mechanisms to cover revenue shortfalls fromuser fees.163 This can improve the credibility ofsubsidy and payment schemes and generate
investor confidence.
Smaller cities will have more problems
accessing capital markets, instead they canapply for loans from national developmentbanks or specific municipal development
funds. For example, Colombia’s Financiera deDesarrollo Territorial (FINDETER) facilitatescommercial banks to finance municipal
governments by lowering the costs of loans.
Its AAA local credit rating enables it to accessless expensive financing. FINDETER and IDB’s
Platform for Sustainable and Competitive
Cities provides urban sustainability projects
financial and technical assistance.164

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

for zero-carbon buildings or energy efficiency
measures provides further incentives. Suchpolicies are low cost and easily enacted.

Industrial policy
Industry receives less attention
in decarbonisation policy thanother sectors.166 However, thedecarbonisation of hard-to-abate
industries will need significant
policy support. These will not see market forcesof growing RE competitiveness, given the highcost of their decarbonisation technologies, andtheir decarbonisation pathways are not clear.
Policymakers will need to both set out thesepathways and encourage and enable investmentin their transition.167 Industrial policy is also closelyaligned with infrastructure and energy policy.

POLICY 43.
Sectoral emissions
targets
Net-zero targets must be
accompanied by ambitious short-termemissions reduction targets. Alongside clear
roadmaps, these can also prevent incremental
change and efficiency gains which could
create asset stranding risks and increase thecost of transition. For example, incremental
fuel switching through gas blending (blendinghydrogen into fossil gas supply) results in limited
emissions reductions and requires retrofitting ofgas infrastructure once hydrogen reaches 10% of
supply, increasing transition cost.168
These targets can also ensure transition occurs incoming investment cycles. Given the long lifespansof such assets, this will avoid carbon lock-in. For
example, 71% of existing coal-based blast furnaces(1090 Mt) will reach the end of its lifetime andrequire major reinvestment before 2030.169

POLICY 44.
Targeted research anddevelopment
Governments will play a crucialrole in enabling nascent decarbonisation
technologies to scale and reach economic
viability. Government R&D programmes
can target particular technical challenges.
Cooperation and collaboration are crucial totheir success. Collaboration with industry allows
identification of R&D priorities, strengthening
knowledge flows, while international cooperation
will also enhance innovation. Clarity on research
priorities and funding availability will also help
incentivise key research. The EIB’s InnovFin
Energy Demo Projects initiative provides loans,loan guarantees or equity-type financing of
EUR7.5-75m to innovative demonstration
projects in energy transformation.170 This canhelp boost private investment in innovation.

20

POLICY 45.
Sectoral subsidies
and guarantees
Guarantees can de-risk larger scale
projects, addressing the investment riskof first movers and encouraging private
sector investment. Guarantees can mobilise
massive investments and provide convening
support to platforms orchestrating value-chain
collaborations and de-risk demonstration funding.
For example, the InvestEU Fund aims to mobilise
over EUR372bn of public and private investment
through an EU budget guarantee of EUR26.2bn,
30% of which must support climate investments.171
Guarantees can be fiscally efficient as theymobilise additional investment, have a greater
impact than direct investment and result in lower
balance sheet liability than direct subsidies.
Green state-backed lending encourages andderisks bank lending to green projects.
Subsidies also mobilise private investment.
In Malaysia, the Green Technology Financing
Scheme provides an interest subsidy of up to
2% for financing of green projects and a 60%
government guarantee.172 Establishing clear
phase-out dates for subsidies also ensures that
schemes do not stifle competitiveness andinnovation – private investment has been provento step in once subsidies are phased out.173
Green guarantees and subsidies will needalignment with standards or taxonomy to ensure
they are supporting robust sustainable investments.
Carbon contracts for difference (policy32) can be used to provide price certainty
but they will need to avoid incentivising
incremental change and ensure projects
are on a Paris-aligned pathway. Favouring
technologies that allow for deep emission
reduction will avoid carbon lock-in.174 Germany
is planning CCfDs for the decarbonisation of thehard-to-abate sectors.175

POLICY 46.
Green PE and VC support
Many early-stage technologies are notwell-suited to loan and bond financing
due to their high risk. Instead, they can befunded by private equity (PE) and venture
capital (VC) investments. The government
can encourage green PE and VC by incorporatingclimate impact in their PE and VC support
programmes, providing more favourable
guarantees and equity on green projects.

POLICY 47.
Green public procurement
As public procurement represents a large
proportion of demand for products such as
steel (25%) and cement (40%), green public
procurement (GPP) offers an opportunity toboost demand for green steel, cement etc.176

POLICY 48.
Carbon capture andstorage strategy
Carbon capture and storage will beneeded for the decarbonisation of somehard-to-abate activities, such as to tackle
process-based emissions in cement
production. The IEA NZE scenario envisages
7600 Mt CO2 capture by 2050, compared to 40
Mt CO2 in 2020.178 Policymaking can ensure
the strategic application of CCS and establish
robust standards for infrastructure. This isvital to prevent overreliance as CCS cannot
remove all emissions and has a limited impact
on supply chain emissions, which account fora significant proportion of carbon emissions
from fossil fuel energy.
CCS standards are key to ensuring a sufficientlevel of emissions capture, ensuring longevityof storage, preventing CO2 leakage at all

For example, the EU has published voluntary
GPP criteria so as to facilitate the inclusionof green requirements in public tenders.177
Such voluntary criteria could be graduallyreplaced with mandatory criteria, embedding
preferential spending across ministerial
budgets, by incorporating carbon emissions andcircular economy considerations into spending
assessments or by allocating a certain portionof budgets to low-carbon solutions. These
criteria can also be aligned with Taxonomy
criteria, ensuring consistency of sustainable
investments. Given the large purchasing powerof governments, such policies can not only
send a market signal but also make a significant
contribution to sustainability targets.

POLICY 49.
Transition standards
and roadmaps
To enable industrial transition,
governments will need to establish
science-based standards and roadmaps
for decarbonisation, to ensure transition
investments are aligned with necessary
carbon trajectories. Following Climate Bonds’
Transition Principles can ensure credibility andambition of transition roadmaps, see Figure
14. Aligning these with international standards
will enable trade of green products, and help
countries plan cross-border projects, leading tolower costs, faster implementation, and securityof supply. The International Sustainability
Standards Board’s (ISSB) objective is to develop
such global standards with a clear focus onsustainability and ESG issues.181

stages of the process, and ensuring the CCS
process uses low-carbon energy. Standards
can allow for some uses of the captured
carbon, CCUS, only when the CO2 is used forthe manufacture of durable products. CCS
has also primarily been used for enhanced
oil recovery – long-term geological storage
requirements and robust limitations on theuse of captured carbon are essential toensure it does not contribute to increased
fossil fuel exploitation.179
Strategic infrastructure development fortransporting CO2 to storage sites can be
included in infrastructure development
prioritisation schemes. For example, CO2transport infrastructure is eligible for EU PCI
status.180 Supportive policies such as theaccelerated permitting of PCIs can favour
priority sectors, to ensure CCS is reserved foremissions which cannot be prevented.

resource extraction required for the net-zerotransition, a growing concern given projecteddemands on the metals and mining industry, andthe environmental impact of mining activities.
Accelerated production of decarbonisation
technologies such as batteries and solar
panels mean overall demand for criticalraw materials is set to double by 2040.
Lithium demand could grow 40 times, andgraphite, copper, and nickel demand 25 times.182
Sustainable and science-based standards for
extraction and processing of these minerals
will mitigate the environmental impact of thisindustry. Governments will also need to fundR&D and facilitate investment in recycling,reuse, and substitution of these minerals to limit
demand for mining and help diversify supply
chains. Diversifying supply chains will help
ensure security of supply, as many minerals
are highly concentrated in a few countries – ¾
of rare earths are produced in three countries.
Without such policies, limited supply could
delay the energy transition.

Including full lifecycle considerations will ensure
developers mitigate environmental impacts inthe supply chain and address scope 1, 2 and 3
emissions. This can help mitigate the level of

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative21

Transport policy
Development of green transportsystems provides many variedinvestment opportunities, in green
private transport, decarbonisingand expanding public transport,
and enabling self-powered mobility. Netzero transport will be delivered by systemredesign, not solely technology switching andelectrification. Transformative urban planningwill reduce travel distances and make sustainabletransport more convenient.183 This will enabledecarbonisation, reduce inconvenience oftransition for consumers and reduce the use ofcars. This will also have significant co-benefits;
reducing air and noise pollution, reducing
transport costs for consumers, and improving
health and wellbeing. Green transport policies
will require close collaboration between central
and subnational government.
The transport sector presents challenges given
complexities in capturing revenue, and themultiple actors involved. Transport accounts
for 32% of energy use globally but only 3.7%of its energy mix is RE.184 Heavy duty transport,
shipping and aviation are emissions-intensive
hard-to-abate sectors. The policies outlined
in Industrial policy for hard-to-abate industry
are also relevant for their decarbonisation. As
these industries are even earlier in the transition
pathway than other hard-to-abate sectors,
without clear decarbonisation pathways,
governments should focus on funding R&D andencouraging early-stage investment in innovativetechnologies.

POLICY 50.
Internal combustion
engine phaseout
strategy
Clear phaseout dates for ICEs are needed
to give a clear signal to investors,
manufacturers, and consumers of the needto switch to EVs. The UK set its 2030 phaseout
date in 2020 – setting phaseout dates early allows
time for transformation of investment flows. New
fossil fuel light duty vehicles should be phasedout by 2030-2045 globally.185
Ministries will also need to remove incentives
on ICEs, such as tax exemptions on diesel
consumption, or lowered fuel duty.186 Suchsubsidies distort the market and this spending
should be channelled to support customers
with EV purchase – an important example ofenvironmental tax reform (policy 7).
Some carbon taxation regimes do not include
transport due to carbon leakage concerns.
Including all transport in carbon pricing will help
ensure their cost and competitivity better reflects
their environmental impact. This can encouragetechnology switching, for example rail transport
for overland aviation.

In addition, pricing mechanisms on fuel could
also factor in fossil fuel externalities, either in
addition to carbon pricing or as an alternative incountries where economy-wide carbon pricing
is not present/possible. Congestion charging
can further discourage use of private cars and
ICEs. Ring-fencing proceeds for investment in
low-carbon transport infrastructure is also key.
This helps ensure such pricing mechanisms
lead to behaviour change and uptake of public
transport. For example, London’s congestion
charge proceeds must, by law, be reinvested in
London transport.

POLICY 51.
Electric vehicle
incentives
Decarbonisation technologies
for private transport, electric vehicles(EVs), are now competitive with internal
combustion engines (ICEs) on a full lifecycle
basis. However, governments will still need tosupport their uptake to overcome consumer
reluctance. Tax incentives can bring down the
upfront cost of EVs, bringing this closer in linewith that of ICEs. Strategic development of thecharging network to enable widespread EV use isalso crucial.

POLICY 52.
Green public transport
procurement
Public transport needs to be both scaled up,
to reduce private transport reliance, and be
decarbonised. Green public procurement canbe used to shift public transport investment togreen. Procurement programmes can enablelocal governments to consider the total costof ownership, levelling the playing field withfossil-based transport options with lower upfront
costs. Procurement programmes can also help
boost investment in sectors that are underdevelopment, as long-term offtake agreements
will provide demand certainty and boost investor
confidence – hydrogen, green steel. Central
government mandates for green transport
procurement can ensure sufficient speed andambition of procurement.
National or supranational governments canprovide subsidies to local authorities to invest in
green public transport. This can also ensure a justtransition by enabling investment in low-income
regions with a smaller tax base.

POLICY 53.
Sustainable aviationfuel mandates
Specifically in air transport, mandates forsustainable aviation fuel (SAF) can be used.
In the UK, a mandate will apply from 2025,with 10% of jet fuel to be SAF by 2030.187 While
mandates can pose difficulties and promote

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

incremental change or inefficiencies and so are
not suggested for all hard-to-abate industries, inaviation a mandate with strict criteria to prevent
use of unsustainable biofuels and promote useof green hydrogen-based fuels can help generatedemand and provide investor confidence.
However, the scales of feedstocks required andproductive and import capacity must be carefully
considered when implementing mandates. For
example, to produce green hydrogen to power
planes would require over double the UK’s
current RE generation capacity.188

Environmental
policyEnvironmental policies thatmaintain biodiversity are closelyaligned with emissions reduction
as climate change and biodiversity
loss are intrinsically linked. Natureprovides significant climate change mitigation,acting as a carbon sink. Land and oceans haveabsorbed more than half of all anthropogenic
CO2 emissions in the last decade.189 Investing in
nature-based solutions (NBS) could achieve up
to a third of the short- to medium-term emissions
reductions needed to limit warming to 1.5°C.190
Environmental stewardship is a core contributor
to sustainable economic development. Morethan half of global GDP is estimated to be naturedependent.191 As outlined for climate risk in
Figure 2, severe financial losses could result fromenvironmental degradation and biodiversity
loss. These could result from reduced crop
yields with loss of pollinators or could be a large
economy-wide shock from another pandemic,
as seen during COVID-19. A major risk arisingfrom biodiversity loss, and climate change, is the
emergence of new pandemics, as humans andlivestock are brought into closer proximity withwildlife, see policy 69.192
Biodiversity and biomass are being lost at an
unprecedented rate and immediate action isrequired. More than a million species are at
threat of extinction, including a third of theworld’s 60,000 species of trees.193 The climatebiodiversity nexus means that biodiversity loss
undermines climate mitigation, destabilisingcarbon sinks, and releasing long-stored carbon
into the atmosphere. Climate-nature feedback
loops accelerate species loss and extreme
climate events.194 For example, climate changeinduced warming damages marine biodiversity,
reducing the carbon-absorption capacityof oceans, which threatens spiralling global
warming and biodiversity loss.195 The Inevitable
Policy Response’s Required Policy Scenario calls
for an end to deforestation before 2030 and the
UN Convention on Biological Diversity (UN CBD)
targets the conservation of 30% of land and sea
areas by 2030.196

22

POLICY 54.
Conservation value
in mitigation andadaptation plans
By recognising the value of nature toclimate mitigation and adaptation
goals and to economic development,
policymakers will be able to channel
investment to nature, help achieve NDC
commitments and limit the economic
impacts of climate change. Conservation
can deliver immediate carbon reductions. andnatural climate resilience, e.g., mangroves
provide coastal flood protection, reducing theneed for engineered infrastructural solutions.
NBS provide many other economic benefits,
especially in rural areas where investment will
strengthen livelihoods and create new jobs.
By valuing nature, policymakers can be
incentivised to fund its protection. For
example, Ministries of Finance should
recognise that conserving forests has greater
overall value in achieving climate targets than
the short-term benefits of deforestation.

POLICY 55.
Nature-based solution
investment strategy
The scope of NBS is very wide and includes
the conservation and restoration offorests, mangroves and natural grasslands,
regenerative agricultural practices that
increase carbon storage in soils, andenhancement and protection of marine
ecosystems. Successful NBS projects increase
natural carbon capture and storage andenhance biodiversity. Biodiverse ecosystems are
more stable and resilient to change, generally
storing more carbon as well as providing
other ecosystem services, such as soil stability
and water supply. Countries with abundantnatural capital have a competitive advantage indelivering NBS, but few are taking advantage ofthe economic opportunities that this presents.
By encouraging investment into natural capital,
many developing countries could meet their
NDCs more easily and attract investment flows
from industrialised nations that seek NBS as aninterim step towards decarbonisation.

POLICY 56.
Nature-related risk andopportunity disclosure
The value of natural ecosystem services
is frequently ignored by the market andtherefore their economic contribution isoverlooked in financial assessments. Thisissue is being addressed by the Taskforce on
Nature-related Financial Disclosures (TNFD),
which is producing a framework that provides
transparency on nature-related risks andDeforestation not only releases carbon into
the atmosphere but also severely impacts
local rainfall and temperatures. Systemic
impacts from lower rainfall and increased
extreme heat days could result in reduced
investment flows as agricultural supply
chains become unreliable and sovereign
bond holders become exposed to energy
price inflation, loss of export income andreduced productivity.197
The majority of NDCs include carbon
reduction contributions from improved land
management, and ongoing degradation offorests and other ecosystems undermines
the contributions of other low-carbon
transition initiatives.198 Visibility of progressthat countries are making towards their
NDCs is likely to impact countries’ credit
ratings. A credit rating downgrade would
increase the cost of capital and disincentivise
investment. This provides a clear incentive
to policymakers to recognise the impact ofconservation on meeting their NDC and takeaction to support it.

to approved management plans for protecting
fresh water and biodiversity and providing carbon
storage. PES are funded by beneficiaries such as
water and hydroelectric companies.203
PES schemes can ensure resilient ecosystem
restoration and conservation. But basing
payments solely on carbon sequestration
targets can incentivise participants to plant thefastest growing plant species – which might be
non-native and not conducive to biodiversity –for the quickest results. The best NBS projects
encompass multiple objectives alongside carbon
sequestration, including positive biodiversity andsocial outcomes. PES projects can be explicitly
designed to meet the needs and ambitions oflocal communities. The San Ignacio lagoon in
Mexico, for example, serves as a calving groundfor grey whales, and a 340,000-acre area has
successfully been protected by annually paying
communal landholders USD25,000 per year tolimit development in the surrounding area.204

POLICY 58.
Nature-based
metrics for financial
instruments

opportunities, see Policy 93.199 Governments
and FIs can also use TNFD disclosures tofacilitate decision-making. Open-source data
hubs can provide FIs with ecosystem data tofacilitate asset-level assessments, like thosethat are being established for climate data.200
Similarly, including biodiversity activities ingreen taxonomies will increase awarenessof biodiversity investments, and their role inmeeting climate goals.201

Governments can fund conservation efforts
and protect carbon sinks with labelledsovereign issuance (policy 14). This has
already been demonstrated on a modest scale inthe case of blue bonds that were issued to fundocean conservation in Seychelles and Belize,
with the Belize bond funding a debt-for-natureswap.205 These act in the same way as green
bonds, providing investors with confidence thatthey are funding environmental protection.

POLICY 57.
Payments forecosystem services

Sustainability-linked bonds could be used to fundmuch wider conservation efforts. While most
SLBs are linked to emissions reductions, thesecan also be linked to biodiversity metrics. This issimilar to the sustainable land bond proposed in2018 by Climate Bonds, with interest offsetting
against land use emissions reductions.206 The
Finance for Biodiversity Initiative has proposed
nature performance bonds to invite dedicatedinvestment into conservation and restoration
activities.207 The first US municipal SLB, issued
by the Arizona Industrial Development Authority
funds forest restoration efforts, and its coupon
step-up is linked to KPIs of restoring 36,000 acresof forest and increasing the proportion of logs
sourced from restored woodland.208

Payments for ecosystem services (PES),
including for example watershed services(PWS), provide incentives for environmentfocused management of natural resources.
In a PWS system, a downstream service buyer(e.g., local water authority) compensates
upstream resource users (e.g., a farmer using
nitrate fertilisers) for changing their land use
patterns to improve water supply. As an example,
New York City adopted an integrated water
resource management approach to protect
the Catskill/Delaware watershed, incentivising
improved land management to maintain cleanwater supply. This cost about USD1bn, providing
significant savings when compared with the costof installing a water treatment facility, estimatedat USD4-6bn.202
Since introducing a PES scheme in 1996, in
response to decades of deforestation, Costa Rica’s
forest cover has doubled, and per capita income
has tripled. The National Forestry Financing
Fund compensates forest owners who adhere

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Government agreements on the export of carbon
credits through Article 6 of the Paris Agreement
will enable capital to flow from developed
to emerging markets.209 These can also be
accompanied by other agreements, such as tradedeals to lower the cost of importing renewableenergy technologies, enabling developing
tropical countries to play to their strengths
in delivering NBS in exchange for low-carbon
technologies from industrialised nations.

23

POLICY 59.
Carbon credit market reform
Carbon credits can be used to fundconservation efforts, particularly indeveloping countries which may lack funds
to protect conservation areas or currently
rely on revenue from ecosystem resource
extraction. The Paris Agreement Article 6
rulebook establishes rules for international
cooperation through carbon markets andwas agreed at COP26 in 2021. This includes
important requirements such as the use ofcorresponding adjustments to avoid doublecounting from country-to-country or projectlevel trades. The ‘overall mitigation of global
emissions tax’ discounts the volume of credit
going to the buyer by 2%. This is intended toensure net additional reduction in emissions,rather than just offsetting CO2 released in one
country with savings elsewhere.
The review of the Article 6 rulebook, to establish
whether to apply additional safeguards or limits
to the use of carbon credits is scheduled for2028.210 However, safeguards and limits needurgent implementation to ensure carbon credits
best facilitate net zero. Increasing the credit
discount could discourage offset use which
delays abatement.
Voluntary carbon market (VCM) reform
is underway to ensure credits focus
on protecting high-carbon and high-Agricultural policy
With farmland constituting morethan a third of the world’s landarea,217 agricultural policy is
crucial to achieving the lowcarbon transition. With climate
impacts increasingly threatening food security,
climate mitigation and adaptation should behigh priorities for ministries of agriculture.
Agricultural policies will need to show ambitionin line with the Transition Principles outlinedin Figure 14 and take into consideration the fullbreadth of the agri-food system, from inputs
through to consumption.

POLICY 60.
Rural development
strategies integratingclimate & biodiversity
Integrating climate and carbon awarenessinto rural development strategies will
ensure resilient land use and enablecommunities to harness the co-benefits ofgreen land use practices.
Naturally occurring soils are major carbon sinks,
accounting for the majority of biosphere carbon
storage. But agriculture and changes in land use

biodiversity stocks. The Integrity Council
for the Voluntary Carbon Market (ICVCM) isdeveloping guidelines for the supply side of themarket. These guidelines include an assessment
framework to establish whether the project
meets its Core Carbon Principles, including
additionality, permanence, and positive
sustainable development impacts.211
Differentiating certain carbon credits forpreferential treatment could ensure credits focus
on protecting high-carbon and high-biodiversity
stocks. For example, credit discounts could betiered according to the biodiversity impact of thecredit, with the lowest discount applied to highly
biodiverse credits.
Buy-side reform can ensure credits are onlyused to offset residual emissions. These are
the GHG emissions that will remain from some
economic activities, even after the implementationof decarbonisation technologies. For example,
current CCS technologies only capture up to 90%
of emissions, while aviation does not currently
have a clear emissions pathway.212 Currently
there are no limitations on who is qualified tobuy carbon offsets from the market. However,producers can choose not to sell to certain buyers– awareness of the reputational risk of selling tofossil fuel companies and possibly facilitating
greenwashing efforts.213 However, these concerns
may be swayed if fossil fuel companies offer highenough prices for offsets. Market reform is key tosafeguarding integrity.

are degrading and eroding soils so that rather
than storing carbon, soils have become a sourceof emissions. Current agricultural practices inmany parts of the world are carbon intensive
and ecologically damaging, which over time
undermines resilience to climate risks andeventually renders agricultural land unusable.
Further, as the organic content of soil
falls, the land is less resilient to flooding,drought and other weather-related risks.
Over time, continued mismanagement of soils isendangering food security, as agricultural land
becomes unusable. Adaptation of water systems
and increased fertiliser use, to compensate
for the loss of nutrients, cause knock-on
environmental problems elsewhere.218 This has amajor economic impact, with soil erosion alone
estimated to cost the US agricultural sector
USD44bn/year.219
Ensuring climate mitigation and adaptationin rural development strategies will address
carbon emissions from soil erosion andensure resilience to climate hazards. It will also
safeguard development as it means land remains
productive, reduces reliance on nitrate fertilisers,and ensures food supplies.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

The Voluntary Carbon Markets Integrity
Initiative (VCMI) was established in 2021 toprovide guidance on the use of carbon credits.
For example, users must set science-based
interim emissions reduction targets.214 Market
reform could prohibit certain sectors fromparticipating in the VCM or establish certain
requirements for participation. This could limit
the use of carbon offsets s to only hard-toabate sectors.
Requiring carbon credit buyers to have
1.5°C-aligned transition plans alongsiderobust transition plan requirements(policy 94) can ensure offsets do not
replace or delay carbon abatement action.
For example, the Climate Bonds Credible
Transition Principles require that transition
plan emissions reduction pathways do notinclude emissions reductions generated
through offsets, see Figure 14.215
The VCM is set to grow and is gaining
international support on both sides of themarket. For example, Japan will launch its
GX League in April 2023, and companies will
participate in voluntarily emissions offsetting
through a national carbon credit market.216
These actions and others by policymakers
will regulate the VCM and ensure that offsets
fund conservation and do not hinder progress
on abatement.

POLICY 61.
Agricultural
subsidy reform
Governments should prioritise
phaseout of policies that inadvertently
support emissions-intensive agriculture,including policies relating to foodprocessors and the procurement strategies
of retailers. This can prevent market distortions
and support investment in climate-smart
agriculture.220 Gradual phaseout will prevent
food price shocks. Subsidies can be redirected
to fund sustainable land use, conservation,and other nature-based solutions. A 2020 study
suggested that the reform of subsidies forforestry, fisheries, and especially agriculture is
the single biggest way to close the biodiversity
funding gap.221 Measures should avoid taking
highly productive land out of food production.
Costa Rica discontinued cattle subsidies in the
1980s, which saw the number of cattle in the
country drop by a third and removed incentives
to clear forest – the country’s deforestation rate
reduced significantly over the next decade.222
Powerful reform is possible: globally, livestock
accounts for 83% of all agricultural land, but
only produces 18% of calories and 37% of

24

protein.223 Cattle also account for 62% of all
livestock emissions.224 With meat consumption
expected to peak globally in 2030 and fall 30%
by 2050, farmers can be encouraged to pre-empt
a fall in demand and move away from livestock
production and focus on other markets.

POLICY 62.
Green preferential tax reform
Fertilisers and pesticides are carbonintensive and lead to soil degradation,with run-off polluting water and causing
biodiversity loss. Switching to moresustainable, regenerative agricultural methods,
can reduce emissions and ecological damage.
Taxation can direct investment to low-carbon
farming methods. Fertiliser and pesticide taxes
have been in place in Norway and Sweden sincethe 1980s, while in Argentina, organic produce is
exempt from export tax.
Fertiliser production is a hard-to-abate sector,
requiring R&D funding and specific subsidies
to develop low-carbon fertiliser production.
Taxation schemes that place higher taxes
on fossil-based ammonia and fertilisers canencourage investment in low-carbon fertilisers.
See Industrial policy for more policies todecarbonise this industry.

POLICY 63.
Loans and grants
for resilience
Improved soil management canensure the resilience of agricultural land.
Cover cropping (planting to protect soil against
rain run-off after harvest) and agroforestry(fruiting trees and/or planting crops below
trees) can protect soils as they are less exposedto the erosional power of wind and rain. This
also reduces fertiliser use as the decompositionof cover crops or tree litter releases nutrientsand leguminous species capture nitrogen.
Terraced hill farms can reduce erosion fromrainwater runoff and enable more water
retention.225 Government support for improved
soil management can include subsidies andeducation on the benefits and methods ofagroforestry, cover cropping, terracing etc. Thiscan help restore degraded land and prevent
further erosion.
Increasing the efficiency of agricultural land use
can increase resilience, reducing deforestationpressures of agricultural land. With improved
management, current agricultural land could
grow enough food to feed more than double
today’s global population.226
Agricultural technology is advancing rapidly,
and can help to maximise resource efficiency(e.g., precision agriculture and controlledenvironments) as well as reduce food loss
(e.g., solar-powered cold chain facilities).
Governments can support technologicaladoption, through the provision of loans
or grants or tax exemptions. Alongside this,governments can strengthen farm advisory
services, targeting improved, climate-smart
crop technologies and livestock husbandry
practices. Government R&D should focus on thedevelopment of new technologies, including
alternative proteins and innovations tostimulate the circular economy.
With farming in developing countries
often characterized by smallholders,the adoption of green technology canbe difficult. Cooperatives and smallholder
associations can disseminate informationand enable the uptake of green technologies.
Rural development strategies that maintaintraditional risk-averse subsistence farming
strategies such as rotational farming, while
enabling market access can improve rural
livelihoods, without over-exposing farmers
to market fluctuations. Tackling resource
constraints to adaptation (e.g., providing
drought-resistant seed) can enable resilience
without disrupting communities.227

Social policy
A key responsibility of governments
is to ensure the wellbeing of their
populations. Social priorities areclosely aligned with climate priorities,
particularly climate resilience, as thiswill minimise loss of life and social disruption.
The transition away from high-carbon activities
will also rework the global employment
landscape, resulting in largescale social change.
Education and employment policy can ensure
the population gains the skills required to accessgreen opportunities. Ensuring equitable accessto these opportunities will maximise growth andprevent instability.

POLICY 64.
Climate risk
communication
The social impacts of climatechange are central to the argument for
immediate and robust action. Even 2°C ofwarming, compared to 1.5°C, will result in far
more frequent extreme weather events suchas droughts, floods, and crop failures.228 Clear
communication of these risks will help prompt
more ambitious action.
Improving awareness of climate risks andopportunities will generate voter buy-in forclimate policies. It will also help generatebottom-up support for transition. Increasing
public awareness of climate change is leading toincreasing demand for green investments andpensions, and for green products. This bottomup pressure on investors and companies cancomplement top-down government action.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

POLICY 65.
Climate and social
priority alignment
The transition provides employment
opportunities and can improve equality.
However some short-term thinking canperceive decarbonisation and development
as in opposition. This can be overcome byintegrating climate risks and opportunities indevelopment plans.
Faster transition is estimated to be less expensive
than delayed action, which increases budgetary
space for social priorities. The smoothertransition resulting from prompt action also
reduces the likelihood of both asset and job
stranding. By ensuring a smooth and justtransition, policymakers can also avoid politicalinstability which may jeopardise climate goals.

POLICY 66.
Gender inclusion inclimate finance
Environmental issues can overlay
or exacerbate existing social inequalities.
Indigenous people’s land rights are often
endangered by deforestation or pollution, withwomen particularly vulnerable to this. Lowerincome households will also be disproportionately
exposed to climate hazards and least-equipped toadapt to them, while 80% of people displaced byclimate change being women.229
There is also a risk that green opportunities
will not be equally accessed by populations.
Green jobs and investment tend to be in sectors
traditionally dominated by men (engineering,
technology, construction, etc.). There is adanger that transition could exacerbate genderinequalities. OECD has called for targeted
approach to green skills, empowering women’s
participation in green leadership, introducing thegender-environment nexus to support transition
and women’s economic empowerment.230
Incorporating gender inclusion into
climate financing mechanisms would be‘smart climate finance’ because women’s
empowerment yields greater economic
growth.231 A scenario in which women participate
in the economy equally to men would increase
annual GDP 26%.232 Therefore policymakers
can prioritise projects with maximum socialand gender co-benefits, such as RE installations
which end reliance on firewood collection
and combustion. This would ensure greater
productivity and efficient use of the workforce.
Women’s education also increases climate
resilience, significantly reducing the impacts ofnatural hazards.233
Including communities in conservation will reduce
enforcement cost and prevent adverse social
impacts. Indigenous peoples have extensive
knowledge of sustainable extraction practices that25

can inform wider land use practices. A key featureof successful sustainable land use management
programmes is the respect for indigenous land
rights, and the support of local livelihoods andeconomic development.

POLICY 67.
Green development
hubs
To stimulate growth inunderdeveloped areas, governments canestablish green hubs to encourage the growthof green industries. Fast-tracking permitting for
key decarbonisation technologies, accompanied
by local employment and development
requirements, will both ensure supply of green
materials and help generate future-proof jobs.

POLICY 68.
Net zero jobs strategy
Successful transition will require availabilityof trained workforce to avoid bottlenecks.
In addition, the net zero transition will require
the closure or redevelopment of many industrial
plants. Including just transition measures suchas workforce retraining in the phaseout ofhigh-carbon activities can prevent largescale
job losses and create community buy-in, seepolicy 30, and ensure workforce availability for
growth of key green industries. The European
Commission’s proposal for a Green Deal
Industrial Plan includes skills as one of its key
pillars for the green transition.234
Safeguarding the jobs that will be needed
under net zero is crucial. This includes those ingreen industry, but also those in key services.
The UK Green Jobs Taskforce was established toassess how to provide the skills required for the
low-carbon transition and how to support transitionof workers in high-carbon industries.235 Expanding
definitions of green jobs to include low-carbon jobs
would help channel investment to support these.
This would also tackle inequality as these lowcarbon jobs such as care, health and education areoften mostly held by women.236

Health policy
Many health and climate change
issues are closely related, with many
common solutions. Uncovering
these commonalities can help
drive sustainable finance to bothaddress climate change and improve health.

POLICY 69.
Climate change healthimpact assessment
Climate change presents several
threats to human health. Whilst the extent ofwarming is still unclear, even meeting 1.5°C will
increase the frequency of extreme weather

events and disease outbreaks. Therefore,
strengthening the capabilities of health services
to cope with these events is a crucial elementof climate resilience.
Climate change will lead to more pandemics,
preparedness for this, and recognition ofpandemics as a climate-related risk, will ensurethat such events do not derail decarbonisation,
contributing to a smooth transition.

POLICY 70.
Climate mitigationplans including
health benefits
There will be more pandemics in the future.
Climate change can directly contributeto increased disease emergence. Climatechange and deforestation has dramaticallyshrunk ecosystems. This, in addition to increased
frequency of wildfires, droughts, and floods, has
led to increased encounters between humans
and wildlife and therefore zoonotic spillover –the transmission of pathogens from one animal
species to another.237 Climate change is also
already impacting the distribution of vectorborne diseases such as malaria.
Recognising the health benefits of tacklingclimate change will help direct funding to thesesolutions and enable health solutions to accesssustainable finance flows. For example, measures
to reduce fossil fuel combustion in buildings andtransport will also improve air pollution-related
health conditions. Coordinating air/water quality
interventions with climate action can create
efficiencies and reduce cost.
Halting deforestation could also reduce theemergence of zoonotic diseases. Preventative
measures are more cost effective than curative
measures and tend to be more effective. There isa “triple bottom line” from ecosystem protection;
maintaining biodiversity, limiting climate change,and decreasing disease emergence. Recognising
the synergies between health, adaptation
and biodiversity conservation can create cost
efficiencies in addressing them.238

POLICY 71.
GSS+ issuancefunding health
In 2020, the COVID-19 pandemic
saw massive issuance of pandemic bonds (asubset of social bonds) to finance immediate
response and long-term recovery plan,
resulting in a tenfold increase in social bondissuance 2019-2020, and continued growthin 2021, see Figure 1.239 Sustainability issuancealso funded pandemic response, see Thailand’s
TBH50bn (USD1.6bn) sustainability bond funding
public transport and COVID-19 rehabilitation,
detailed in Fi. The growth of sustainability issuancereflects increasing recognition of the congruity
between climate action and social development.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Defence and security
Climate change impacts are alreadyresulting in increasing volatility andconflict.240 Avoiding conflict andcatastrophes will be a key elementof climate resilience, and climatechange is material for defence decision making
and policies. Defence departments globally willneed to prepare for climate-related volatility,
while government leaders and diplomats working
to avoid conflict will also be avoiding increased
carbon emissions.
Defence policy could also provide lessons for
how to tackle climate change. Many are callingfor a ‘war footing’ for climate change. Europe’s
sudden transition away from Russian fossil gas
imports in 2022, from 41% to 13% December
2021 to November 2022, demonstrates the speed
that is possible.241

POLICY 72.
Climate risks in
defence strategies
Climate change will lead tochanging demands on defence capabilities.
Extreme weather will likely lead to increased
demand for humanitarian assistanceand disaster response capabilities.242
Incorporating climate risks into defence strategies
will help build resilience to climate hazards suchas increasing flooding, droughts, and wildfires.

POLICY 73.
Volatility resilience
Resilience to volatility is partof climate resilience. Sudden
catastrophes can cause economic
shocks and possible diversion ofbudgets. Climate change will also
increase the likelihood of conflict, with
impacts such as resource scarcity anddisplacement causing instability andunrest. Accounting for this risk of increased
volatility can increase resilience ofbudgets, preventing the sudden diversionof resources.
Understanding the geopoliticalvulnerabilities inherent in overrelianceon fossil fuel imports or exports can also
increase decarbonisation efforts.

POLICY 74.
Conflict prevention
Conflict will not only be made more likely byclimate change, but it will also contributeto it. Global militaries account for around
6% of GHG emissions.243 Warfare also resultsin significant environmental destruction
and water pollution.244 International conflict
has environmental impacts far wider than26

these direct impacts. Arguably, international
conflict’s greatest threat to 1.5°C is its threat tointernational collaboration and agreements.
War and conflict disrupt global supply
chains. Russia’s invasion of Ukraine disrupted
global supply chains of fossil gas, leading tolarge fossil fuel investments as countries tried todiversify their fossil gas supply. Such investments
may delay decarbonisation plans, and possibly
lead to other countries delaying fossil fuelphaseout in response.
In addition, Russia has since significantly
weakened environmental legislation andoversight, including directly venting fossil gas into
the atmosphere.245 The government has claimed
that sanctions prevented it from following the(already under ambitious) decarbonisation
pathway set out before the war.246 Countries at
war and/or under severe economic sanctions
may roll back climate policies, to reduce
expenditure and due to removal of “peerpressure” to reduce emissions. Avoiding conflictis central to climate mitigation.
International diplomacy will play a key rolein avoiding conflict and in depoliticisingclimate issues. This could help avoid climateagreements from failing when geopoliticaltensions rise, see International relations.
Defence policy should primarily focus on tacklingconflict’s root causes and avoiding climaterelated conflict.247 This will include holistic social
policies, ensuring resilient and equitable accessto necessities and other resources to prevent
unrest. The cost of preventing conflict is also far
smaller than managing it.

POLICY 75.
Defence spending
decarbonisation
The need for economywide decarbonisation means that
defence investments will also need to be
decarbonised. Defence is a significant sourceof GHG emissions, accounting for 50% of UK
central government emissions.248 The nature ofdefence, and warfare means that it will likely be
impossible to completely decarbonise activity
and prevent environmental damage, however,significant reductions can be made. R&D todecarbonise defence could also facilitate wider
emissions reductions. For example, aviationaccounts for a significant portion of defence
emissions, R&D to develop sustainable aviation
fuels will also facilitate decarbonisation of amajor hard-to-abate sector.

Justice
Climate change litigation on
environmental issues has been
rising, with the number of cases
doubling 2015-2022. Cases
have been brought to holdgovernments or entities to account on their net
zero targets, or to demand greater ambition.
However, anti-climate cases have also beenbrought to challenge climate regulations or
claim compensation on stranded assets. Climate
litigation is expected to continue growing, as
scientific progress provides more granular
evidence and enables stronger attribution.249
The IPCC has recognised the role of litigation in
affecting “the outcome and ambition of climate
governance”. There is growing recognition thatthe legal system can meaningfully contributeto climate change, with growing efforts within
the legal community to target systemic climatechange issues.250
Climate litigation, and climate law enforcement
are also closely related to human rights and justtransition, with human rights forming the basis
for many climate cases. Enforcing conservationand deforestation legislation can also undermine
or strengthen indigenous land rights, dependingon their design.

POLICY 76.
Environmental law
enforcement
Governments’ enforcement ofenvironmental laws is crucial, to ensure
protection of conservation areas and prevent
illegal carbon emissions. Illegal logging andresource extraction must be controlled, as
they undermine climate mitigation efforts andundercut sustainable activities in this sector.251
The consequences of the lack of enforcement oflaws are clearly demonstrated by the accelerated
deforestation seen in Brazil 2019-2022.252
Enforcing climate laws is also crucial for ensuring
emissions targets are met. For example, methane
venting, direct release of fossil gas into theatmosphere, and leakage significantly increase
the carbon intensity of fossil fuel operations.
While many countries regulate against this,enforcement is low, with global energy sector
methane emissions 70% higher than official
figures.253 Satellite monitoring is becoming animportant tool for policing emissions but will also
expose poor policing, posing a political risk.

POLICY 77.
Climate litigation
risk mitigation
Policymakers will need to
anticipate the growth of climate cases brought
to challenge ambition or implementationof climate policy.254 There is a risk that policy

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

measures could have to be taken very quickly tocomply with judicial decisions. Government legal
teams will need to ensure that government action
is consistent with legal duties, safeguarding anorderly and rapid transition, without sudden policychanges. Policymakers could also recognise theopportunities posed by the obligation to makedecisions, engaging with the climate science
underpinning the framework challenges.
Climate litigation has played an important rolein fossil fuel phaseout, challenging government
support for fossil fuel use. These cases are also
increasing in the Global South, with challenges
mounted against exploitation of new reserves.
Greenwashing cases are also increasing, thesecan challenge transition strategies, such as
overreliance on carbon capture or offsets.
Recognising the risks posed by litigation can
encourage greater government ambition on
climate action.

International
relationsInternational relations encompass
the government’s interaction withother states or unions and are theresponsibility of the Foreign Officeand Diplomatic service. They areclosely linked to other foreign policy areas ofTrade, Development and Defence and Security.

POLICY 78.
International
collaboration
International collaborationand coordination are vital for the successof sustainable finance policies and climate
targets. For example, international collaborationis one of the PBOC’s five pillars of sustainablefinance. The UNFCCC Conferences of the Parties(COP) are the most high-profile opportunity
for this, resulting in the signing of the Paris
Agreement in 2015. Recent years have seen
increased focus on finance; COP27 resulted inan agreement on a loss and damage fund forvulnerable countries.255
Inter-governmental forums such as the G20 and
G7 offer an opportunity to align on key policies
such as fossil fuel phaseouts and international
carbon pricing, enhancing the COP process. The
G20 Sustainable Finance Roadmap sets out fivekey policy areas to advance international efforts
to scale climate finance.256 In 2022, the G20
agreed to pursue efforts to limit the temperature
increase to 1.5°C, aligning with IPCC assessmentsthat climate impacts will be much lower at
1.5°C compared with 2°C.257 Other international
collaborations can range from unilateralsovereign guarantee agreements, to multilateralcarbon price agreements.

27

POLICY 79.
Climate diplomacy
International diplomacy cancommunicate the risks andimpacts of climate change and galvanise
global action. The united efforts of the Small
Island Developing States (SIDS), a coalitionof low-lying vulnerable island nations, have
had a disproportionate impact on UN climate
negotiations.258 Climate change impacts arehighly unequal, with many regions already seeing
increased hazards and loss of life. Recognisingand addressing this disparity is key to the justtransition, for example the loss and damage fundto assist developing countries in responding toclimate change.259
Conflict both poses a threat to climate mitigationand is already being exacerbated by climatechange, see Defence and security. International
diplomacy efforts to avoid conflict can help
safeguard the green transition.

POLICY 80.
International
capacity building
International collaboration canalso take the form of peer-to-peer capacity
building. Government leadership can facilitate
their departments to share their experiencesin developing and implementing the policies
outlined below. This will not solely be led by DM
governments, as many innovative climate financepolicies have been introduced in EM countries,
due to constrained balance sheets, and greaterclimate risk exposure.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

28

Central banks and regulators
Central banks and regulators have an
opportunity to promote sustainability and ensure
credibility and soundness of sustainable financemarkets and investments. While central banks
are independent from government, they are key
policymakers in transition and the role of central
banks in addressing climate change is increasing
in prominence: the growing consensus thatclimate change poses a systemic risk to financial
stability brings it firmly within central bankremits. The growth of the Network for Greening
the Financial System (NGFS) to 121 members, asof October 2022, is proof of this. In addition, thethreats of biodiversity loss to financial stability
are such that the NGFS has declared that thesefall within the CB mandate.260

Monetary policy
Central banks can safeguard
financial stability by addressing
climate change. Central banks canadapt almost all elements of theirpolicymaking to reduce financial
stability risks from climate change, see Figure 13.

While monetary and prudential instruments arepresented separately here, there is a need for
coordination of these policies to address climaterelated risks. CB COVID-19 response measuresdemonstrate how policy innovation can address
systemic risks.261

POLICY 81.
Green asset purchaseCentral banks’ reluctance toaddress climate change partly
stemmed from concerns of distorting
financial markets and impacting pricestability, the main focus of their mandates).
This particularly limits green monetary policy,
as asset purchase is carried out in accordancewith market neutrality, replicating market
distribution to avoid market distortion. However,they are increasingly recognising that ‘market
neutral’ approaches under-price climate risk
and can overly favour high-carbon assets dueto their dominance of financial markets and are
introducing measures to align asset purchasewith climate goals.262

Adjusting monetary operations away from themarket neutrality principle and towards climate
neutrality can help ensure financial stability andresilience to climate-related risks.
Since 2018, the Banque de France has aligned
the equity portion of its EUR23bn asset portfolios
with a below 2°C trajectory and is now working
to align it with a 1.5°C trajectory. This is done byfiltering out those companies least compatible
with 2°C and preferencing companies alignedwith the target. It also purchased EUR1.6bn of its
EUR1.9bn transition financing target by the endof 2021.263 Sweden’s Riksbank made inclusion inits corporate bond QE conditional on compliancewith sustainability standards.264
During periods of monetary expansion, the CB
can tilt asset purchases to green. The European
Central Bank (ECB) now tilts all corporate bondpurchase using an issuer-specific climate score,
based on past emissions, ambition of climate
targets and disclosure quality.265 This composite
score also enables the transition of emissionsintensive companies as the score is not solely
based on emissions.

Figure 13: Options for greening central bank operations
Central Bank
Prudential

Monetary
Bank balance
sheet

Central Bank
balance sheet

Micro

Macro

Indirect

DirectSupervisory
review
Liquidity
requirements
Capital adequacy
Mandatory ESG
risk management
standards

Loan-to-value
and loan-toincome caps
Large exposure
restrictions
Risk weighting

Credit operations
pricing
Conditionality ofcredit operations

Interest Rate
Exchange rate
Minimum
Reserves

Collateralframeworks

Non-standard

Stress testing
Disclosure requirements

Countercyclicalcapital buffers

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

Haircuts
Asset Eligiblity

Quantitative
EasingAsset Purchase
Sovereign bondpurchase

Credit guidance

Own reserves

Targetedrefinancing
Priority sector
lending

Eligibility

29

The CB can still green its portfolios during
monetary tightening. For example, the ECB will
tilt purchases to better climate performers morestrongly during partial reinvestment. It is also
considering actively reshuffling the portfolio togreener issuers to meet climate targets.266

POLICY 82.
Green foreign exchange
reserves
Like asset purchases, foreign exchange
reserves can be adjusted to take climate risk
into account. For example, Sweden’s Riksbank
applied climate risk weightings to a portion of
its SEK500bn foreign exchange reserves andexcluded bonds from the highly fossil fueldependent provinces of Alberta, Canada andWestern Australia and Queensland, Australia.267
Hungary’s MNB created a dedicated green bondportfolio within its foreign exchange reserves in
2019.268 However, such adjustments will need tobe made carefully in order to avoid restricting theability of highly polluting states to decarbonise.
With growing concern over the impact oftransition risk on cost of capital for emerging
markets, such policies could include sensitivity totransition plans.

POLICY 83.
Collateral framework
adjustment
Collateral frameworks can be adjusted toaccount for the climate risk of an asset.
The collateral framework has a significant
impact on the price and allocation of capital.
It determines what assets an FI can pledge to
receive a loan from the CB. This Several central
banks have widened the framework, for example
the ECB includes sustainability-linked bonds. The
PBOC includes AA-rated green bonds and credit,
citing the lower non-performing loan ratio ofgreen loans.269
A haircut (reduction in value) is applied topledged assets based on their riskiness. Thisis traditionally calculated based on historical
data. Incorporating climate risk will allow better
resilience to future systemic risk- as outlined
regarding risk weightings for capital and reserve
requirements above. Adjusting the haircut allows
for a scaled approach to green monetary policy.
Calculation of green supporting or brown
penalising factors may require evidence fromclimate stress tests, and their strength may also
depend on whether the CB feels it is within its
remit to actively promote net-zero transition.
The NGFS suggests the most impactful haircut
adjustment to be one that uses a sliding scale
combining positive and negative screening, andthat this would prevent constraints to liquidity
by ensuring post-haircut collateral volume
remains constant.270

POLICY 84.
Climate-tilted credit operations
Central banks can adjust credit operations
to reflect climate risk. This can be doneby adjusting the interest rate of lending
facilities to reflect counterparties’ climaterelated lending, or according to carbonintensity pledged collateral. For example, theBank of Japan offers a zero-interest rate to
FIs that finance climate mitigation projects inJapan, exempting these loans from negativeinterest rates paid on central bank deposits.
The announced programme replaces an earlier,
growth-oriented lending facility, which provided
0.1% subsidy to banks that financed projects
deemed to contribute to economic growth.271
Availability of lending can also be madeconditional on climate-related disclosureor the proportion of green investments. For
example, during the COVID-19 pandemic,
Canada introduced a Large Employer Emergency
Financing Facility, access to which required
TCFD disclosure among other constraints.272
However, uptake was limited (a total of sevenloans approved) since finance was also available
to firms through the Bank of Canada’s asset
purchasing programme on less onerous terms.273
This demonstrates the need for consistency
across financing facilities provided by the CB andgovernment.

POLICY 85.
Green credit guidance
Credit guidance is used by alimited number of central banks.
This is when the CB mandates that a certain
share of loans is issued to specific sectors orthat firms in those sectors have access to credit
at discounted interest rates. It could be used tochannel lending to key transition activities.
Green targeted refinancing lines offering
preferential refinancing for specific green
assets enable FIs to lend at lower interest rates
to sustainable projects. This is most relevantin economies with relatively underdeveloped
secondary security markets as they lack marketbased refinancing options. 274
Asian central banks have used priority sector
lending to increase the supply or reduce the costof credit for specific sectors, either underserved
by financial markets or strategically significant.
The Reserve Bank of India added renewableenergy as a priority sector in 2015, causing RE
portion of energy sector bank credit to grow from
5.4% to 7.9% by 2020. Bangladesh Bank requires
financial institutions to allocate 2% of all loans
to green projects and for 15% of all loans to meeta wider definition of supporting ‘sustainable’
activities.275 The ECB has suggested it will look atgreen targeted lending when its monetary policy
becomes expansionary again.276

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

These mandatory credit quotas have thepotential to create severe market distortions
and should be carefully evaluated against
other less distortive incentive measures such aspreferential treatment of green lending. Rather
than setting a hard quota, central banks could
offer preferred interest rates for priority sectors;
setting interest rates to promote sustainable andcurb unsustainable lending, however this is still ahighly interventionist policy.277

Prudential
regulation
Within prudential regulation, central
banks can take action to ensure
systemically important financial
institutions adequately integrate
climate risk. Prudential regulation is primarily
guided by the Basel Committee on Banking
Supervision (BCBS). Basel III is its global
framework for regulation, covering minimum
capital requirements, supervisory review, andmarket discipline. A review of its core principles andsupervisory review process concluded these were
sufficiently broad to accommodate supervisory
response to climate change, However, they do not
explicitly account for climate risk. Individual CBs
will need to take steps to address climate-related
risk exposure until the Basel Framework explicitly
integrates climate-related risks, particularly given
the long timelines to update the framework.
BCBS recently issued 18 principles for theeffective management and supervision ofclimate-related financial risks, to provide
additional guidance on addressing climaterelated financial risks.278 Central banks canuse these principles to inform FIs about
their expectations for the management anddisclosure of climate and environmental risks.279
For example, the BCBS principles suggest
compensation policies could be altered toinclude climate risk.
Central banks will also need to evaluate prudential
regulation to ensure that it does not unintentionally
adversely impact green investment. For example,
Basel III stipulates a higher capital requirement
for long-term credit because long-term loans are
considered riskier. This disproportionately impacts
sustainable finance projects as infrastructure
projects are, by nature, long-term.280

POLICY 86.
Climate stress testing
Climate stress testing (carriedout top-down by the CB or
bottom-up by individual FIs) is an important
tool to reveal sources of climate risk
vulnerability within the economy. Thiscan also prompt FIs to take action to improveclimate resilience and can inform monetary andprudential policy operations. Central banks can30make use of the NGFS scenarios for national
scenario development and stress testing. Thesesix scenarios provide supervisors with various
30-year forward projections of climate mitigation
policies and physical climate risks.281
One of the most comprehensive climate stresstests has been carried out by the ECB. This
assessed the physical and transition risks facing
2,000 banks and 4 million companies worldwide
over 30 years. This showed the heterogeneity
and significant concentrations of physical andtransition risk exposure across regions, sectors,
and financial institutions. This stress test also
explored complexities posed by the amplificationof natural hazards, such as protection gaps
(non-insured losses). The 2022 supervisory stresstests focus on climate-related risks, carried out
as a learning exercise without directly impacting
capital requirements. The results of the test
found climate risks to be relevant for the majorityof supervised institutions, with high reliance oninterest income from high-emitting sectors but
a lack of long-term strategies to transition credit
allocation.282
Some central banks, particularly in EM, may
not have the capacity to carry out economywide stress testing. However, they could
test a specific risk to which it is particularly
exposed. For example, De Nederlandsche
Bank stress tested physical flood risks, revealing
potential losses of EUR20-60bn.283 The National
Bank of Belgium’s 2020 Financial Stability Report
included an article on real estate transition risk
exposures in the Belgian financial sector andrecommended that “financial institutions analyse
the extent to which the energy inefficiency of
their real estate exposures could have an impact
on current and future credit risks, and to takemeasures to manage and limit this transitionrisk”.284

POLICY 87.
Climate disclosure
requirements
A major barrier to stress testing, and theintroduction of climate criteria in monetary
policy, is a lack of data.285 The lack of Scope
1,2 and 3 emissions, and the use of proxies byfinancial institutions for emissions data can beaddressed by mandatory climate disclosure
requirements.286 These are increasingly being
introduced by central banks and can also
inform policy and prompt FI action. Disclosure
requirements can follow the framework set out
by the Taskforce on Climate-related Financial
Disclosures (TCFD).287 Aligning prudential
disclosure requirements with those for otherfinancial market participants ensures consistencyof data. Several central banks now maketheir own climate disclosures. This provides
an example and strong signal to the market.
Assessment of climate risks and opportunities
will also inform climate-related policymaking.

POLICY 88.
Green capital and reserve
requirements
Central banks can adjust risk weightingsfor capital and reserve requirements
to include climate risk. Risk weightingsnormally rely on historical data, and socentral banks can add a green-supporting or
brown-penalising factor to incorporate futureclimate risks. For example, Hungary’s CB
introduced preferential capital requirements
for green mortgages, by discounting capitalrequirements against lenders’ balance sheet
exposure to green mortgages. This was
based on the lower risk of default on green
mortgages.289 290 PBOC has included green
credit in its macroprudential assessment,with a higher level of green assets improving abank’s score.291

Mandatory ESG risk management standards
require financial institutions to incorporate
E&S risk factors into their governanceframeworks. These may include rules forlending, such as obliging banks to include anassessment of E&S risks as a criterion for loan
origination. This reduces the flow of finance topolluting firms. 288

POLICY 89.
Carbon capital buffer
Some CBs require financial institutions
to hold a counter-cyclical capital buffer,with which to absorb potential losses. This
is increased when risks build in the financial
system. CBs could introduce a carbon capital
buffer; whereby financial institutions are
required to hold a certain volume of capital
proportionate to the emissions intensityof their portfolio. A carbon capital buffer
could simultaneously provide resilience totransition shocks and ‘carbon bubble’ risks andcreate economy-wide incentives to allocate
finance away from high-carbon sectors andtechnologies.292 No central bank has yet
implemented a carbon capital buffer.

Eligibility of these loans for preferential reserve
requirements could be verified by a climate
science agency, which could assess whether
the underlying investments would contributeto greening the energy sector and declare thebank loans that finance them eligible.
Risk weighting adjustments are a powerful tool
for the central bank to increase green lending,
without incurring additional expenditure.
They can also be made by central banks witheven very narrow mandates as they address
financial stability risks, rather than promotesustainable development or other suchsecondary objectives.
Central banks could also introduce normative
green capital requirements – in addition to Baselcapital requirements. This is only possible inmarkets with a large enough pool of green debt.

also be used to limit the extension of credit tocertain industries and limit the flow of resources
to carbon-intensive sectors or companies.293

POLICY 90.
Sustainable financeresearch and analysis
CB research and analysis
can play an important influential role ingrowing sustainable finance, for example,
the research produced by the NGFS.294
They can also play an instrumental role ingreen Taxonomy development; ASEAN central
banks led the development of the regionaltaxonomy and several national taxonomies.
Through the promotion of this research, and theintroduction of some of the policies outlined
below, central banks can signal the importanceof climate change issues to market participantsand encourage further action, beyond thatincentivised by specific policies.295

A carbon capital buffer, or a brown penalising
factor on risk weighting would need to becarefully evaluated to ensure that it does not
reduce the capital available to transition highcarbon corporates.
Large exposure restrictions (bycounterparty, sector, or geographic area)
are employed to limit the exposure offinancial institutions to assets entailing highrisks or high carbon intensity. This can protect
financial institutions against a carbon bubble
but could also be employed for the fine-tuningof lending restrictions and credit allocation.
Loan-to-value and loan-to-income caps could

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative31

Supervisors
and regulators
POLICY 91.
Climate consideration
requirements
Financial market regulations
can be updated to include climate change
considerations to ensure that productofferings match retail clients’ environmental
preferences in pensions, investments,
and insurance. The French regulator foundthat despite strong retail investor interest in
sustainability, only 17% reported holding atleast one related investment.296 Product level
disclosure rules require amendment to make surethat consumers’ sustainability preferences are
considered in the financial advice and marketingof products.297 The European Securities andMarkets Authority is partly responsible for drafting
technical norms for integrating sustainability
preferences. These require firms to ask clients
about their sustainability preferences andidentify the products that fulfil these. It has also
released proposed amendments to its Suitability
Guidelines to outline how it expects sustainability
considerations to be built into the suitability
process.298 The US Securities and Exchange
Commission has proposed norms to enhance
disclosures about ESG investment practices.299 It
will review its “names rule”, which requires fundinvestments to reflect the name, to adapt it more
specifically to ESG investing.300
Regulators can embed climate risk
considerations into senior leadership
requirements, integrating responsibility forclimate risk into board accountability and due
diligence requirements . Including double
materiality ensures boards consider impact on
climate, as well as climate risk exposure. In theUK, bank and insurer boards and leadershipteams are required to have climate oversight,
partly due to increasing climate liability risks.301
Legal action against financial institutions orcompanies whose activities negatively impact theenvironment, or who fail to protect their clientsfrom climate-related risk have risen significantly,
see policy 77.302
The EU’s proposed Corporate Sustainability Due
Diligence Directive would require companies toadopt a plan to make their business model andstrategy compatible with 1.5 °C, but only requires
emissions reductions objectives for those forwhich climate is a principal risk for or a principal
impact of the company’s operations.303 Requiring
near- and long-term emissions reduction targets
from all companies in the Directive’s scope would
strengthen its impact and help embed sufficientambition in corporate transition plans.304

POLICY 92.
Regulatory KPIs
Regulatory KPIs can be established tonudge financial institutions to allocate
their capital towards green or transition
activities through capital regulations. These
measures do not put stability of the financial
system at risk if designed carefully and are nondiscriminatory (i.e., if all financial institutions
in a given jurisdiction have an opportunity
to take advantage of this measure). It is very
important to set KPIs for financial institutions anddevelopment banks in alignment with sciencebased green taxonomies. Vague KPIs, aligned,
for example, the SDGs, may be too vague andinefficient in terms of decarbonisation.

POLICY 93.
Climate disclosure
requirements
Regulators are increasingly
establishing climate disclosure
requirements. While these do present a large
administrative burden, disclosure is a valuable
tool to assess alignment with a 1.5°C pathway,
encourage FIs and corporates to decarbonise
their activities, enable enforcement of targets
and phaseout dates, and inform climate-related
risk assessments and stress tests. Corporate
disclosure requirements can also enablefinancial disclosure.
For example, the Swiss Financial Market
Supervisory Authority mandated the largest
banks and insurers to disclose climate risks
based on the TCFD recommendations from 2022.
This includes the financial risk that a company
incurs as a result of climate-related activities andthe impact of the company’s business activities
on the climate and the environment (double
materiality).305 Double materiality ensures acomprehensive understanding of the climate
risks incurred by an investment.

Regulators can also introduce naturerelated disclosure requirements, following
the recommendations of the TNFD. Thesefollow the TCFD structure, aiming for double
materiality in disclosures of nature-relatedrisks and opportunities. TNFD disclosures willencourage actors to address vulnerabilities andadverse impacts.308 In 2021 France extended
investor reporting requirements to biodiversityrelated risks. While challenges remain with data
access, this will increase awareness and enable
management of nature-related risks.309
A clear roadmap for disclosure requirements
ensures companies have time to prepare
for disclosure. The PBOC Guidelines forEnvironmental Information Disclosure by
Financial Institutions were piloted in its green
finance innovation zones.310 Guidance fromsupervisors is key to minimising compliancecosts and ensuring meaningfulness andcomparability of disclosed data. Guidance fromthe Dutch supervisor prompted some sustainable
funds to reclassify their funds (dark green to lightgreen) under SFDR, given the regulator’s stricter
disclosure demands for dark green funds.311
Regulators can standardise key metrics thatneed to be disclosed, establishing tools for data
capture. To reduce the burden of data collection,
they can also capture data at a national leveland ensure data is easily available to investors.
For example, the European Single Access Point(ESAP) will provide centralised and digital accessto sustainability-related information disclosed by
European companies.312
Many financial institutions will likely be disclosing inseveral jurisdictions. Therefore, as with taxonomies,
it is important to improve the internationalalignment of disclosure requirements. This can
reduce the burden of disclosure, likely improving
quality of disclosed information.

The European Commission’s Sustainable Finance
Disclosure Regulation (SFDR) applies to all financial
market participants, requiring entity and productlevel disclosure on sustainability risks and principal
adverse impacts. The sustainability reporting
regime also includes Taxonomy Regulation
disclosures on turnover, capital expenditure,and operating expenditure from Taxonomyaligned products or activities.306 The Corporate
Sustainability Reporting Directive (CSRD) requires
large and listed European companies (3/4 of all
EU-based companies) to publish audited
sustainability data.307 Companies will make CSRD
reports from 2025. The standards ensure thatcompanies are reporting the information requiredby investors and FIs and include indicators that
correspond to those applied to FIs.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

32

POLICY 94.
Transition plan requirement
and assessment

Figure 14: Climate Bonds Principles for a Credible Transition
1. In line with 1.5
degree trajectory. All
goals and pathways needto align with zero carbon
by 2050 and nearly halving
emissions by 2030.

Credible company transition plans are
crucial to ensuring transition financeflows are aligned with 1.5°C, see Figure 14.
An immediate step is to require investors andcorporates to set and publish transition plans.
For example, UK and EU sustainability disclosure
requirements include net-zero transition plans.313
EU disclosure laws can be strengthened torequire setting, not just disclosing, transition
plans. Requirements can also be accompanied
by guidance and templates for plan construction.

2. Established byscience.
All goals and pathways
must be led by scientificexperts and be harmonised
across countries.
3. Offsets don’t count.
Credible transition
goals and pathways
don’t count offsets, butshould count upstream
Scope 3 emissions.

The regulator can then introduce risk tools forlong-term assessment of transition plans andtheir impact on exposure. Basing these on robust
standards such as the Climate Bonds transitionand entity criteria will ensure credibility and speedof transition.314 Robust accountability frameworks
are crucial to ensure timely company transitions.315
Transition plan assessment criteria and detailed
requirements can ensure the strength of these plans.
For example, the OECD Guidance on Transition
Finance recommends consideration of other nonclimate sustainability impacts.316 Including naturein practice guidance and requirementswill ensure aholistic approach to transition.317
Transition plan assessment can also informeligibility for subsidies and preferential treatment.
For example, the ECB’s corporate bond tilt isbased on issuer-specific climate scores, which arepartially based on ambition of climate targets.318
Similar schemes could be based on credibility oftransition plan assessments. These assessments
would not only prompt companies to transition
their activities, but also ensure that funds areavailable for hard-to-abate transition.

POLICY 95.
Stock exchange climate listing
requirements
Stock exchange listing requirements
ensure investors are adequately informed
before making an investment. The regulator
can ensure listing requirements include ESG
reporting. Companies listed on the London Stock
Exchange have been required to report carbon
emissions in their annual strategic report since2013.319 Singapore Stock Exchange is phasing
in mandatory TCFD-based climate reporting,
beginning with ‘comply or explain’ reporting forthe financial year commencing 1 January 2022.320

POLICY 96.
Rating agency climate
assessment disclosure
requirements
Credit rating agency assessments are an
important consideration for investment
decisions and are used in monetary policy.

Robust integration of climate risk into credit
ratings will ensure capital flows take climate risk
into account and will help shift capital to green.
While climate risks are considered in ratings, theextent of this is unclear. Regulators can require
more granular disclosure on how climate risk isassessed in methodologies.321 Given the longer
time horizons of climate risks and transition, ashort-term financial rating could view a transition
investment as an increase in borrowing anda source of credit risk, which could dissuade
entities from investing in transition for fear of
downgrade and increased cost of borrowing.
Regulators can require transparency on the time
horizons of credit risk assessment to ensure allrisks are appropriately assessed.322
Policymakers and regulators can requiretransparency of ESG rating methodologies
and purpose, differentiating between physicaland transition risks. This would ensure market
participants are better informed on how to
use ESG ratings for asset allocation andportfolio assessment.323

POLICY 97.
Green taxonomy andstandards
A key element of manysustainable finance strategies, and a central
tool for governments to drive sustainablefinance is the development of taxonomies
and standards. A taxonomy is a classification
system identifying activities and investments thatdeliver key sustainability objectives. Taxonomies
aim to direct finance flows towards activities that
reduce GHG emissions and other environmental
damage, as well as improve transparency forinvestors and inform financial supervision.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

4. Technological viability
trumps economic
competitiveness. Pathways
must include an assessmentof current and expected
technologies. Where a viable
technology exists, even if
relatively expensive, it should
be used to determine thedecarbonisation pathway forthat economic activity.
5. Action not pledges.
A credible transition is backed
by operating metrics rather thana commitment/pledge to follow
a transition pathway at somepoint in the future. In otherwords, this is NOT a transition toa transition.
Taxonomies’ environmental objectives will be
informed by national environmental policy andpriorities. Including other objectives such as
biodiversity, circular economy and pollution
prevention widens the scope of activities thatcan be included and ensures that these otherenvironmental objectives are not disadvantaged
in terms of financial flows. Including biodiversity
activities in a taxonomy can also provide clarity
on what projects contribute to biodiversity
and climate objectives. These can draw on
the International Finance Corporation (IFC)
Biodiversity Finance Reference Guide.324
For their criteria to best meet the needs of thesustainable transition, these need to be sciencebased, usable and aligned with both global andlocal standards. For example, in China, different
types of green bonds had to reference different
guidelines from the corresponding regulators. In
2021, the PBOC, the National Development andReform Commission, and the China Securities
Regulatory Commission jointly revised and released
the Green Bond Endorsed Project Catalogue.325 The
updated Catalogue was a crucial step in developinga standardised green bond market because it unified
domestic standards.
Global alignment will enable international flows
of capital and prevent market fragmentation,
particularly vital for countries without a strong
local investment base.326 It will also reduce theburden on international investors who will likely
be working with several different taxonomies.
Taxonomy developers can use the IPSF’s EUChina Common Ground Taxonomy (CGT) as abasis for taxonomy development. For example,
Hong Kong has adopted the CGT and it will be
operationalised by the Green and Sustainable
Finance Cross-Agency Steering Group.327 This
was to facilitate international collaboration andenable them to act as a hub for capital flows.

33

POLICY 98.
GSS+ bond guidelines
Supervisors can set out GSS+ bondguidelines and frameworks. These can help
standardise the local market which reduces
investor due diligence and facilitatestransparency efforts. Many green bondguidelines are aligned with the ICMA Green Bond
Principles328 and Climate Bonds Standard.329
Alignment with ICMA will create consistency withinternational markets and ensure local issuancemeets investor expectations. Such guidelines canalso be set out for green and sustainability-linked
loans (SLLs), drawing on the SLL guidelines.330
Guidelines can help kickstart local green bondmarkets. The PBOC 2015 guidelines for the issuanceof green financial bonds in the interbank bondmarket were accompanied by the first edition of theGreen Bond Endorsed Project Catalogue and led to
rapid scaling of Chinese issuance.331
Jurisdictions with green bond guidelines
already in place can expand their guidelines toalso cover social and sustainability issuances.
For example, the Moroccan Capital Markets Authority
expanded its Guidelines in 2018 to cover green, socialand sustainability bonds with support from IFC.332
This also illustrates how supervisors can leveragedevelopment bank or other expertise to assist withguideline development, overcoming capacity issues
that may be present particularly in EM.
Guidelines are also being developed forsustainable sukuk. Sukuks are shariah lawcompliant debt instruments, well-suited for GSS
issuance given the overlap between Islamic
finance principles and sustainability principles.
The Malaysian Securities Commission’s updated
Sustainable and Responsible Investment-linked
Sukuk Framework builds on guidelines first issued
in 2014.333 Sukuk issued under the Framework
or bonds issued under the ASEAN GSS Bond
Standards are eligible for a grant scheme covering
up to 90% of external review costs.334 This
demonstrates how frameworks can facilitate theimplementation of grant and incentive schemes.

POLICY 99.
Green regulatory sandboxes
Regulators can support green andsustainable financial innovation by
establishing regulatory sandboxes thatallow financial products to be tested ina controlled environment, exempt fromcompliance with regulatory requirements.
Complying with such a regulatory frameworkis the biggest barrier to entry for financial
services providers. Once these are tested, and if
successful, they can be launched onto the market
and required to comply with the regulatory
framework in place. The UK’s Financial Conduct
Authority promotes innovation in finance tosupport the transition to net zero through its
Green Fintech Challenge and Digital Sandbox.335

POLICY 100.
Green securitisation
framework
Regulators can establish a green
securitisation framework. Securitisation
involves the aggregation and packaging ofloans into a larger debt product to reach
institutional investors’ minimum bond sizes.
This enables banks to move those assets off theirbalance sheet and originate more green loans
within their capital requirements. Establishingstandards for loan contracts, installation
processes, operations, and management createsconsistency boosting securitisation.
Including green assets, e.g., renewable energy andlow-carbon transport assets, as eligible assets incovered bond legislation could also boost green
bond issuance. Green covered bonds provide an
opportunity to increase transparency to underlying
green assets and provide a bridge between bonds
with entity recourse and pure asset-backed
securities, where bondholders are reliant solely
on the performance of a defined pool of assets.336

POLICY 101.
Stock exchange green bondsegment
The regulator can work with the stock
exchange to establish green bond/equity
segments to increase the visibility ofsustainable finance instruments.337 The
segments’ listing requirements also provide
investors with certainty about the issuance,
reducing due diligence requirements. 38% of
exchanges have ESG bond segments according
to Sustainable Stock Exchange Initiative which
provides guidance to stock exchanges on
growing green finance.338 Fast tracking green
products provides further incentive for issuance.
For example, Shanghai Stock Exchange andShenzhen Stock Exchange offer fast tracks
for green corporate bonds.339 In addition, theexchange can work to promote the benefits ofgreen products, and of listing them publicly.
Supervisors and regulators can also provide
economic actors with advice and capacity
building on sustainable finance activities,
to encourage and enable action. A specificentity can be set up to deliver this. CapitalMarkets Malaysia was set up by the Securities
Commission, to provide capacity building toissuers, investors, and intermediaries.340 Capacity
building can also be provided to support thedevelopment of local expertise in green bondverification and second-party opinion provision.
This can help kickstart local green bond markets
and reduce the cost of obtaining verification.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

34

The way forward
Achieving a 1.5°C world will
require mitigation and adaptation
investments in all aspects of theeconomy. By embedding theseinvestments in development
strategies, policymakers will be able to grasp
the growth opportunities of transition. Crucially,a rapid transition to net zero makes economic
sense and will result in billions of savings, on
reduced climate damage, job creation andavoided stranded assets.
The capital is available to finance transition.341
The challenge is in directing this capital toclimate mitigation and adaptation priorities, andsufficiently de-risking projects for investment.
Policymakers are key to this reorientationof finance flows. It is key for all government
departments, central banks, and regulators tobe actively working towards transition, withina clear and coordinated policy framework. A
sustainable finance policy framework enables
policymakers to capture private finance flows
and deliver greater decarbonisation levels. Thismeans governments could increase the climate
ambitions of their NDCs, if they consider theincreased levels of finance they are able to accessto fund decarbonisation.

Each country will be starting from a different
point, however certain key policies canhelp kickstart flows of sustainable financeto deliver decarbonisation. These critical factorsof success include:

Policy 1.

Development plans incorporating climate
targets and carbon budgets. 1.5°C-aligned
national and sectoral carbon budgets ensuresufficient ambition of policies and avoid
incremental change which could lead toasset stranding.

Policies 81, 88.

Central banks recognising climate risk as arisk to financial stability and incorporatingclimate risk in asset purchase and reserve
requirements will both help to shift investmentaway from high-carbon assets, and to insulate
the economy from climate-related risks which
could result in financial instability.

Policies 10-13.

Sustainable finance incentives, tax credits,and subsidies to derisk green andsustainable investments.

Policy 19.

Ramp up of blended finance offerings to
overcome the very low risk appetite of
institutional investors and direct capital to more
nascent technologies and higher-risk markets.

Policies 49, 97.

Science-based green standards or taxonomy
to provide clarity on what is a green/resilient
investment, enabling capital to move at scale.

Further reading
Coalition of Finance Ministers for Climate Action,
2022. Strengthening the Role of Ministries ofFinance in Driving Climate Action: A Frameworkand Guide for Ministers and Ministries of Finance,
https://www.financeministersforclimate.org/
news/global-consultation-strengthening-rolefinance-ministers-driving-climate-action
Songwe, V., Stern, N. & Bhattacharya, A., 2022.
Finance for climate action: scaling up investment
for climate and development, International
High-Level Expert Group on Climate Finance,
https://www.lse.ac.uk/granthaminstitute/publication/finance-for-climate-action-scalingup-investment-for-climate-and-development/
Inevitable Policy Response, 2022. IPR 2022
Policy Gap Analysis, https://www.unpri.org/
download?ac=17459
IEA, 2021. Net Zero by 2050, IEA, Paris https://www.iea.org/reports/net-zero-by-2050
NGFS, 2019. A call for action: Climate change asa source of financial risk, https://www.ngfs.net/
sites/default/files/medias/documents/ngfs_first_
comprehensive_report_-_17042019_0.pdf
NGFS, 2021. Adapting central bank operations
to a hotter world: Reviewing some options,
https://www.ngfs.net/en/adapting-central-bankoperations-hotter-world-reviewing-some-options
Prasad, A. et al, 2022. Mobilizing Private Climate
Financing in Emerging Market and Developing
Economies, IMF Staff Climate Note, https://www.
imf.org/en/Publications/staff-climate-notes/
Issues/2022/07/26/Mobilizing-Private-ClimateFinancing-in-Emerging-Market-and-DevelopingEconomies-520585
UN High Level Expert Group on the Net Zero
Emissions Commitments of Non-State Entities,
2022. Integrity Matters: Net Zero Commitments
by Businesses, Financial Institutions, Cities andRegions, https://www.un.org/sites/un2.un.org/
files/high-level_expert_group_n7b.pdf
World Bank, 2021. Toolkits for Policymakers
to Green the Financial System, https://
openknowledge.worldbank.org/
handle/10986/35705

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative35

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SUSTAINABLE FORFINANCE POLICIES

.
1 5°C

Suggested citation: Burge, L., 2023. 101 sustainable finance policies for
1.5°C, Climate Bonds Initiative
Lead author: Lily Burge
Contributing Authors: Eilidh MacKenzie,
Fabio Passaro, Juan Manuel Viver Gargallo,
Acknowledgements: Bridget Boulle, Simon Buckle, Stuart Clenaghan,
Ana Diaz, Marie Diron, Sean Kidney, Smitha Hari, Mikhail Korostikov,
Christopher Knowles, Anthony Miller, Wolfgang Mostert, Marie Netto,
Vangelis Papakonstantinou, Michel Pinto, Nick Silver
Design: Godfrey Design, Joel Milstead© Published by Climate Bonds Initiative, March 2023 www.climatebonds.net
Disclaimer: The information contained in this communication does not constitute investment advice in any form and the Climate Bonds Initiative is not an investment adviser. Any reference to a financial organisation or
debt instrument or investment product is for information purposes only. Links to external websites are for information purposes only. The Climate Bonds Initiative accepts no responsibility for content on external websites.
The Climate Bonds Initiative is not endorsing, recommending or advising on the financial merits or otherwise of any debt instrument or investment product and no information within this communication should be taken
as such, nor should any information in this communication be relied upon in making any investment decision. Certification under the Climate Bond Standard only reflects the climate attributes of the use of proceeds of adesignated debt instrument. It does not reflect the credit worthiness of the designated debt instrument, nor its compliance with national or international laws. A decision to invest in anything is solely yours. The Climate
Bonds Initiative accepts no liability of any kind, for any investment an individual or organisation makes, nor for any investment made by third parties on behalf of an individual or organisation, based in whole or in part on
any information contained within this, or any other Climate Bonds Initiative public communication.

101 Sustainable Finance Policies for 1.5oC Climate Bonds Initiative

39