The Role of Green Financial Sector Initiatives in the Low-Carbon Transition : A Theoryof Change

Green financial sector initiatives, including financial policies, regulations, and instruments,could play an important role in the low-carbon transition by supporting countries in the implementation of economicpolicies aimed to decarbonize their economy. Thus, it is fundamental to understand the conditions under which and theextent to which green financial sector initiatives could enable the scaling up of green investments and theachievement of national climate mitigation objectives, while, at the same time, avoiding unintended effects onmacroeconomic and financial stability. However, this understanding is currently limited, in particular in thecontext of emerging markets and developing economies. This paper contributes to filling this knowledge gap by analyzingopportunities and challenges associated with the implementation of green financial sector initiatives. Italso considers the specificities of green financial sector initiatives in emerging markets and developing economies,which are often characterized by budget constraints, debt sustainability concerns, and limited access to finance. Theanalysis focuses on green macroprudential policies, green monetary policies, and green public co-funding. For eachgreen financial sector initiative, the paper qualitatively investigates the transmission channels through which itaffects the availability and cost of capital for high- andlow-carbon goods, but also investments, output, and greenhouse gas emissions, considering the design andimplementation of the green financial sector initiative. For each green financial sector initiative, the paper furtheridentifies its entry point in the economy and its direct and indirect impacts. Building on these insights, the paperdevelops a theory of change about the role of green financial sector initiatives in climate mitigation and inthe low-carbon transition, identifying the criteria for applicability and conditions to maximize impact.