Reflections on the IPE of green finance

Abstract

This contribution reflects on the ways in which the history of green finance can be told and the kinds of theoretical tools and perspectives that can be used to explain its evolution. We suggest that the origins of green finance—as well as the roots of some of its specific “pillars”—date further back than sometimes portrayed. Histories of green finance could also give more attention to China’s distinctive experiences, the role of financial regulatory initiatives, and environmental goals beyond those relating to climate and biodiversity. We also suggest ways in which this special issue’s proposed theoretical framework can be extended to help explain the emergence and trajectory of green finance. On this latter point, we note various explanatory factors that might be included and note insights from drawing on a wide range of theoretical perspectives.

We are delighted to contribute reflections on this special issue on the International Political Economy of Green Finance. The editors provide important contextualization of the issue with a useful analysis of the history of green finance and present some theoretical concepts for studying the topic. The other articles provide in-depth analyses of specific dimensions of this topic. We focus our contribution on themes discussed in the introductory article, while commenting in passing on specific aspects of the other articles. Overall, we praise the special issue for devoting attention to this important topic as well as the editors for encouraging a big thinking approach to studying it. We also add to the discussion with further reflections on two broad issues that we feel deserve more consideration. The first is about the way in which the history of the green finance can be told. The second relates to the kinds of theoretical tools and perspectives that IPE scholars can use to explain the evolution of green finance.

Telling the history of green finance

We applaud the editors for highlighting the importance of first developing a comprehensive history of green finance before trying to theorize about the topic. To set a conceptual framing for the special issue, they helpfully suggest that this history can be told as one involving four main pillars of green finance that have evolved sequentially since 1990s: (1) one focused on “sustainable development” funding starting with the Global Environment Facility (GEF) in 1991; (2) a second focused on emissions trading from the late 1990s; (3) a third focused on environmental, social and governance (ESG) initiatives beginning in the early 2010s; and (4) a final emerging pillar of state-led financial governance that has begun to emerge in the early 2020s. We find this temporal classification of different initiatives to be a very useful framework to situate the case studies but would suggest an extension of the timeline on several of these periods to better capture some of the important milestones in the emergence and development of green finance.

To begin, while the editors locate the origins of green finance at the GEF’s creation in 1991, another interpretation is that it originated much earlier. As Robert Wade (1997: 623) highlights, the World Bank played a “leading role” role two decades before at the 1972 landmark UN Stockholm environment conference, pledging to address environmental issues in its lending and even promising (in Wade’s words) to developing countries that it would “provide funds to cover any additional costs directly attributable to its environmental standards.” The Bank also subsequently created an Office of Environmental Affairs that issued “Guidelines on environmental dimensions of projects” in 1975. To be sure, its environmental initiatives were initially implemented very unevenly, but it became more consistently engaged with the issue after 1987 when, in response to NGO pressure (who were particularly concerned about Amazon deforestation), the Bank created mandatory environmental reviews of projects as well as a new Environmental Department, even hiring one of the pioneers of ecological economics, Herman Daly, in 1988 (Daly, 1996; Rich, 1994; Wade, 1997).

We wondered whether these pre-GEF activities of the World Bank should count in a history of “green finance.” The editors do not explicitly provide a definition of the term, but their first sentence suggests that “green finance” refers to “a multitude of public and private financial initiatives, instruments and institutions that seek to develop environmentally oriented financial services, funds, projects, policies and commodities to support global climate adaptation and mitigation goals, as well as forms of biodiversity.” The World Bank’s pre-1991 initiatives noted above would seem to fit the definition. So, too, would other important initiatives such as “debt-for-nature” swap initiatives in the 1980s in which non-governmental environmental groups purchased the official debt of countries and used the proceeds to fund local conservation projects in those countries (Macekura, 2016).

At the same time, we would also suggest that the definition of the “green” dimension of finance should go beyond a focus on finance that is addressing just the two issues of climate change and biodiversity. No doubt, these two issues are ones that currently garner the most attention in elite Western investor and policymaking circles. But there are so many other environmental issues that are crucially important and have financial initiatives associated with them. Some of these also predate the GEF’s creation. For example, the 1989 Basel Convention (on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal) included a provision creating a “Technical Trust Fund” designed “to assist developing countries and other countries in need of technical assistance in the implementation” of the convention (Annex II, Art 1). In 1990, the 1987 Montreal Protocol for protecting the ozone layer was also amended to include a financial mechanism to meet the needs of developing countries (it subsequently became a permanent Multilateral Fund in 1994). In more recent years, there have also been prominent multilateral financial initiatives in the realm of food and agriculture that include environmental goals in their mandate, such as the Global Agriculture and Food Security Program (GAFSP) established in 2010. The 2013 Minimata Convention on Mercury also has a financial mechanism to support its implementation in developing country and economies in transition. Negotiations currently underway for a global plastics treaty also include a focus on an associated funding mechanism.

In addition to these multilateral financial initiatives, many national financial initiatives have been undertaken with green goals that are wider than those associated with climate change and biodiversity. For example, China’s banking regulator and its central bank began in 2006–07 to use informal “window guidance” and formal “green credit” regulatory directives to prompt banks to direct capital away from polluting activities and towards greener ones. These initiatives were responding to the concerns of Chinese leadership that the country’s rapid economic growth was generating environmental problems ranging from resource depletion to air, water, and soil pollution. Prompted by increasingly severe air pollution crises in Chinese cities, the Chinese government then launched in 2016 an even more ambitious initiative to create a national “green finance system” that would serve these goals. When China helped to found the Network for Greening the Financial System in 2017 (see below), it also insisted that the new body focus on wider environmental risks than just climate-related ones (Dileo et al., 2024).

For these reasons, we favor a more open-ended understanding of green finance that is focused on supporting not just a few environmental causes but rather environmental goals of all kinds. Other efforts to develop an IPE research program on “green finance” embrace this wider approach, such as Johannes Jäger and Lukas Schmidt’s (2020a) special issue on the topic. Interestingly, however, the latter suggest that “green finance” emerged only after the 2008 global financial crisis (Jäger and Schmidt, 2020b: 5). In our view, that is much too narrow a view of the origins of green finance. We appreciate how this special issue widens the history by locating these origins earlier in time, but we have highlighted how the timeline can still be pushed further back.

One additional way to widen the history of green finance might be to include financial regulatory initiatives that were not designed primarily to address environmental issues, but which were supported by environmentalists because of their potential environmental benefits. An important example was the 2010 Dodd–Frank Act passed by the US Congress in the wake of the 2008 financial crisis, specifically its provisions to strengthen regulation over derivatives markets. The primary purpose of those provisions was to promote financial stability, but environmentalists actively supported them at the time out of a belief that they would support future carbon market governance in the US (Helleiner and Thistlethwaite, 2013). Others highlighted how the reform made possible greater control of financial speculative pressures in commodity derivatives markets that could have important beneficial environmental consequences. For example, by generating food price spikes, those pressures could encourage increased production of cash crops in ways that undermined biodiversity via land clearing and intensified monocrop planting practices and agrochemical use (Clapp, 2014).

In addition to widening the history in these various ways, the timeline of early ESG initiatives can also be extended. The introduction to the special issue highlights how ESG investment “came to prominence” in the early 2010s, but it is important to note that the term ESG was first coined earlier by the UN Global Compact in 2004 (Bowley and Hill, 2024: 238). As the article in this special issue by van Der Zwan and van der Heide briefly notes, UNEP also played an important role in promoting environmental standards in finance as far as back as early 1990s, convening leading financial institutions to endorse statements about the importance of integrating environmental considerations into their banking (1992) and insurance (1995) operations (see also Paterson, 2001). These initiatives were then consolidated with the creation of the UNEP Finance Initiative (UNEP FI) in 2003, which subsequently launched the influential Principles of Responsible Investment (PRI) for investors in 2006. In 2003, the IFC and ten commercial banks created the Equator Principles, which highlighted the case for environmental risk management and outlined a voluntary environmental screening process for banks’ project finance. Also noteworthy was the early work of the World Business Council for Sustainable Development (WBSCD), especially its 1996 book Financing Change which made a forceful case for a wide group of private sector actors in finance to give more attention to environmental issues in ways that anticipated the idea of ESG standards. The WBCSD analysis was particularly interesting because its recommendations were directed at not just bankers, insurers, and investors, but also other private financial actors such as accountancy firms and bond rating agencies which were urged to pay more attention to environmental risks (Schmidheiny and Zorraquin, 1996). These and other initiatives that predated the early 2010s were extensively analyzed in an earlier wave of IPE scholarship on green finance (e.g., Dempsey, 2016; Helleiner, 2011; Morth, 2014; Pattberg, 2005, 2012; Thistlethwaite, 2011; Wright, 2012, 2013; Wright and Rwabizambuga, 2006).

We also would extend backwards from the early 2020s the timeline of the fourth pillar of state-led financial governance. For example, if the 2010 passage of the Dodd–Frank Act is included in a history of green finance for the reasons noted above, it would seem to fall in this pillar as an example of what the editors call “market-disciplining measures.” Even more important is the case of the Chinese initiatives to promote green finance from 2006–07 onwards. Many of these represent particularly ambitious forms of state-led financial governance. They included not just the use of regulatory power and informal window guidance to discipline markets but more recently the greening of central bank collateral policies and the creation of a central bank facility that offers cheaper lending to banks to use the funds for clean energy and energy conservation projects. Central bank discussions and initiatives relating to climate change in places such as Europe also date back before the early 2020s (Deyris, 2023; Quorning, 2023; Siderius, 2022).

We emphasize the need to integrate the Chinese case better into a history of green finance not just because of its distinctiveness but also because of its significance to global environmental outcomes, particularly in the area of climate change. Given that importance, there is a need for more scholarship on its experience in this realm. The Chinese case is relevant not just to the history of green finance outlined in the introduction, but also to themes raised in other articles in the issue. For example, it would be very useful to know more about whether efforts have been made to integrate Chinese financial institutions—which are now among the largest in the world—into the transnational sustainable financial initiatives studied by van der Zwan and van der Heide. China’s ambitious efforts to build a financial system to support the greening of its economy also speak directly to Murau et al.’s interest in the kinds of long-term macro-financial governance needed to finance net-zero transitions. To what extent can these authors’ analysis of Europe be applied to the China experience so far? As the largest bilateral lender to many African countries, China’s policies have also mattered much more to the trajectory of green finance in those jurisdictions than the kind of limited Western-supported initiative analyzed by Chamberlain and Bernard. We need to know much more about how those policies relate to the latter’s generalizations about the centrality of a “climate-development-finance” nexus and “the contradictions engendered by global capital accumulation” (see for example Bhandary et al., 2022; Tröster and Küblböck, 2020; Voituriez et al., 2019).

Explaining the evolution of green finance

Turning from history to theory, we are very appreciative of the editors’ goal of developing an analytical framework for IPE scholars to use in studying green finance. They suggest that green finance be conceptualized as four pillars and as an “evolving ecosystem” embedded within a wider landscape of regulation, politics and power relations. They identify four different “layers” of this ecosystem, beginning with a core of immediate suppliers and targets and then extending out to its instruments, its governance via “regulation and contestation,” and finally its embeddedness in the broader realm of global finance. The editors suggest that this framework allows us “to go beyond static notions of what constitutes green finance” because it highlights how the parameters of green finance shift over time and encourages a focus on how green finance adapts to and shapes new political realities. In their words, it “allows us to highlight the political nature of its emergence, its recurrent and emerging forms of contestation and crisis in, and its relationship to the governance of global finance.”

We find this approach very useful as a typological exercise in its identification of the evolving four pillars and the four layers within the green finance ecosystem. We also suggest that their conceptual framework can be extended in a way that would offer more in-depth explanations of the emergence and trajectory of green finance. The editors and contributors to this special issue point in their articles at various explanatory factors in ways that can provide the basis for this extension. If green finance is embedded in the broader global financial system—a point with which we fully agree—it is also possible to turn to wider IPE literature on the politics of finance for insights to support a more dynamic analysis of this kind that can help to explain the evolution of green finance.

One explanatory variable identified by the editors is the role of global capitalism. They argue for a focus on “the dynamics of capital accumulation processes in the global political economy” and “the relations of power that inform crises in capitalism.” Other contributors to this special issue also embrace this neo-Marxist explanatory framework, including Chamberlain and Bernards who highlight how outcomes in their case study privilege “the interests of global finance capital” even when the latter do not have much direct influence. Van der Zwan and van der Heide are more interested in disaggregating “global financial capital” and examining the interests and agency of specific financial firms (see also Buller, 2022). In analyzing transnational networks from this position, they cite both neo-Marxist and liberal literature as an inspiration and highlight the potential significance of contextual factors in shaping firm preferences, such as the degree of internationalization of firms, the level of market concentration they face, distinct types of asset owners, and varieties of national financial systems. Broader IPE literature analyzing global financial change—from both neo-Marxist and liberal perspectives—also highlights the importance of these kinds of inter-firm divisions within the financial sector in analyzing change (e.g., Porter, 2014).

Wider IPE literature on the politics of finance also devotes considerable attention to broader interest group conflicts, including political interactions between financial firms and non-financial firms, to explain the trajectory of financial policy (Pagliari and Young, 2013). These wider interest group interactions receive less attention in this special issue, but they are clearly central to the politics of the contemporary backlash to ESG initiatives in contexts such as the United States. Much of that backlash is driven by non-financial firms embedded in the fossil fuel economy that are threatened economically by initiatives to steer investments away from sectors exposed to climate-related risks. Like those in many other sectors today, political debates about green finance are increasingly shaped by “existential politics” involving struggles between those losing from climate change and efforts to address it and those who stand to benefit (Colgan et al., 2021).

Contributors to this special issue also highlight the role not just of private interests but also of ideas and institutions in shaping the politics of green finance. From a “critical” IPE standpoint, the role of ideas is discussed with reference to both specific professional “knowledge practices” (Bogner) and broader ideologies such as neoliberalism (Babic and Sharma). As the editors note, the latter has clearly been central to the evolution of market-oriented approaches to green finance (see also Buller, 2022), just as the growing backlash to them is prompting greater interest in the fourth pillar of state-led financial governance. At the same time, it is important for scholars of green finance to reject binary discussions that focus only on ideological struggles between supporters of the neoliberal “Wall Street Consensus” and its critics. In the emerging global “polycrisis” (Helleiner, 2024), critical IPE scholarship highlights how we are increasingly seeing ideologies that combine elements of neoliberalism and more activist ideas into novel kinds of hybrids (e.g., Wijaya and Jayasuriya, 2024). Recent scholarship also highlights important reasons to be cautious about the influence of the Wall Street Consensus on green financial policies around the world (Larsen, 2024a, 2024b). The global structuralist orientation of some critical IPE scholarship on this topic needs to be complemented with comparative political economy analyses that highlight the distinctiveness of countries’ experiences and their room to maneuver (see also Schindler et al., 2023).

Ideas have also been central to the emergence of green finance through the role that “norm entrepreneurs” (Finnemore and Sikkink, 1998) have played in driving the process forward. Some figures of this kind have been in the business community, such as those associated with the WBCSD. Others have come from the official world and non-governmental organizations. Norm entrepreneurs from both of these realms were, for example, key to various stages of the greening of multilateral development institutions such as the World Bank as well as of national institutions involved in development lending, including export credit agencies (for early analyses, see Clapp and Dauvergne, 2011: ch7; Durbin and Welch, 2002; Nelson, 1996; O’Brien et al., 2000; Scholte, 2013; Wade, 1997). The more recent turn to state-led financial governance has also been driven forward by norm entrepreneurs within bodies such as central banks and environmental NGOs (Deyris, 2023; Dileo et al., 2023; Helleiner et al., 2024; Quorning, 2023; Siderius, 2022).

Institutional variables discussed in the special issue range from “macro-financial governance” structures (Murau et al.) to smaller scale “micro-financial” conditionalities (Cooiman) and “legal technologies” (Bogner). Van der Zwan and van der Heide also call attention to the significance of transnational networks, an institutional feature that is highlighted in much of the broader IPE literature on global finance. While they analyze private networks, scholars of green finance can also gain insight from a greater focus on the central role of a transgovernmental network—the Network for Greening the Financial System (NGFS)—in shaping green finance debates. Created initially by central banks and financial supervisors from eight countries in late 2017, this network has quickly expanded to include over 140 institutions of this kind from all regions of the world. Liberal transgovernmental theorists have highlighted the significance of these kinds of networks in other areas of financial policymaking. But the rapid growth of the NGFS has been unprecedented and it has played a major role in developing and promoting new norms about the importance and content of green finance in policymaking circles, including those well beyond the world of central banks and financial supervisors (Helleiner et al., 2024).

There is one further institutional variable developed by liberal IR/IPE scholarship that deserves more attention from scholars of green finance: the concept of a “regime complex.” This concept has been used to describe situations in which an issue is governed by partially overlapping agreements and institutions in ways that shape outcomes. IPE scholars have shown its explanatory usefulness in other areas of financial policymaking (Henning, 2017). Regime complexes seem particularly relevant to the study of green finance, which is governed internationally by multiple forums, including those focused on international development, the international financial architecture, and climate change and other environmental topics. In this special issue, Chamberlain and Bernards’ reference to a “climate-development-finance nexus” in the African context points to this institutional overlap and complexity of the governance of green finance. We would argue that the idea of regime complexes can generate insights on dynamics within the green finance governance landscape more widely, including in the context of overlaps between the four pillars of green finance identified by the editors. Those overlaps also appear to be growing as policymakers focused on the sustainable development pillar are increasingly turning to actors and governance arrangements in the other three pillars to meet their increasingly ambitious goals for ramping up green finance.

While critical/Marxist and liberal perspectives offer these various important insights on green finance, other IPE perspectives can also help to shine light on important aspects of green finance, and, as such, deserve more attention. In wider IPE literature on global finance, for example, it is common to find realist perspectives that emphasize the significance of inter-state rivalry and competition as drivers of change. Just as new kinds of green industrial policy are being driven partly by neomercantilist goals today, state efforts to cultivate green financial products and activity in domestic financial market often have the objective of gaining a competitive advantage and capturing this rapidly growing global financial activity for local firms and markets. The promotion of public green financial lending abroad is also often caught up in broader geopolitical goals of states and their competing visions of how best to promote climate goals (Larsen, 2024b). Also deserving more attention is the relevance to green finance of other kinds of issues preoccupying realist IPE scholars today, such as the heightened weaponization of financial interdependence in the wake of the Russian invasion of Ukraine as well as growing challenges to US dollar’s dominant role in the global financial system (for the latter, see the potential usefulness of the analysis in Olk, 2024; Svartzman and Althouse, 2022).

We would also suggest that “green” perspectives in IPE—not surprisingly—have much to offer in highlighting the biosphere’s active role in shaping green finance outcomes. The editors briefly nod in this direction when noting that the “evolving ecosystem of green finance has emerged in response to forms of climate crisis.” This important insight about the biosphere’s role as an agent of change could be integrated more deeply into their conceptual framework. They rightly note that green finance is embedded in the wider global financial system. But more attention could be placed on the fact that both green finance and the wider global financial system are themselves embedded within the wider biosphere that influences and imposes constraints on the human economy (and its financial systems) in profound ways. In the words of Herman Daly and John Cobb (1989), the biosphere can be conceptualized as a kind of “Great Economy” in which the human economy is located. A framework for analyzing the “layers” of the “ecosystem” of green finance would benefit from recognition of the influence of this deeper biophysical layer of the natural ecosystem itself. Indeed, it is the human failure to recognize the constraints—both on the input (e.g., resource extraction) and the output (e.g., pollution) side—imposed by this layer that is at the core of the global environmental crisis itself.

The growing support for green finance stems in part from a growing recognition these ecological constraints and their influence on the wider financial system. The focus of policymakers and investors on growing climate- and biodiversity-related prudential risks, for example, is one clear way in which they are recognizing that nature can have agency in transforming finance. But it is important not to limit the focus of the natural environment’s agential role to the climate and biodiversity crisis. As noted above, the ambitious Chinese initiatives to develop green finance have often been driven by concerns about wider forms of environmental degradation. The same is true in other non-Western contexts where political support for “green finance” has frequently reflected worries about more issues than just climate and biodiversity.

IPE scholars have not focused as much as they could on the agential role of the environment in influencing finance, but they could draw on insights from the pioneers of “green” political economy. Herman Daly is one such figure whose work on the relationship between the biosphere and systems of money and finance deserves more attention in IPE scholarship on green finance (Daly and Cobb, 1989, 407-442). Daly (1996: ch12) himself also drew inspiration from earlier ideas on this topic developed by the Nobel prize-winning scientist Frederick Soddy. In the 1920s, Soddy (1922, 1926) criticized the liberal economists of his day, such as John Maynard Keynes, for endorsing the idea that debt could fuel ever-expanding wealth. In his view, debt was merely “virtual wealth” that had “no concrete existence,” while the production of real wealth was constrained by the physical energy of nature and was “subject to the laws of thermodynamics” (Soddy, 1926: 769-70).

Conclusion

Summing up, there are many ways in which IPE scholars can learn from and build on the insights of this special issue to analyze the history and evolution of the ecosystem of green finance. In exploring this topic, they can also draw upon other IPE work, including early literature we have cited that is often overlooked in newer scholarship on green finance. IPE scholars who are interested in the links between global finance and the environment might also find useful insights from even older academic work that is rarely cited today, including not just Soddy’s but also that of other environmentalists in the interwar years who developed interesting analyses of the links between international capital flows and environmental issues, such as soil erosion (e.g., Jacks, 1939). Taken together, all of this literature highlights how the IPE of green finance can be analyzed from many diverse theoretical perspectives, each of which benefits from engaging intellectually with the others. This special issue helps to advance that conversation on this important topic.