The jubilation about good climate intentions in the financial sector is deafening. In the financial press we frequently see reports of financial institutions pledging to reach ‘net zero’ at some point in the distant future. And to divert capital from potential climate catastrophes to green solutions: green bonds, climate funds, ESG funds.

Undoubtedly, the UN climate scientists had hoped that these exuberant jubilations would be confirmed by hard data when they decided to dedicate a whole chapter of the new IPCC report to climate funding. Because everyone is now well aware that change will only happen if big finance joins the fight.

I expect they will have been quite disillusioned when they penned the closing words of that chapter. Far too little money is still being allocated to climate mitigation. Three to six times as much is needed. Indeed, there is still more money going towards global warming than towards cooling the planet. The effect of the funds that are being spent on mitigation is still hardly noticeable. Hardly surprising, probably, because this mainly concerns funding for ‘less bad’, rather than for ‘better'. And even though climate risks are being taken into consideration - partly because this is prescribed by the regulators - far too little is subsequently done to address these risks. Climate risks are rarely really priced, so it still pays to fund the fossil sector.

Also, the amount of greenhouse gas that is funded us shifting to different segments of the financial sector: from regulated banks to shadow banks and from listed companies to spin-offs. Wherever the sector is being forced into the right shape, there does appear to be a positive effect. The total amount of greenhouse gas that is being funded, however, is hardly diminishing. And so shrill jubilations and not enough consideration for climate risks increases the dangers, because contrary to what is often argued, sustainability risks are not ‘exogenous’ to the financial sector. Underestimating the risks results in too much non-sustainable capital expenditure and makes the problem bigger.

We really can do better. This does require us to make changes to the real economy, in order to make it unattractive for everyone to undertake activities that are not aligned with the Paris climate agreement. This starts with consistent government policy: even now it is mainly governments that directly or indirectly provide subsidies for fossil fuels. In the Netherlands, too, we have just seen another example of this. Pricing, setting standards, prohibiting. Only then will funds be directed exclusively to climate solutions and will jubilations finally be justified.

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published April 12th, 2022.