From Paris to the World: The Future of Climate Finance in a Post-COVID-19 Era

The impact of climate change has become a concerning global issue for academics, policymakers, international organisations and financial institutions alike. As a result, there has been a focus on developing environmental finance regulations that might provide solutions which balance economic growth with environmental sustainability. Since the advent of the Kyoto Protocol, and the failed implementation of carbon offsets (Pham et al., 2019), the Paris Agreement has become an important milestone for international regulatory agencies that aim to limit the effect of greenhouses gases. The agreement led to the growth in Socially Responsible Investments (SRIs), and Environment, Social and Governance (ESG) investment regulations; these can be broadly defined as investment criteria aimed to fulfil an ethical goal. However, a pertinent challenge facing international regulation setting agencies is that, although their designed framework is well-intentioned, its voluntary nature has presented corporations with the opportunity to capitalise on environmentally sensitive market sentiments to obtain financing under questionable ethical pretences. In addition to this enduring challenge, the world has to contend with the economic and financial impact of the COVID-19 pandemic, which has changed the focus of global policymakers towards recovery. This essay will examine the role of climate finance as the world tries to recover from the current recession.

Although there are no strict definitions of what constitutes climate finance, it can broadly be interpreted to represent funding directed towards projects that limit greenhouse gas emissions (World Resources Institute, 2013). It can also take the form of investments in firms that aim to shift their business operations to be more sustainable (ibid). Due to the variety of funding instruments available in modern finance, the instrument deployed can encompass a variety of asset classes: bonds, mutual funds, equities and direct investments into sustainable projects. Climate finance instruments, unlike conventional ones, conform to a set of criteria that falls under the broader umbrella of ‘responsible investing’.

‘Responsible investing’ has become a fashionable catchphrase for institutions and policymakers operating in the finance industry and, as a result, market participants have created many investment sub-categories within this universe of assets. The categories that describe responsible investing include Mission Related Investing (MRI), Impact Investing, ESG investing, and SRI (Caplan et al., 2013). Each subcategory has its own set of criteria and objectives on how an investment is evaluated. For example, SRI criteria involve investors engaging in negative screening of investments, whereby a firm’s environmental, social and ethical activities are considered in an exclusionary manner before deciding whether to incorporate their assets in investment portfolios (Berry and Junkus, 2012, Caplan et al., 2013). In contrast, ESG investing is a more flexible analysis and considers whether a firm’s environmental, social and governance scores have a material impact on the asset’s long-term performance in a portfolio (Caplan et al., 2013). Due to the differing criteria, there appears to be a disjointed set of agendas that has created confusion on certain instruments and their regulations. However, it is ultimately the responsibility of firms to provide additional disclosures to regulatory and verification agencies in order to certify and participate in these schemes (Wang, 2018; Trompeter, 2017).

This ability to self-certify is particularly relevant in the case of green bonds, which have grown significantly worldwide. Green bonds are an example of an instrument that can, depending on the issuer, be subject to either SRI or ESG criteria. Defined as financing raised with proceeds directed solely towards environmentally friendly projects, these bonds have grown substantially since their inception. Green bonds were first issued in 2007 by the European Investment Bank (EIB) initially to increase awareness of their existence; subsequent issuances by the World Bank and other multinational development banks allowed for their proliferation (Trompeter, 2017). These bonds were issued primarily to fund sustainable projects in developing countries. For example, World Bank green bonds were used to fund the development of lighting projects in Mexico, eco-buses in the Philippines and waste treatment facilities in Morocco amongst many others (OECD, 2015; Trompeter, 2017). In 2013, corporate green bond issuances increased and reached an issuance volume of USD 11 billion by the end of the year (OECD, 2015). For the period 2015-2016, the amount grew further and USD 81 billion was raised, as markets witnessed a ‘green bond boom’ (Morgan Stanley, 2017). This growth has continued and S&P estimates that USD 180 billion in green bonds have been issued globally in 2019 (Standard and Poor’s, 2019). However, with this growth in issuance, the self-certification concern remains.

The key problem is the lack of consistency and accountability in the implementation of a framework for the verification and approval of (new and existing) green bonds. The crux of the matter lies with the environmental policy and regulations that green bond issuers must adhere to, which are ambiguous, imbalanced, opaque (Trompeter, 2017; Wang, 2018). For example, the ICMA developed a document titled ‘Green Bond Principles’ (GBP) in order to verify that private sector green bonds are structured in accordance with regulations that will enable them to be certified as environmentally friendly (ibid). The regulations stipulate that green bond issuers need to ensure adequate disclosure of the underlying projects the bonds are funding in a transparent manner and with integrity (Wang, 2018). However, the GBP are also voluntary guidelines (OECD, 2015; Trompeter, 2017; Bachelet et al, 2019; Wang, 2018), and in the event that an issuer violates these guidelines, there is a lack of enforcement measures in place to penalise any offending corporations (ibid). Enforcement of these principles can vary by each jurisdiction they are listed in so, in this instance, it is necessary for national authorities to intervene and impose enforcement of their own rules and regulations to ensure that corporations are raising funds in a green manner. Nevertheless, issuers can still use third-party verification agencies, such as a credit rating agencies and consulting firms to verify their bonds (Wang, 2018). In addition, due to the standards governing the issuance and trading of green bonds being voluntary, corporations do not need to disclose or adhere to all the requirements of the GBP, or any other standard currently applicable to their SRIs or ESG criteria – effectively allowing a firm to ‘self-label’ themselves as green (ibid).

As explained earlier, the growth in green bonds is one of many instruments that have proven to be popular since their inception and the demand for climate related investments has grown, and will continue to, over the next decade. According to the investment arm of the World Bank, the International Financial Corporation (IFC), there is a conservatively estimated potential to invest approximately USD 23 trillion in climate finance instruments per year in 21 emerging markets from 2016 until 2030 (IFC, 2016). This expected growth of climate finance is not surprising and is ultimately underpinned by the implementation and observation of international climate treaties. Initially, the Kyoto Protocol of 1997 was deemed ineffective in reducing greenhouse gases and was superseded by the more stringent Paris Agreement in 2015 (Pham et al, 2019). According to finance academics, financial markets have become more sensitive to climate announcements now that 195 countries have agreed to legally binding climate commitments (Bachelet et al, 2018; Pham et al, 2019). From an investor’s perspective, the promise of investing in assets that provide positive environmental externalities as well as a return on investment would be appealing (Berry and Junkus, 2012; Wang, 2018), and with corporations keen to benefit from these sentiments, they have capitalised and announced their intentions. For example, Apple and Starbucks have both raised financing of over USD 1 billion each in order to transition their operations to become environmentally friendly (Wang, 2018). Volkswagen is also a leading example of an ethical institution espousing environmentally friendly operations throughout the company (Rhodes, 2016). While it is still unknown how well Apple and Starbucks have progressed in reducing their respective carbon footprints, Volkswagen’s corporate subterfuge became public knowledge in 2015, leading to its listed stock price declining by 20% in one day (Bachelet et al, 2018; Rhodes, 2016).

Having established that voluntary corporate disclosures could prove to be challenging to climate finance, it is important to consider recent developments. The COVID-19 pandemic has resulted in a sharp deterioration of global economic conditions, and this has impacted the global financial sector. The crisis has been unprecedented in that it has crystallised due to an exogenous event that has impacted economic and financial conditions across the whole world. Resulting in mounting fiscal and monetary pressures, governments have taken aggressive measures to curb the negative impact of the virus (Albuquerque et al., 2020; Döttling and Kim, 2020). For instance, these measures have included the ‘Commercial Paper Funding Facility’ asset purchases in the U.S. (Albuquerque et al., 2020) and furloughs in the U.K. (Döttling and Kim, 2020). As a result of this renewed policy focus on combating the recession, recent academic literature has focused on the performance of ESG and SRI certified instruments during and after the lockdowns. The early results have contrasting implications. On one hand, Döttling and Kim (2020) found that there were significant net outflows from high ESG rated retail mutual funds from a variety of markets during the crisis; on the other hand, Albuquerque et al. (2020) found that equities of high ESG scoring companies were less volatile and had a better price performance during the market crash.

Given the mixed results, it is still important to note that SRI and ESG investor scores are based on voluntary corporate disclosures; thus, coupled with the necessity for national authorities to intervene and support their economies, recent developments during the pandemic cannot disregard the need for the Paris Agreement to be upheld. While long-term doubts will persist about self-certification of responsible investing, the near-term challenge that governments, policymakers and private finance companies face is ensuring the deployment of economic support does not violate the Paris Climate Treaty (Caldecott, 2020). According to J.P. Morgan (2020), the pandemic has served as a ‘wake-up call’ for policymakers, implying the need for increased global awareness of climate change and its impact on the future of the economy. With the world slowly reopening, and full-scale lockdowns being replaced with intermittent ones, will financial markets be able to adequately balance responsible investing with growth? Can corporations avoid self-labelling and justify their high ESG ratings and enable the world to recover in a sustainable fashion?


Albuquerque, R., Koskinen, Y., Yang, S. and Zhang, C. (2020) Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash, The Review of Corporate Finance Studies, 9(3), pp. 593-621.

Bachelet, M. J., Becchetti, L. and Manfredonia, S. (2019) The Green Bonds Premium Puzzle: The Role of Issuer Characteristics and Third-Party Verification, Sustainability, 11(1098), pp. 1-22.

Berry, C. T. and Junkus, J. C. (2012) Socially Responsible Investing: An Investor Perspective, Journal of Business Ethics, 112, pp. 707-720.

Caldecott, B. (2020) Post Covid-19 stimulus and bailouts need to be compatible with the Paris Agreement, Journal of Sustainable Finance & Investment, pp. 1-8.

Caplan, L., Griswold, J.S., Jarvis, W.F. (2013) From SRI to ESG: The Changing World of Responsible Investing, Commonfund Institute

Döttling, R. and Kim, S. (2020) Sustainability Preferences Under Stress: Evidence from Mutual Fund Flows During COVID-19, Social Science Research Network [Online]. Available at:

International Finance Corporation (2016) Climate Investment Opportunities in Emerging Markets: An IFC Analysis [Online]. Available at: (Accessed: 20 January 2020)

J.P. Morgan (2020) Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing [Online]. Available at: (Accessed: September 4, 2020)

Morgan Stanley (2017) Behind the green bond boom [Online]. Available at: (Accessed: 20 January 2020).

Organisation for Economic Cooperation and Development (2015) Green bonds: Mobilising the debt capital markets for a low-carbon transition, Policy Perspectives [Online]. Available at:[f3]%20[lr].pdf

Pham, H., Nguyen, V., Ramiah, V., Saleem, K., and Moosa, N. (2019) The effects of the Paris climate agreement on stock markets: evidence from the German stock market, Applied Economics, 51(57), pp. 6068-6075.

Rhodes, C. (2016) Democratic Business Ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty, Organization Studies, 37(10), pp. 1501–1518

Standard and Poor’s (2019) S&P Ratings forecasts moderate green bond market growth in 2019 [Online]. Available at: (Accessed: 20 January 2020)

Trompeter, L. (2017) Green Greed is Good: How Green Bonds Cultivated into Wall Street’s Environmental Paradox, Sustainable Development Law & Policy, XVII (2), pp. 4-11.

Wang, E. K. (2018) Financing Green: Reforming Green Bond Regulation in the United States, Brooklyn Journal of Corporate, Financial & Commercial Law, 12(2), pp. 467-491.

World Bank (2019) 10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets [Online]. Available at: (Accessed: 20 January 2020)

World Resources Institute (2013) Why is Climate Finance So Hard to Define? [Online]. Available at: (Accessed: September 4, 2020).