Climate change has been considered as a crucial new factor that influences economic growth, financial stability, as well as corporate performance and decisions (e.g., Huang et al., 2018; Rezai et al., 2018; Nguyen and Phan, 2020; Battiston et al., 2021; Kahn et al., 2021; Stroebel and Wurgler, 2021). More than 200 countries in the world have made commitments to address climate changes by joining the Paris Agreement. However, coping with the challenges of climate change not only requires coordinated actions from governments and international organizations, but also requires significant investments in green initiatives and green innovations across all sectors of the economy. As discussed in COP-UNFCC (Conference of the Parties to the United Nations Framework Convention on Climate Change) (COP, 2016), the “green finance gap”, which represents the lack of sufficient financial resources to be directed toward green investments (Buchner et al., 2017), is considered as a serious barrier to achieving the climate goals (D’Orazioa and Popoyan, 2019). Therefore, the development of green finance is the key to a successful transition to the more sustainable green economy.
The green financial system may promote the green transition through resolving the problem of financial constraints in the process of decarbonization. Cross-country studies have found that nations with developed financial market have better transition to the low-carbon economy (e.g., De Haas and Popov, 2018; Mamun et al., 2022). Similarly, the energy financing development is found to be a critical factor in the growth of renewable energy sectors in different countries (e.g., Ji and Zhang, 2019; Taghizadeh-Hesary et al., 2021).
In addition, the pursuit of sustainable objectives by the green finance participants, through shifting (or the threat of shifting) investments toward greener areas in the credit allocation process, may encourage firms to become greener (e.g., Naaraayanan et al., 2021; Pastor et al., 2021). For example, studies found that banks revise the lending conditions to firms that do not comply with the green credit regulation, and that they play a main role in the success of climate policies’ implementation (e.g., Dunz et al., 2020; Fan et al., 2021). Similar roles are discovered for other financial market participants such as green investors and mutual funds. When mutual funds decarbonize, they push the divested firms to reduce their carbon emission (e.g., Rohleder et al., 2022); when green investors eschew from the high polluting firms, it increases the cost of capital for relevant firms and forces them to reform and to become more socially responsible (e.g., Heinkel et al., 2001).
Despite the aforementioned findings, research on the green financial system and its relation with the green transition is still at a nascent stage. A lot remains to be answered and more research needs to be devoted to this area. For example, what are the main challenges to the development of green finance? How can central banks and financial regulatory authorities support the green transition? How to best motivate private participation in green investment? What lessons can we learn from the experience of green finance development in various countries, and in different industries?
In Nov 2022, the Cop 27 to be held in Egypt will bring together leaders from the world to discuss strategies and solutions to the challenges of climate change and a smooth transition toward a low-carbon economy. In this context, this special section calls for papers that explore critical issues pertinent to green financial system and green transition. Topics of this special section may include but are not limited to the following:
- the impact of green finance on green transition
- participation of non-bank financial institutions in green investments
- environmental, economical or financial benefits of green financial system
- roles of government intervention in green transition
- green central banking
- risk and performance of green finance instruments
- Fintech and green finance
- financial innovation in green financial system
- other topics related to green finance and green transition
