Initial financing

The channel of influence with most specificity and least breadth is the direct, initial financing of sustainable productive investment, for example, electric vehicles, renewables, and energy efficiency projects – or start-up companies working on sustainability-advancing technologies. This can principally happen in two ways: First, internally via retained earnings, that is, profits of a company, or second, externally through a bank loan, a bond or equity, or a combination of both (Campiglio et al., Reference Campiglio, Godin, Kemp-Benedict, Matikainen, Arestis and Sawyer2017). By definition, initial financing can be clearly attributed to a particular productive investment (attributability), which would not have occurred without it (additionality) (Krahnen et al. Reference Krahnen, Rocholl and Thum2021). Hence, it is only these financing flows that directly contribute to the green transition without detours.

In principle, several financial instruments can serve as vehicles for initial financing. Examples include bank loans to finance productive investment, green bonds that are issued against particular sustainability-advancing capital assets (e.g., wind farms), or equity issued at an initial public offering and subsequently bought by investors. The latter is particularly important at the initial phase of business development when companies typically lack access to bank loans and capital markets, but, contrary to conventional wisdom, it is often public finance rather than venture capital that provides the necessary start-up support (Mazzucato and Semieniuk, Reference Mazzucato and Semieniuk2018). Furthermore, corporate bonds are typically refinancing instruments issued after initial investment, whereas equity markets overall saw net capital outflows from corporations in recent decades – largely due to stock buybacks and dividend payments (Lazonick, Reference Lazonick2015; Fichtner, Reference Fichtner, Mader, Mertens and van der Zwan2020).

One important peculiarity of initial financing is that when it comes to bank loans, there is no financing constraint as such, because commercial banks endogenously create money by expanding their balance sheet when they issue loans (McLeay et al., Reference McLeay, Radia and Thomas2014; Wullweber Reference Wullweber2024). Crucially, this sort of financing does not rely on the redistribution of prior savings, as is often assumed in market-fixing approaches to sustainable finance (Golka et al., Reference Golka, Murau and Thie2024; Murau et al., Reference Murau, Haas and Guter-Sandu2023). Hence, ‘the amount of available external finance for low-carbon investment is also a function of the demand for credit by low-carbon companies’ (Campiglio et al., Reference Campiglio, Godin, Kemp-Benedict, Matikainen, Arestis and Sawyer2017: 317), implying that credit expansion by banks is limited only by the intricacies of maintaining long-time customer relationships and the Basel III banking regulations (Interview 26, 46). However, the greatest limitation to utilizing bank leverage to finance the green transition currently still lies with the lower relative risk-adjusted profitability of sustainable productive investments vis-á-vis unsustainable ones, especially in the energy sector (Semieniuk et al., Reference Semieniuk, Campiglio, Mercure, Volz and Edwards2021; Christophers, Reference Christophers2021).

The most important private actors in initial financing are commercial banks and infrastructure funds. Their operations differ considerably regarding the two types of company borrowers most relevant for the green transition. First, young and unlisted companies depend on external debt financing for expansion and growth (Mazzucato and Semieniuk, Reference Mazzucato and Semieniuk2018). Second, large, listed and mature corporations tend to finance a larger part of their productive investments out of cash-flows from operating activities. This pertains especially to oil and gas majors, which are highly profitable and can thus expand relatively independently from external funding costs (Christophers, Reference Christophers2021). But although the cost of external debt finance plays a minor role for capital expenditure of these majors, debt still plays an important role for mergers and acquisitions, share-buybacks, and access to liquidity (Caldecott et al., Reference Caldecott, Clark, Harnett, Koskelo, Wilson and Liu2022). Furthermore, the numerous smaller and mid-sized independent oil firms depend on external debt.

Between 2000 and 2015, approximately 64% of new external debt financing for the oil and gas sector came from bank loans, followed by 26% from bonds and share-issuance representing just 10% (Cojoianu et al., Reference Cojoianu, Ascui, Clark, Hoepner and Wojcik2019), underscoring the importance of banks for fossil fuel financing. Although funding has shifted significantly toward corporate bonds since 2020, now making up 50%, banks still play a key role in underwriting bonds (see refinancing) and offering standby-credit lines to their corporate customers (Ambrose, Reference Ambrose2023). So far, most of the world’s largest banks have not cut financing for new fossil fuel projects (RAN, 2024). However, there exists considerable scope for renegotiation (i.e., worsening) of credit conditions when rolling-over loans, because the oil and gas sector relies on domestic ‘relationship banking’ that goes beyond purely quantitative considerations (Hoepner et al., Reference Hoepner, Oikonomou, Scholtens and Schröder2016; Interview 39). Hence, Caldecott et al. (Reference Caldecott, Clark, Harnett, Koskelo, Wilson and Liu2022) argue that loans pose the strongest (in our words, most specific) transmission mechanism between finance and the productive economy.

Refinancing

Once a productive investment has been financed initially, the ensuing asset has to be held until maturity, a process that may involve a variety of balance sheets fulfilling different functions over the asset’s lifetime (Murau et al., Reference Murau, Haas and Guter-Sandu2023). Often, refinancing means substituting initial financing in whatever form with cheaper, tradable debt securities such as a corporate bond. Corporate bonds are typically not issued for a specific project, but against the overall cash-flow of a company, thus lacking attributability. Although this is given in other cases of tradable debt securities such as securitized loans as well, what distinguishes refinancing from initial finance is that these financial flows do not immediately add to new productive investment. Hence, they show a lower specificity than initial financing. This ‘difficulty of linking funding and investment in a comprehensible, traceable way’ (Krahnen et al., Reference Krahnen, Rocholl and Thum2021: 2) renders the utilization of refinancing instruments for the green transition challenging, because its effective real-world impact often cannot be determined (Langley et al., Reference Langley, Bridge, Bulkeley and van Veelen2021).

Nevertheless, there are several mechanisms by which refinancing can contribute to more sustainable productive investment as a channel of influence. First, it can free up both bank and corporate balance sheet space to finance new initial investments (Interview 9, 26, 73). Second, green bonds may also have certain process-driven impacts on corporate practices, for example, through sustainability-related auditing before issuance or improved access to liquidity due to a broader investor base (Interview 59). Third, the anticipation of lower refinancing costs attached to green-labeled versus conventional securities – the so-called ‘greenium’ – may incentivize more sustainable productive investment to serve as collateral for future green bond issuance or green securitization (CBI, 2024; Interview 59, 72). The underlying market logic is that if a critical mass of investors shifts portfolio holdings to green-labeled securities, it will affect overall capital costs of corporations significantly enough to impact productive investment (Krahnen et al., Reference Krahnen, Rocholl and Thum2021).

However, for such a market dynamic to become viable, a sufficient stock of green-labeled securities must be issued in the first place. The total issuance of green bonds has reached a respectable $2.8 trillion by end-2023 (CBI, 2024). In 2014, green bonds accounted for only 0.6% of all bonds issued in the EU, rising to almost 9% in 2022; globally, however, green bonds accounted for less than 5% of all bonds (EEA, 2023). Despite strong demand and growth in recent years, evidence of an emerging greenium for green bonds is still somewhat ambiguous (Wilkens et al., Reference Wilkens, Rohleder and Zink2023). Furthermore, most ‘green’ verifications are confined to disclosure and reporting, excluding the question of real-world impact (Langley et al., Reference Langley, Bridge, Bulkeley and van Veelen2021). These points suggest that this third mechanism of the refinancing channel of influence is not yet effective in advancing financial flows to sustainable productive investments.

Conversely, refinancing could play a crucial role in curbing flows to unsustainable aims. Capital markets are essentially made up of large, listed corporations, respective underwriting banks (often large investment banks such as JPMorgan Chase), and institutional investors who end up holding fixed-income securities and equities, particularly pension funds and insurers (Interviews 23, 27, 35, 36, 39, 43, 54, 68, 75). Thereby, this (shadow banking) system provides corporations with indirect financing via institutional investors (Kedward et al., Reference Kedward, Gabor and Ryan-Collins2024). Notably, large asset managers such as BlackRock and Vanguard continue to indirectly fund oil and gas majors in this way without any conditionalities attached (Reclaim Finance, 2023). Since access to liquidity matters for large corporations’ business operations, bondholders as well as underwriting banks could reach out to bond issuers at investor roadshows and at debt issuance (see company engagement), especially at critical times when companies try to refinance loans with cheaper bonds (Caldecott et al. Reference Caldecott, Clark, Harnett, Koskelo, Wilson and Liu2022; IIGCC, 2023; Interview 27, 35, 39). Crucially, this also includes public institutions that act as asset owners – such as public pension and sovereign wealth funds (Babic and Sharma, Reference Babic and Sharma2023; Interview 44, 68). Furthermore, a refusal of certain investors to hold bonds pertaining to unsustainable (e.g., coal and oil) corporations (see divestment) to a point where liquidity in corresponding markets declines would arguably disincentivize banks to underwrite such bonds by increasing risks, thus raising the cost of capital and lowering overall business profitability of such sectors (Interview 39, 45).

(Re)insurance

Ever since Stern (Reference Stern2007: viii) termed climate change ‘the greatest market failure the world has ever seen’, policymakers, academics, and financial practitioners sought to ‘fix’ the market by pricing in climate-related risks (Bolton and Kacperczyk, Reference Bolton and Kacperczyk2021; Campiglio et al., Reference Campiglio, Daumas, Monnin and von Jagow2022; Crona et al., Reference Crona, Folke and Galaz2021; Semieniuk et al., Reference Semieniuk, Campiglio, Mercure, Volz and Edwards2021). Most of these accounts refer primarily to the ‘outside-in’ dimension of financial risk impinging on incumbent industries and financial actors holding their debt as assets (Campiglio et al., Reference Campiglio, Daumas, Monnin and von Jagow2022). By contrast, financial risk may also be conceptualized in its ‘inside-out’ dimension as a potential channel of influence by (re)insurance companies, rating agencies, and law firms, governing through one of the financial system’s inherent logics (Folkers, Reference Folkers2024). This entails utilizing risk-pricing to bring risk–return profiles of investments (both productive and financial) in line with climate science, that is, worsen risk–return profiles of unsustainable investments and – in turn – improve those of sustainable investments.

The risk-related channel of influence with the arguably highest specificity is the outright pricing-in of physical and transition risks by insurance companies and their respective re-insurers. These costs directly impinge on the financial risk associated with productive investments. If (re)insurers stopped insuring new unsustainable productive investments, this would significantly increase the cost of such endeavors and squeeze their profitability vis-á-vis sustainable alternatives. Therefore, CSOs such as ‘Insure our Future’ have called upon 30 (re)insurance companies to immediately stop underwriting new fossil fuel projects (Sims and Jessop, Reference Sims and Jessop2023) – a call which has been followed by some in the industry (Allianz, 2023; Interview 23, 36, 42).

On the asset-side, (re)insurers also have strong incentives to improve the sustainability profile of their portfolios (see engagement and divestment) as their time-horizon is longer than the conventional short-term outlook of most financial market players (Interview 23, 36, 42). Even though several major industry members recently left the Net-Zero Insurance Alliance (NZIA) due to fear of antitrust litigation (Smith and Bryan, Reference Smith and Bryan2023), key players in the field announced to stick to their climate goals, above all the world’s biggest re-insurer Munich Re, who already stopped insuring coal-fired plants, coal and oil sand mines, and new oil and gas fields (Interview 23, 42; Sheehan, Reference Sheehan2023). The knock-on effects of this decision should not be underestimated, as the cost of re-insuring also affects insurance companies’ risk calculations and pricing. Shortly after Munich Re had made its announcement, Allianz, the world’s second largest insurer, decided to exclude the development of new oil and gas fields, midstream oil-infrastructure, and new oil power plants from their insurance underwriting, including the renewal of existing policies (Allianz, 2023). Such examples among insurance industry competitors suggest a certain peer pressure that may give CSOs influence to drive sustainability in the sector (Interviews 42, 48). However, overall the (re)insurance sector is still far from exhausting its leverage and influence to accelerate the green transition (ShareAction, 2024).

Ratings

Another risk-related channel of influence comprises ratings of climate-related risks. This channel may pertain to the three dominant credit rating agencies S&P, Moody’s, and Fitch, but is currently more utilized by specialized ESG ratings providers such as MSCI, ISS ESG, or Sustainalytics. It is less specific as it operates through financial rather than productive investment, but its breadth is larger because risk metrics often feed into the construction of green-labeled financial indices and influence thousands of investors and companies.

Credit rating agencies include climate change risks in their ratings of credit worthiness, but their ratings have a horizon of only five years or less, whereas the severe risks of climate change manifest themselves during a period of a decades. Moreover, credit rating agencies rely on information from corporations that is often not verified (Mathiesen, Reference Mathiesen2018). In general, the development of ratings is a highly contested process of private standard-setting. The question of what counts as ‘(un)sustainable investment’ and thus as relatively risky or not is characterized by conflicting interpretations. Ratings are thus a highly performative form of knowledge production which shapes financial flows to certain asset classes and actors while disregarding others that do not correspond to the epistemic standards employed (Dimmelmeier, Reference Dimmelmeier2023).

Recent years have seen the emergence of a private ecosystem surrounding ESG ratings which purports to translate financially material climate-related risks of the corporate sector into measurable and standardized figures (Johnson, Reference Johnson2023). However, almost all ESG ratings lack double materiality, curbing their potential as a channel of influence to shift flows into more sustainable productive investment. The reconcilability of the ESG framework with risk-adjusted portfolio investing may explain why this approach has been favored by private-industry initiatives over other, more impactful approaches such as mandatory company engagement to mitigate these risks directly on the firm level (Fichtner et al., Reference Fichtner, Jaspert and Petry2023).

These flaws are illustrative of the essential problem of measuring climate-related risks, namely their inherently political nature. Transition risks require making assessments about the future course of political struggles concerning the green transition (Parfitt and Bryant, Reference Parfitt and Bryant2023), while physical risks are subject to methodological problems, with actuaries openly criticizing that ‘[f]inancial institutions often did not understand the models they were using to predict the economic cost of climate change and were underestimating the risks of temperature rises’ (Hodgson, Reference Hodgson2023). This is also exemplary of the inherent limitations of risk disclosures as a market-driven tool of governance in general (Christophers, Reference Christophers2017).

Consequently, ratings of climate-related risks still constitute a weak channel of influence in practice. Nonetheless, both transition and physical risks are very likely to cause a significant share of high-carbon assets to become ‘stranded’, that is, they will lose their productive value and thus also affect the corresponding financial asset valuations negatively (Caldecott et al., Reference Caldecott, Clark, Koskelo, Mulholland and Hickey2021; Semieniuk et al., Reference Semieniuk, Holden, Mercure, Salas, Pollitt, Jobson, Vercoulen, Chewpreecha, Edwards and Viñuales2022). By now, this view is shared by the financial industry itself, with the UK’s top asset manager warning that a delayed green transition may cause global equity values to drop by a third, while a quarter of current investment-grade bonds could be downgraded (Hodgson et al., Reference Hodgson, Flood and Mooney2023). Accordingly, investors now increasingly consider such risks in their portfolio allocation (Interviews 8, 26, 35, 36, 43, 44, 68, 70, 75), which is in turn assumed to incrementally influence firm behavior, leaving high-risk companies with higher risk-premia on their debt and lower valuations of their equity (Schoenmaker and Schramade, Reference Schoenmaker and Schramade2019; Interview 34, 54).

Climate-litigation

Litigation against laggards in decarbonization (both financial and non-financial firms) constitutes another risk-related channel of influence. Litigation over responsibility for the consequences of climate change has grown sharply over the past few years. What is new is that cases increasingly turn against firms’ contribution to global warming in general, not just redress, as had been the case in the past (Hodgson, Reference Hodgson2023). The strategy of CSOs, hedge funds, and several private litigation law firms operating this channel of influence is to turn unsustainable high-carbon business practices into a financially material risk – ‘so that warnings of “stranded assets” become a self-fulfilling prophecy’ (Parfitt and Bryant, Reference Parfitt and Bryant2023). This rise in uncertainty over the future profitability of high-carbon investment essentially may turn the institution of private law on its head – challenging the predominant legal ‘coding’ of assets that selectively protects private profits despite the negative externalities involved (Pistor, Reference Pistor2019).

A study by the European Central Bank has found that of the 95 largest eurozone banks, 70% could face higher litigation risks because these financial institutions are publicly committed to the Paris Agreement, but their credit portfolios are not yet aligned with this pledge (ECB, 2024; see also NGFS, 2023). Growing attention to greenwashing from states and CSOs has turned legal disputes into a business opportunity, with professional litigation funders backed by institutional investors and hedge funds actively seeking for profitable climate-related claims instead of waiting for class-actions in what one CSO-founder in the field called ‘a golden moment for climate litigation’ (Hodgson, Reference Hodgson2023).

One case in which climate-litigation may have played a decisive role already was the withdrawal of finance for new gas field projects of Europe’s second-largest bank, BNP Paribas, in the wake of lawsuits against the latter pursued by CSOs (White and Bryan, Reference White and Bryan2023). Other high-profile cases include climate-litigation against German utility RWE and oil major Shell (Bryant and Webber, Reference Bryant and Webber2024). In total, over 2,300 cases of climate-litigation have been recorded so far (Setzer and Higham, Reference Setzer and Higham2023). These events suggest that climate-litigation could serve as a meaningful, albeit unconventional, channel of influence in sustainable finance, especially for CSOs (Weller and Tran, Reference Weller and Tran2022).

Company engagement

The next two channels of influence, company engagement and divestment, fall mainly into the domain of corporate governance and thus mostly concern private asset managers and asset owners. In corporate governance parlance, engagement with company management and the voting of an asset owners’ shares at annual general meetings is referred to as ‘voice’, while divestment – the selling of shares or bonds – is called ‘exit’ (Galaz et al., Reference Galaz, Crona, Dauriach, Scholtens and Steffen2018; Jahnke, Reference Jahnke2019a). These channels of influence for sustainable finance are important, considering that the current period is referred to as the ‘age of passive asset management’ in which benchmark stock indices (e.g., the S&P 500) and the firms that create these indices (major index providers such as S&P DJI and MSCI) increasingly shape the capital allocation of many investors, which often merely track these indices via index funds (Jahnke, Reference Jahnke2019a; Reference Jahnke2019b; Petry et al., Reference Petry, Fichtner and Heemskerk2021). Consequently, active fund managers are in decline, while large passive asset managers that dominate index funds, such as BlackRock and Vanguard, are growing (Braun, Reference Braun2016; Reference Braun, Hacker, Hertel-Fernandez, Pierson and Thelen2021; Fichtner et al., Reference Fichtner, Heemskerk and Garcia-Bernardo2017).

Company engagement consists of two main mechanisms through which investors can influence listed companies – proxy voting of their shares at annual general meetings and dialog with top management (Marti et al., Reference Marti, Fuchs, DesJardine, Slager and Gond2024 distinguish between public and private voice). Existing research on proxy voting has found that in the past most private asset managers voted all their funds – actively managed funds, passive funds, and ESG funds – in the same way, and they usually voted against shareholder proposals that demanded more sustainability (Baines and Hager, Reference Baines and Hager2022; de Groot et al., Reference de Groot, de Koning and van Winkel2021; Golland et al., Reference Golland, Galaz, Engstrom and Fichtner2022). However, in principle, proxy voting is a channel through which private and public investors can exert significant influence on listed corporations. Shareholder engagement with management is another potentially powerful channel of influence of sustainable finance (Muñoz et al., Reference Muñoz, Cerrato and Lamandini2021). Kölbel et al. (Reference Kölbel, Heeb, Paetzold and Busch2020) found relatively high success rates of shareholder engagement of up to 60%. Hence, in principle, company engagement constitutes a viable channel of influence for sustainability-focused investors to have a positive real-world impact via changing corporate practices toward more sustainability. Initiatives that engage in coalition-building, such as Climate Action 100+ have the potential to significantly amplify the effect of engagements (Interview 23, 75).

One episode shows the potential of company engagement. In 2021, the small hedge fund Engine No.1 succeeded in electing three sustainability-minded board members against the will of the management of US oil major ExxonMobil (Coffee, Reference Coffee2021). Most votes at annual general meetings are not legally binding for management, but the election of board members is. Engine No.1 prevailed against ExxonMobil primarily because this activist investor had built a coalition of large private (BlackRock, Vanguard, State Street, and others) and public shareholders, such as the US pension funds CalPERS and CalSTRS (see coalition-building). Another element that helped this coalition to succeed was the fact that the influential proxy advisor ISS, to which many shareholders effectively outsource their voting, had recommended voting with Engine No.1 (Coffee, Reference Coffee2021). In hindsight, however, this unique ‘sustainability activism’ has not developed into a persistent trend. One key reason is that ESG funds, the main instruments via which private retail investors are seeking to advance sustainability, neither systematically define nor pursue company engagement – this has been called the ‘ESG shareholder engagement gap’ (Fichtner et al., Reference Fichtner, Jaspert and Petry2023).

CSOs and public asset owners are crucial for the channel of company engagement. As You Sow, Climate Votes, FollowThis, and ShareAction, for example, organize engagement campaigns and provide analytical work on the proxy voting behavior of private asset managers. Norges Bank Investment Management (NBIM), the Norwegian sovereign wealth fund managing over $1.5 trillion, is pre-disclosing its proxy voting intentions since 2021. Research has found that NBIM is thereby significantly influencing the voting behavior of the other shareholders (Fahlenbrach et al., Reference Fahlenbrach, Rudolf and Wegerich2024). Other public asset owners such as large pension funds from the Netherlands, the UK and the US often pursue forceful company engagement (Interviews 27, 36, 44, 54). CSOs such as Rights CoLab, Center for Active Stewardship and the Interfaith Center on Corporate Responsibility are spreading knowledge to smaller public asset owners about engagement and encourage them to demand company engagement from the private firms that manage their assets (Interview 69, 75). Large private asset managers, such as BlackRock and Vanguard are primarily motivated by maximizing their assets under management. For a short period, they had become more vocal in company engagement, but the recent backlash against decarbonization by the Republicans in the US has caused them to refrain from forceful company engagement (Interview 68, 70, 71). In early 2024, JPMorgan Chase, State Street, and other US asset managers have quit Climate Action 100+ due to ‘intense pressure from Republicans over climate issues’ (Temple-West and Masters, Reference Temple-West and Masters2024). What this backlash arguably demonstrates is that company engagement is perceived as a very potent channel of influence.

Divestment

There are two different yet interrelated kinds of divestment. The first is more technical and applies when funds sell the stocks of individual listed companies. However, such divestment from specific firms has become difficult or even impossible because many funds nowadays fully replicate existing stock indices, which means that they will only sell stocks if the respective firm is excluded from the tracked index (Petry et al., Reference Petry, Fichtner and Heemskerk2021). The majority of supposedly ‘sustainability-advancing’ ESG funds are effectively tracking benchmark indices (e.g., S&P 500) with the tweak of excluding coal companies and slightly underweighting big oil firms. This is a very weak form of divestment and thus has been called the ‘ESG capital allocation gap’ (Fichtner et al., Reference Fichtner, Jaspert and Petry2023). Rohleder et al. (Reference Rohleder, Wilkens and Zink2022) have found empirical evidence that (sustainable) funds are able to create ‘decarbonization selling pressure’ thus potentially affecting listed firms. However, others have found that so far divestment has had no significant financial impact on fossil fuel companies (Hansen and Pollin, Reference Hansen and Pollin2020). Most investors would likely need to practice (sustainability) divestment for it to have significant effects on listed firms (Wilkens et al., Reference Wilkens, Rohleder and Zink2023), which seems unrealistic for the foreseeable future. And, as interviewee 69 stressed, the major oil firms have traded with a large discount on the stock market compared to other industries for many years without significantly affecting their business. Arguably an inherent problem of divestment from individual fossil fuel firms is that this reduces the proportion of sustainability-minded shareholders, which means that engagement to drive decarbonization will become more difficult; moreover, as already argued, most oil firms do not need equity for initial financing. Divestment in the segment of bonds is not yet common and might be more effective than divesting from shares, especially if done by large banks (see refinancing).

The second dimension of divestment is not narrowly focused on direct financial impact on individual companies. Instead, the focus is much broader about how divestment as a growing societal movement might affect fossil fuel firms and their social license to operate (Cojoianu et al., Reference Cojoianu, Ascui, Clark, Hoepner and Wojcik2019). This perspective emphasizes that divestment might have significant effects on the public discourse regarding fossil fuels. In the words of Bergman (Reference Bergman2018: 1):

Divestment, especially in its broader form, is shaped by the interplay of civil society and private finance. CSOs, such as 350.org, Carbon Tracker, and Divest USS, have been essential for divestment to become a broader social movement that is increasingly able to influence the ongoing public discourse shift on decarbonization (Ayling and Gunningham, Reference Ayling and Gunningham2017). Coalition-building (see section below) is thus a crucial component of divestment in its broad form.

Broccardo et al. (Reference Broccardo, Hart and Zingales2022) have found that engagement is significantly more effective than divestment in influencing individual listed corporations. Hence, the most important impact of divestment is probably to influence the public discourse on decarbonization and fossil fuel firms rather than to have (measurable) direct financial consequences on individual corporations. Divestment might also have effects by affecting the reputation of non-financial firms, banks, and asset managers.

Reputation

The opinion that investors and the public have about financial and non-financial companies matters – this also applies to sustainability, as the salience of this issue is growing significantly. Consequently, reputation can be a significant channel of influence in sustainable finance (Interviews 21, 28, 29, 31, 32, 34, 41, 42). This channel can work in both directions – a positive reputation in terms of sustainability can be beneficial for corporations, while a negative one can clearly entail disadvantageous consequences. In recent years, CSOs have played a central role in naming, blaming, and shaming financial corporations that invest in or provide finance to fossil fuel firms (Interview 7, 13, 48, 65, 66). One key example is the yearly ‘Banking on Climate Chaos: Fossil Fuel Finance Report’ published by the Rainforest Action Network (RAN) in cooperation with BankTrack, Indigenous Environmental Network, Oil Change International, Reclaim Finance, the Sierra Club, and Urgewald (which also shows the importance of coalition-building). The report identified the banks that provided the most finance to the fossil fuel industry from 2016 to 2023 – the top five being JPMorgan Chase, Citigroup, Bank of America, Mitsubishi UFJ Financial, and Wells Fargo (RAN, 2024). The fact that these banks have not reduced their financing of fossil fuels firms substantially in recent years could however indicate that – on its own – reputation is limited as a channel of influence in sustainable finance.

Sustainability-reputation is also becoming important in the segment of asset managers. A global network of more than 20 CSOs has come together under the name of ‘BlackRock’s Big Problem’ to influence the largest global asset manager to do more on climate-related issues (via company engagement) – and reputation plays a key role in that process (Bryant and Webber, Reference Bryant and Webber2024). Greenwashing has become much more frequent as a strategy to evade reputational loss and negative judgment by the public related to sustainability issues in recent years. The case of the German asset manager DWS shows that greenwashing is now having financially material consequences, as the firm agreed to pay a penalty of $25 million to the Securities and Exchange Commission for overstating the sustainability of its funds (Palma and Storbeck, Reference Palma and Storbeck2023). Finally, reputation can also be seen as a major reason for asset managers, banks, and insurance companies to join coalitions for sustainable finance (Schoenmaker and Schramade, Reference Schoenmaker and Schramade2019; Interview 40).

Coalition-building

Recent years have seen the proliferation of financial governance networks in the form of alliances and coalitions. Among them are the Glasgow Financial Alliance for Net Zero (GFANZ), the Institutional Investors Group on Climate Change (IIGCC), the Paris Aligned Asset Owners Initiative (PAAOI), and many others. Coalitions can be found in the private but also in the public and civil society sphere (Tischer and Ferrando, Reference Tischer and Ferrando2024). Public bodies can furthermore initiate coalition-building in the private sector. UNEP Finance Initiative has for example initiated GFANZ (UNEP FI, 2023). CSOs form relevant coalitions, for example to realize large reports like the annual ‘Banking on Climate Chaos. Fossil Fuel Finance Report’, which is a joint effort from different CSOs (RAN, 2024).

Macleod and Park (Reference Macleod and Park2011: 54) define investor-driven governance networks as ‘coalitions or alliances led by investors (…), formed around a specific public goods issue or issue-areas, in which investors are the primary actor’. Based on this definition and adhering to the integrative approach of this article (i.e., including a variety of private financial actors, not just investors), coalition-building in sustainable finance can be understood as the process of forming coalitions led by different types of private finance actors or joining coalitions launched by the public for strategic reasons. These are formed around sustainability-related public goals and aim to influence the behavior of members and other market participants.

To shape sustainability-related public goals, coalitions in sustainable finance have a variety of tools at their disposal: in the most direct sense these coalitions of financial actors can influence the behavior of their members via information sharing, setting requirements for shared business practice goals, disclosures, monitoring of carbon footprints, and similar measures (MacLeod and Park, Reference Macleod and Park2011; Kawabata, Reference Kawabata2019). GFANZ for example is an industry-led but UN-convened network that incorporates industry-specific alliances under its umbrella, for example, the Net-Zero Insurance Alliance (NZIA), the Net-Zero Banking Alliance (NZBA), and the Net-Zero Asset Managers (NZAM) initiatives. Its members are required to set and follow up on science-based targets that lead to a net-zero transition of operations and portfolios by 2050 or sooner (UNEP FI, 2021). Coalitions also play a crucial role in driving company engagement strategies. One major actor is the Climate Action 100+ initiative, which specifically coordinates investor engagement strategies to change the world’s most carbon emitting companies (see company engagement). A variety of studies furthermore suggests that financial governance networks are crucial in framing what sustainable finance is and should be, thereby practicing standard-setting (Dimmelmeier, Reference Dimmelmeier2023; MacLeod and Park, Reference Macleod and Park2011; Mitchell, Reference Mitchell2017). Beyond framing, financial governance networks are major contributors to qualifying what high-carbon assets are specifically and developing metrics to assess such (Langley et al., Reference Langley, Bridge, Bulkeley and van Veelen2021). MacLeod and Park (Reference Macleod and Park2011) call the rise of financial governance networks on sustainability an emerging form of private global environmental governance.

Our research has found that, in principle, coalition-building can act as a major amplification/support mechanism for many other channels of influence, including company engagement, divestment, and climate-litigation (Interview 10, 13, 23, 33, 35, 36, 40, 44, 55). While there is influence connected to creating coalitions, these processes are far from linear. Coalitions serve as fora for the coordination of competing interests of financial elite actors (Bernauer, Reference Bernauer2020), the coordination is not always successful, however. In fact, recent turmoil reveals how coalitions serve as political space where meaning and ambition of sustainable finance are negotiated, sometimes with the result of companies leaving coalitions. The recent exit of several large insurance companies from the NZIA (Smith and Bryan, Reference Smith and Bryan2023), the withdrawal of Vanguard from the NZAM (Flood et al., Reference Flood, Agnew, Jenkins and Darbyshire2023), and the exit of JPMorgan Chase, State Street, and others from Climate Action 100+ (Temple-West and Masters, Reference Temple-West and Masters2024) show that coalition-building as a channel of influence can also function as a means to weaken sustainability norms via exiting; alternatively, this could be interpreted as highlighting the potential strength of coalition-building, because the Republicans in the US have focused specifically on undermining coalitions in sustainable finance. On the other end of the spectrum, the German GLS Bank left the NZBA in early 2023 in protest over continued financing of fossil fuel explorations by other members (Marsh, Reference Marsh2023), thus advocating for stricter sustainability standards.

Standard-setting

Private actors have gained regulatory authority and standard-setting capability in certain issue-areas (Büthe and Mattli, Reference Büthe and Mattli2011). This also holds for sustainable finance (Golka, Reference Golka2024; Interviews 40, 43, 52, 54). One evident example is the case of ESG investing. The term ESG was introduced in a report by the United Nations Global Compact in 2004, but the concrete market standards for how to conduct this kind of ‘sustainable’ investing have been devised by a small group of ESG index providing firms, primarily by one dominant company: MSCI (Fichtner et al., Reference Fichtner, Jaspert and Petry2023). As Eccles et al. (Reference Eccles, Lee and Stroehle2020: 581) have shown, by 2010 MSCI decided to advance a methodology ‘as quantitative as possible’ that was well-suited to create investor-friendly products. Concurrently, they discontinued a methodology that addressed double materiality more comprehensively. In essence, the ESG methodologies dominant today are practicing a very weak form of divestment by excluding coal firms from their portfolio while underweighting oil and gas firms. However, using the potent channel of company engagement is not an essential element of their methodology. Mainly following a single materiality logic, most ESG funds seek to reduce sustainability-related risks to investor’s portfolios, they do not strive to change corporate practices toward more sustainability.

ESG investing is a case in which market dominance of a few firms (primarily MSCI) led to a de facto standard-setting. In other issues areas this was achieved by industry associations (i.e., coalition-building) of private actors (e.g., green bond principles and green loan principles). Studies on standard-setting in other industries have shown that standard-setting agencies compete in so-called ‘standard markets’. In the process, standards tend to increasingly converge in that shared certification platforms or industry-wide understandings of good business practices emerge (Reinecke et al., Reference Reinecke, Manning and von Hagen2012). Concerning divestment, CSOs such as Urgewald have contributed to the setting of market standards by providing databases (Interview 34), while the large public asset owner NBIM is shaping market practices by regularly publishing a list of firms that have been excluded from its portfolio, which is then followed by most institutional investors in Scandinavia (Interview 44).

Standard-setting is the channel of influence with the greatest breadth. As an amplification and support channel it can strengthen other channels such as divestment, company engagement or (re)insurance. Conversely, standard-setting can also weaken other channels and sustainability impact by shaping and legitimizing market practices that do not contribute to changing corporate practices toward more sustainability. Moreover, private standard-setting has the potential to pre-structure public regulation (akin to agenda-setting), as was the case with EU regulation on sustainable finance that did not include binding minimum standards for how ‘sustainable’ funds must pursue company engagement.