Over a decade ago, Mark Carney’s 2015 landmark speech “Breaking the Tragedy of the Horizon” put climate change on the agenda of financial institutions. Warning that the financial system is materially exposed to climate risks, the speech sparked institutional engagement that contributed to the launch of the Network for Greening the Financial System (NGFS) in 2017. Regulators and central banks have increasingly responded by adopting green financial and monetary policies (GFMP), measures targeting the structure and conditions of the financial system to address climate-related concerns. For example, last year the European Central Bank decided to introduce a climate factor within its collateral framework to manage transition risks. Many others have developed versatile GFMP toolkits ranging from disclosure requirements over climate stress tests to green finance guidelines. A growing body of empirical research is now shedding light on what drives this engagement and, crucially, whether it supports low-carbon transition efforts and financial risk mitigation.
What are the drivers of GFMP adoption?
Before asking what GFMP achieve, it is worth asking what shapes institutional engagement with climate in the first place. Campiglio et al. (2025) study this question through the lens of central bank communication, drawing on speeches delivered by 131 central banks over nearly four decades. Using natural language processing, they identify two distinct climate-related narratives. A green finance narrative oriented towards promoting sustainable investment, and a climate-related risks narrative centred on financial stability threats from climate change. A striking finding is that institutional factors are stronger drivers of climate engagement than a country’s actual exposure to physical or transition risks.
Shears et al. (2025) complement the picture by examining how and why central banks manage climate risks. They distinguish between “re-risking” brown investments by internalizing climate risks into financial supervision, and “de-risking” by actively reducing the risks of clean energy investments. One of their key insights is that re-risking activity is primarily driven by the stringency of national climate policy, while public concern about climate change drives de-risking. This suggests that central banks may act more as amplifiers of the national policy environment than as autonomous correctors of climate-related market failures.
Do GFMP move the needle on the low-carbon energy transition?
Moving from drivers to impacts, Rischen (2026) provides an empirical assessment of the real-economy consequences of GFMP. The study deploys (quantile) regression and IV methods to investigate whether GFMP intensity, measured as the stock of adopted policies and regulations, translates into greater renewable energy (RE) capacity, a proxy of RE investment and indicator of countries’ low-carbon transition progress. Results show that, on average, adopting a GFMP is associated with an increase of about 0.02 gigawatt RE capacity per million capita, corresponding to roughly 4.9 Mt CO₂ emissions avoided annually when displacing fossil energy sources. Disentangling the aggregate impact reveals heterogeneity across policy types and time.
First, incentive-based instruments are found to be twice as effective in promoting RE deployment as informational instruments. This can be exlained by the characteristics and transmission channels through which these measures operate. Informational GFMP, such as disclosure requirements, primarily affect investment decisions indirectly by reducing information asymmetries. Their effectiveness somewhat hinges on market participants’ willingness and ability to internalise new climate-related information into pricing decisions, a process that may be constrained by short investment horizons and other market frictions. In contrast, incentive-based GFMP, such as credit allocation rules, tend to alter relative prices more directly, thereby exerting a relatively stronger promotional steering impact towards low-carbon funding. While informational measures still dominate the global GFMP landscape, these findings also provide a possible explanation for the increasingly pivotal role incentive-based instruments assumed in countries’ policy mixes in recent years.
Second, impacts mostly materialize over the medium- to long-term. Recently adopted policies show only modest and marginally significant impacts on RE deployment, while older policies drive substantially larger RE capacity additions. GFMP require multiple time periods to translate into real economy outcomes, consistent with the transmission lags involved in policy actions feeding through to investment decisions and scaling-up of energy infrastructure.
Do GFMP safeguard financial stability?
While Rischen (2026) implicitly links to the green finance narrative, D’Orazio (2025) relates closer to the climate-related risks narrative by assessing the effectiveness of GFMP in mitigating financial risks. Stronger climate financial policies are found to be associated with lower non-performing loans and improved bank liquidity conditions. The study also documents diminishing returns at higher levels of regulatory intensity and heterogeneous effects by climate vulnerability, with policies proving less effective in highly exposed economies where structural vulnerabilities may require interventions beyond financial regulation.
Policy implications and conclusion
These recent research findings point to three interconnected lessons. First, GFMP can be a meaningful lever for the green transition and financial resilience, but realising this potential requires deliberate policy choices, for example, about tilting current policy mixes towards mandatory, incentive-based measures. Second, timing matters. As highlighted by the IPCC (2022), the window of opportunity for an orderly transition is closing rapidly and transmission lags between policy adoption and effect imply that delayed action compounds the challenge. Put simply, to contribute to tomorrow’s decarbonisation, GFMP would need to be implemented today. Third, the institutional ecosystem can act as a key enabler or barrier. Strengthened policy cooperation, knowledge sharing and capacity building via bodies like the NGFS or the Coalition of Finance Ministers for Climate Action could be a catalysing force to enhance the effectiveness of GFMP in managing climate risks and meeting the Paris Agreement goal of making finance flows consistent with a pathway towards low greenhouse gas emissions.