The global push for net-zero emissions has triggered a ten-fold increase in sustainable finance policies over the last decade. Yet, as the climate crisis intensifies, a critical question remains: are these policies actually reducing emissions, or are they just adding to the growing "green tape" for businesses?
A new study published in Business Strategy and the Environment by Chang Wang and colleagues provides a comprehensive answer. By analyzing over 10,000 public firms across 64 economies from 2002 to 2021, the research team identified which policy designs effectively lower greenhouse gas (GHG) emissions and where the current regulatory approach is falling short.
Not All Policies are Created Equal
The researchers found that a greater number of sustainable finance policies generally leads to reduced Scope 1 GHG emissions in carbon-intensive sectors, the type of policy matters significantly.
Promotional over Prudential: Policies designed to actively steer credit and financing toward low-carbon activities (promotional) are more effective than those focused solely on maintaining financial system stability (prudential).
Incentives over Information: Incentive-based policies—such as green bonds and capital requirements—and quantity-based controls drive actual emission reductions. In contrast, informational tools like corporate ESG disclosure requirements, while popular, have not yet demonstrated a direct impact on reducing emissions by themselves.
The “Stewardship Gap”
One of the most striking findings is that current disclosure-only policies—the cornerstone of many national strategies—do not automatically lead to lower GHG intensities. While the UN Principles for Responsible Investment (PRI) notes that 55% of sustainable finance policies focus on corporate disclosure, these policies primarily act as a precondition for action rather than the action itself.
The researchers identify a persistent stewardship gap. When investors only use data for risk management (prudential), they may divest from "brown" industries only to avoid regulatory risk. This divestment can be counterproductive, as it reduces the influence of climate-conscious investors over high-emitting firms. Effective change occurs when policies, such as stewardship codes, mandate that investors engage directly with firms on their transition plans.
Closing the Net-Zero Gap by 2030
The study's scenario analysis delivers a sobering reality check: simply maintaining the current rate of policy creation is insufficient to meet midterm climate goals. To align with the 2°C warming goal, the research suggests a radical shift in strategy:
Shift to Investor Regulation: Policy focus must move beyond firm-level disclosure to promotional and incentive-based policies specifically designed to regulate and mobilize investors.
Support the Global South: Developing countries often lack the resources to implement or enforce robust sustainable finance policies. The study calls for developed nations to honor Paris Agreement commitments by scaling blended finance facilities and providing direct capacity-building support to the Global South.
Target Scope 2 and 3: Current policy impacts are largely confined to Scope 1 emissions, which firms control directly. To reach net-zero, new standards must be integrated to guide firms in reducing indirect emissions across their entire supply chain.
Actionable Insights for Business Leaders
The research offers a clear roadmap for CFOs and executive teams:
Proactive Investor Relations: Rather than focusing solely on compliance with disclosure rules, companies should proactively communicate long-term resilience and transition strategies.
A Partnership Model: As stewardship codes become more prevalent, firms should prepare for deeper, more strategic engagement with investors, viewing them as partners in the net-zero transition rather than just capital providers.
The message for both policymakers and businesses is clear: transparency is a start, but it is not a substitute for action.