Financial Sector and Climate Targets: Much Remains to Be Done
Research
08.05.2025
INTERACT Sheds New Light on the Impact of Green Financial Intermediation
It is uncertain whether the financial sector is adequately contributing to the realisation of climate targets. Most importantly, it remains unclear which channels are best suited to empower the financial sector in driving a sustainable transformation of the economy. The project Green Financial Intermediation – From Demand to Impact (INTERACT), which ZEW Mannheim conducts jointly with the ifo Institute, analyses how the financial sector can more effectively support sustainable investments.
The results show that ESG ratings and financial literacy have a crucial impact on green investments and that green bond issuances encourage banks to adopt a more climate-friendly lending policy. The INTERACT project is funded by the Federal Ministry of Education and Research (BMBF).
Financial literacy and reliable information for private investors
“Retail investors tend to invest more in sustainable asset classes if their sustainability is proven by ESG ratings. However, divergent ratings undermine investor confidence and thus limit the effectiveness of this tool in promoting sustainable investment,” explains Professor Tabea Bucher-Koenen, head of the ZEW Research Unit “Pensions and Sustainable Financial Markets”. The lack of knowledge about sustainable financial products also proves to be an obstacle: “It is difficult for many private households to integrate sustainability goals in their investment strategies because they either lack the financial knowledge required or they are not aware of the existence of sustainable investment products. It is therefore crucial to strengthen financial literacy and include sustainability topics.”
Sustainable financial products: The potential of green bonds
Green bonds can be an effective channel: They encourage both institutional investors to invest more in sustainable financial products, and banks to grant loans that lead to positive climate effects. Professor Karolin Kirschenmann, deputy head of ZEW’s “Pensions and Sustainable Financial Markets” unit, emphasises: “Our findings show that green bonds can play a supporting role in financing the transition. However, the positive climate effects only occur in certain subgroups of loans and companies. This means that more targeted initiatives are needed to scale up the impact.”
Unclear steering effect of sustainability reporting
It is questionable whether the EU Taxonomy has so far been successful in directing capital flows towards sustainable investments. At the same time, the reporting obligations impose considerable costs, especially for small and medium-sized enterprises (SMEs) that are not directly subject to reporting obligations but are integrated into supply chains and require external financing. Banks and capital markets also perceive the associated compliance costs as a risk for companies with direct reporting obligations. “The high reporting costs are only justified if they actually lead to a relevant mobilisation of green investments. The costs and benefits of sustainability reporting need to be carefully assessed in the coming years and the necessary adjustments made,” Kirschenmann says.
About INTERACT
The INTERACT project provides a comprehensive analysis of all steps of financial intermediation. It covers the process of green financial intermediation, from investor demand and new regulations, through mechanisms that translate these into different financing conditions for greener and browner investment projects, to the climate impact of these projects. INTERACT therefore provides extensive new insights into the drivers and barriers for the sustainable transformation of the economy.
