By Fernanda Feil – Economist, specialist in sustainable finance, and adjunct professor in the Graduate Program in Economics at the Fluminense Federal University – PPGE/UFF and Carmem Feijó – Full professor at PPGE/UFF and coordinator of the Financialization and Development Group – Finde
The transition to a low-carbon economy is one of the most challenging tasks contemporary society faces, requiring coordinated global efforts and the mobilization of vast financial resources. According to the International Energy Agency (IEA, 2023), achieving this goal will demand an investment of $900 billion by 2030 for modernizing the energy sector, in addition to $1.7 trillion per year for low-carbon technologies applied to end-use consumption. The Intergovernmental Panel on Climate Change (IPCC, 2022) underscores the magnitude of this challenge, estimating annual costs between $1.6 trillion and $3.8 trillion through 2050, covering areas from agricultural changes to land use, to effectively achieve carbon neutrality.
This climate transition process can be described as a form of “creative destruction,” as it involves disruptive transformations in technology and infrastructure. Achieving climate, environmental, and social goals requires not only introducing new technologies but also making profound structural changes that can impact economic dynamics and global financial stability. The necessary adjustments to sustainably reconfigure economies have direct implications for the stability of the financial system. The challenges arising from this process are numerous, and the transition must be swift enough to avoid significant economic losses while protecting nations’ financial stability.
The financial system’s role becomes central in this context, acting as the engine for creating and allocating essential resources for the sustainable transition. The climate crisis demands the mobilization of long-term financing to support structural investments that not only address climate impacts but also foster technological innovation. However, the current financial system, often oriented toward short-term rent extraction, exhibits characteristics incompatible with the necessary investments, which are highly uncertain, costly, and long-term. This phenomenon, known as financialization, represents an obstacle that must be overcome through financial reforms promoting the integration of environmental and social sustainability. Such reforms aim to create a favorable environment for a fair and necessary transition to achieve net-zero greenhouse gas (GHG) emissions.
In this scenario, sustainable finance emerges as a critical solution. A sustainable financial system is one capable of (re)configuring real wealth, conducting asset transactions that meet the long-term needs of an inclusive and resilient economy. This type of system seeks to align its operations with sustainable development goals, promoting integrity, transparency, and a commitment to collective well-being. Sustainable finance, therefore, focuses not only on generating economic returns but also on fostering sustainability, recognizing that financial returns cannot be dissociated from environmental and social impacts.
For sustainable finance to develop effectively, the creation of a specific taxonomy becomes essential. A taxonomy for sustainable finance provides a classification system that identifies activities, assets, and projects contributing to environmental and social goals based on clear and measurable criteria. This standardization helps direct capital flows toward genuinely sustainable projects, preventing practices like greenwashing and providing a solid foundation for drafting public policies aligned with climate commitments. During COP 29 in Baku, Brazil will launch its own taxonomy, highlighting the importance of mobilizing and redirecting investments toward activities with positive climate and societal impacts. Strategic objectives include promoting sustainable technological advancement, increasing economic competitiveness, and ensuring the production of reliable financial information for long-term decision-making.
The alignment between the financial system and climate commitments is not just desirable but essential. Integrating sustainable finance with a robust taxonomy establishes the foundation for an economy that balances economic growth with environmental protection, ensuring a more resilient and inclusive future. Thus, a sustainable green transition is not merely a matter of environmental responsibility but also an economic and social imperative requiring global collaboration and strategic investments.
