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The Entrepreneurial State Must Lead on Climate Change

As a much-touted green alliance of financial institutions crumbles, the private sector has once again proven unequal to the task of climate leadership. The global transition to a net-zero economy simply will not happen at the pace that is needed unless states embrace their proper role as a market maker and investor in public goods.

CAIRO – In recent weeks, several members of the Glasgow Financial Alliance on Net Zero (GFANZ) – a group of 450 financial institutions – have quit over concerns about the cost of delivering on their climate commitments. In dropping out, they have given the lie to the notion that private financial institutions can lead the transition to a carbon-neutral economy. What the transition really needs is more ambitious states that will go beyond market-fixing to become market shapers.

The market-led approach is rooted in the belief that private financial institutions allocate capital more effectively than anyone else. The implication is that states should refrain from “picking winners” or “distorting” market competition, and confine themselves to “de-risking” green investment opportunities to make them more appealing to mainstream private investors.

But modern economic history tells a different story. In many places and on many occasions, it is public actors that have taken the lead in shaping and creating markets that then deliver benefits for both the private sector and society more broadly. Many major technological breakthroughs that we now take for granted happened only because public entities made investments that the private sector found too risky.