Addressing the climate and environmental crisis requires fundamental restructuring of the state, economy, and society in a socially just and ecologically sustainable manner. Shifting financial flows away from climate-damaging and toward sustainable investments is crucial for this transition. The financing needs are high, yet existing investments remain insufficient, while significant amounts of capital continue to flow into emissions-intensive activities. This policy brief summarizes the key findings of the policy report developed as part of the project “Climate Change and Global Finance at the Crossroads”, which analyzes the causes behind the insufficient financing of the green transition.

The research team from the Witten/Herdecke University and the Institute for Ecological Economy Research (IÖW) finds that the global green financing gap is not primarily due to a lack of capital, but rather to the insufficient bankability of green projects. Banks and other financial institutions are reluctant to increase lending and investment in green activities because such investments often fail to meet their expected risk-return profiles. At the same time, carbon-intensive investments remain attractive, as climate risks are not adequately incorporated into financial regulation.

The report derives three core recommendations for a future-fit finance policy framework:

1. Targeted support to increase the bankability of green projects by reducing investment risks and increasing returns.
    
2. Measures to disincentivize high GHG-emitting investments by increasing risks and lowering returns.
    
3. Provision of public funds for essential but never-bankable investments, such as biodiversity conservation or climate adaptation.

A key insight is that no single measure is sufficient. Instead, a combination of financial, industrial, innovation, and fiscal policy is needed to ensure a just and sustainable transformation.