Laissez-faire neoliberal green finance expects that individual behavior of corporations, e.g., in the areas of corporate social responsibility (CSR) and/or financial investment strategies following ESG (environmental, social and governance) criteria, are effective in managing environmental problems. This is very much in line with the idea that financial investors’ behaviors are a central element in dealing with environmental problems as promoted by private investors such as Larry Fink, CEO of BlackRock ^[4][20], as well as by banking supervisory institutions such as the European Banking Authority (EBA) ^[5][21].

This optimistic perspective regarding the potential of private (financial) agents can be criticized within the neoliberal perspective itself ^[6][22]. The assumption that voluntary “green” investment behavior makes a difference is largely at odds with the efficient market hypothesis ^[7][23], the dominant perspective regarding the functioning of financial markets today. This perspective suggests that the prices of financial assets are not determined by the demand for them but by rational expectations regarding the future returns. The perspective holds that if some (or even many) market participants are irrational (or prefer green investment), the prices of financial assets, and hence, the investment conditions for different industries, will still be determined by the expected returns (and not by the demand for these assets). Individual strategies of investing in green bonds, shares or other financial instruments due to rebalancing effects are expected to have at best a minor impact on prices, financing conditions and the real economy ^[8][24]. In a less optimistic view, short- or medium-term deviations of equilibrium prices and market distortions may occur but only as a temporary phenomenon. Hence, while individual behavior in the form of green consumption changes the form of production and the structure of output, and therefore, undoubtedly has a positive environmental impact. This is far less the case of private green investment within the context of efficient financial markets. Therefore, it is not surprising that it is so difficult to find empirical evidence showing any significant effectiveness of private green investor behavior [9]. Based on a recent review of empirical literature ^[10][25], investor impact is at best very modest and can be found most often when financial markets are not efficient and small or less-established firms face financing constraints. Notwithstanding this, it is often argued that such voluntary approaches by investors may help to solve global environmental problems. However, Weber and ElAlfy ^[11][2] (p. 73) conclude that the promotion of green finance by financial industry takes place “[…] only as far as it has direct positive impact on the business or as long as it has positive impact on the reputation”. This goes along with widely critiqued “greenwashing” in the financial sector ^[12][26], whereby companies offering green products continue to promote traditional “brown” products and “brown” investment is, consequently, not significantly constrained.

This perspective encompasses a less radical and more conventional neoclassical view that builds on the assumption that environmental problems are caused by externalities that can be internalized by either taxes and/or subsidies ^[13][30]. While taxes and/or increasing the costs for capital are considered reformist approaches, subsidies to companies and the financial sector are classified as standard neoliberal green finance because of the different distributional implications. In the context of green finance, this approach is reflected by promoting the (indirect) subsidization of private green investment as an effective policy approach ^[14][15][31,32]. These subsidies can take the form of public guarantees such as de-risking Private–Public Partnerships (PPPs) ^[16][33] or green credit guarantee schemes (GCGSs) ^[17][34]. It is criticized that these measures use public money to increase profitability for private investors as has been the case in Africa ^[18][35]. Directly supporting private investors tends to imply adverse effects on the distribution of income and wealth. This is why such an approach can be classified as standard neoliberal green finance.

In the area of monetary policy, a standard neoliberal approach supports using measures that improve financing conditions for private green investment. Such a strategy builds on traditional monetary policy measures and combines them with innovative instruments such as targeted longer-term green refinancing operations, green QE, a reduction in the minimal capital requirements for green lending, etc. ^[19][20][21][36,37,38].

Policies and regulations that create and support markets can be subsumed under the banner of market-making neoliberal green finance. Such policies do not just include regulations regarding property rights but also standards such as “green” taxonomies. Standardization measures are expected to increase transparency and facilitate the creation and functioning of markets and financial instruments ^[22][44]. This is expected to make markets work more effectively for environmental goals ^[23][45].

The EU taxonomy ^[24][3] is an important and well-developed example defining standardized criteria for classifying and rating green investments, allowing, for example, for the comparison of different (green) mutual funds. In developing the taxonomy, the EU relied heavily on input from private finance. The taxonomy is expected to provide a level playing field for the banking industry and improve its reputation in the context of accusations of greenwashing. In so doing, it should enhance business opportunities by increasing the demand for green financial products.

Instead of relying on subsidies as in the standard neoliberal approach, taxes on environmentally problematic activities are introduced ^[28][53]. This approach also considers the distributional implications of taxes and includes wealth and income taxes (including taxes on capital) as a central tool for raising funds for public investment in green activities. Financial resources are an important precondition for public ownership and public provision of infrastructure, e.g., in the energy sector or in the transport sector. This approach is expected to tackle environmental problems effectively ^[29][54].

Although a neoclassical perspective considers environmental taxes targeting externalities to be a legitimate instrument, it is critical of increasing taxes on wealth and higher income groups in the economy as this is expected to affect the private sector negatively. In a critical political economy perspective, it can be argued that such a reformist policy, although not directly supporting the financial sector, continues to support green private investment. Hence, it is a strategy that leads to green capitalism but does not combat environmental problems adequately ^[30][55].

The Green Deal proposed by the European Commission in December 2019 ^[31][56] mainly shares a neoliberal perspective but also contains some reformist elements. It proposes to reduce the risk of greenwashing by introducing standards but also argues that both public and private finance are required to transform the economy. For instance, it is intended for the European Investment Bank to increase the share of green loans from 25% to 50% of the overall portfolio. A “well-designed tax reform” (p. 17) is expected to further contribute to economic growth and increase resilience to climate changes.

This reformist approach tries to change the context within which economic activities in the real or productive economy take place and expects that private finance responds accordingly. Hence, the starting point for introducing environmentally more friendly economic activities is not the financial sector but the rules that govern the activities in the real economy. Private sector finance follows and supports these policies. A central element of such a reformist approach includes binding regulations for the financial sector, which forbid or enforce specific financing activities ^[29][54]. The efficiency of such an approach is illustrated by successful environmental policies in the past that, for example, forbid the use of toxic substances or enforced technical standards for emissions, etc. ^[32][10].

However, in a neoclassical perspective, command and control policies are considered problematic. Against the background of neoclassical welfare economics, market-based instruments are preferred over command and control policies as they are considered to be less invasive and more efficient ^[3][19].

In such a progressive perspective, finance must support global sustainable welfare ^[37][67]. This implies that access to sufficient natural resources (goods, services) must be guaranteed for all globally. A decommodified provision of essential goods is suggested. In order to avoid a global over-use of natural resources and related negative consequences such as global warming and the loss of biodiversity, this perspective suggests limiting the over-use of natural resources by a small share of wealthy people. Moreover, this requires the reorganization of production on a systemic level, such as the implementation of a globally sustainable agriculture and other provision systems ^[36][66]. The definition of these individual rights and caps and the specific way of reorganizing global production should be subject to (global) democratic decision-making processes ^[32][10]. In order to compensate for global economic inequalities, it is necessary to implement a global system of financial transfers that guarantees that all, including the poor in the global South, have access to necessary goods. Monetary policy supports sustainable welfare in general and these global arrangements by providing resources and infrastructure accordingly.

The debt-for-nature transactions are an important example of such an approach. The first attempts of such a strategy date back to the late 1980s. They involve forgiving (part of) foreign debt obligations and allowing debtor nations to use the funds for environmental purposes ^[38][68]. More recently, debt-for-nature swaps were re-proposed within the context of the Chinese Belt and Road Initiative (BRI) ^[39][69]. Under progressive green finance, such transactions could reduce the foreign debt dependence and simultaneously contribute to reach environmental goals. While debt-for-nature transactions are an important first step, they could be expanded to transfer additional financial resources beyond a reduction of debt to the global South. Monetary policy provides a global institutional setting in order to achieve the goal of sustainable welfare by providing resources accordingly.

Historical analysis shows that monetary policy can be deployed for purposes other than targeting inflation. Monetary policy potentially also has more instruments and power to pursue social goals than is commonly assumed ^[40][71]. In a progressive approach, the power of central banking and monetary policy should, therefore, be used. Progressive green monetary policy builds on reformist strategies but goes substantially beyond them. In particular, the international dimension of money is important.

The global financial architecture should support the goal of sustainable welfare and restrict private capital flows where needed. It should also establish international measures of redistribution to assure adequate access to natural resources for all. This means that we should abandon the mechanism of the current international financial system, which, thanks to debt relations and financial dependency, contributes to a drain of financial (and environmental) resources from the global South to the global North ^[41][42][61,72]. An alternative global monetary architecture should be implemented that avoids the problems of a global currency hierarchy that fosters a flow of natural resources from the global South to the global North ^[43][41][59,61].

International monetary policy coordination based on solidarity is, therefore, essential in a progressive strategy. Departing from the dollar-centered global currency hierarchy and the implementation of a genuine global currency that systematically favors poorer countries is considered crucial. This could be inspired by Keynes’ original Bancor proposal but goes substantially beyond it. It implies that global capital flows should be systematically controlled, and the global monetary architecture should support domestic policies ^[44][60]. This would be an important precondition for the implementation of sustainable welfare. However, mechanisms of global cooperation are essential. Potentially, the recent proposals by the Bank for International Settlements (BIS) ^[45][73] and the People’s bank of China towards a global central bank digital currency (CBDC) may lead to a revolution in the global monetary architecture. In the current form, the instruments can be classified as reformist. However, they have the potential to become progressive. The BIS and the People’s Bank of China ^[46][74] have cooperated with the central banks of Hong Kong, the United Arab Emirates and Thailand and the BIS Innovation Hub in Hong Kong on a multiple CBDC (m-CBDC) project. The dominance of a single national currency at the global level could end. This would allow for a more symmetric global monetary regime. The specific features of such a global (public) digital currency would enable very specific interventions and, at a global level, would facilitate access to and control of environmental resources. Hence, democratically controlled and based on global solidarity, such a measure and a new global monetary and financial architecture could be a powerful instrument of progressive monetary policy and support progressive finance. However, it is to be seen whether m-CBDC or a similar initiative will develop into this progressive direction.

Such far-reaching reforms of the global financial system and the global monetary regime are considered at odds with a traditional neoclassical perspective on monetary policy that focuses mainly on price stability and see a very limited role of money for the economy.