Rethinking Green Finance

This paper reviews the economic foundations of green finance and how it works in practice. Public policy is essential for addressing climate externalities, but its impact is often limited by policy swings and the difficulty of coordinating across countries. These gaps have raised expectations for private investors, yet common channels such as divestment and engagement face structural hurdles: heterogenous investor preferences, fiduciary constraints, and weak links between ESG metrics and real economic outcomes. Recent research finds that sustainable investing tends to shift portfolios more than it cuts emissions. Transition-focused tools, including sustainability-linked bonds, show more promise. Overall, we argue that green finance is most effective as a complement to public policy and technological innovation, not a substitute for them.