How Climate Policy Is Being Built Into The Financial System

For most people, climate policy still sounds like something debated at environmental conferences or negotiated in international treaties but increasingly, it is being implemented somewhere else entirely.

Mark Keenan | March 12, 2026

For most people, climate policy still sounds like something debated at environmental conferences or negotiated in international treaties. But increasingly, it is being implemented somewhere else entirely. 

Instead of being decided openly through legislation, many of the most consequential climate policies are now emerging through financial regulation and banking rules that few citizens ever see or vote on.

A quiet shift has been taking place over the past fifteen years. Increasingly, climate policy is not being implemented through laws that voters can see and debate. Instead, it is being embedded into the plumbing of the financial system itself.

That change matters because the financial system decides who gets credit, who receives investment, and which industries survive. Once climate criteria are built into lending rules, capital requirements, and investment standards, the effects reach far beyond environmental policy. They begin shaping the entire economy.

To understand how this works, it helps to start with a concept that emerged in financial circles two decades ago: “stranded assets.”

The idea is simple. Many “fossil-fuel” companies hold large reserves of oil, gas, or coal on their balance sheets. These reserves are treated as valuable assets because investors assume they will eventually be extracted and sold. But if governments enforce strict carbon limits, a portion of those reserves could become unusable.

In that case, assets that appear valuable today might suddenly lose much of their worth. They would become “stranded”—investments that can no longer generate the expected returns.

At first glance, this may sound like a narrow issue affecting energy companies. But the concept quickly expanded beyond that. Once climate policy was framed as a financial risk rather than merely an environmental concern, it captured the attention of banks, regulators, and institutional investors.

The logic was straightforward: if climate policy might reduce the value of certain industries, then financial institutions should measure and manage that risk.

Over time, this argument moved from academic discussion to regulatory practice.

One important step was the rise of climate-related financial disclosures. Investors began asking companies to report their exposure to climate risks, including how their business models would perform under stricter carbon limits. What began as voluntary reporting gradually became standardized expectations.

Today many large firms are encouraged—or in some jurisdictions required—to disclose how climate policy might affect their future profitability. That information feeds directly into how investors price risk.

Another major development occurred in the world of central banking and financial regulation.

Following the financial crisis of 2008, regulators significantly expanded their oversight of banks. New rules were introduced to ensure that banks held enough capital to withstand potential shocks. These rules rely on complex formulas that assign “risk weights” to different types of assets.

A bank that holds riskier assets must set aside more capital as a buffer. Because capital is expensive, higher risk weights make certain loans less attractive for banks to issue.

Now climate risk is being incorporated into those frameworks.

Central banks and supervisory bodies increasingly ask financial institutions to examine how climate change—and the policies responding to it—might affect their loan portfolios. Banks are encouraged to run stress tests that simulate scenarios such as rapid decarbonization, rising carbon prices, or physical climate impacts.

In practice, this means that lending to certain sectors may be viewed as increasingly risky. If regulators conclude that a coal power plant or oil project faces long-term regulatory pressure, banks may have to hold additional capital against those loans.

That makes the financing more expensive.

Over time, these technical adjustments can have powerful consequences. Industries that regulators classify as high climate risk may find it harder to obtain credit. Insurance companies may raise premiums or withdraw coverage. Investors may shift capital toward sectors deemed more “sustainable.”

No law has to ban those industries outright. Market forces—shaped by regulatory guidance—gradually do the work.

This process has accelerated in recent years as large asset managers have entered the discussion.

In 2020, BlackRock CEO Larry Fink famously declared that “climate risk is investment risk.” When the world’s largest asset manager signals that companies must address climate exposure to attract investment, corporate executives pay attention.

Meanwhile, governments have introduced classification systems that label which economic activities qualify as environmentally sustainable. The European Union’s taxonomy regulation is the most prominent example. Its criteria influence which investments can be marketed as “green” and which may face stricter disclosure requirements.

These classifications affect the cost of capital. Firms that fall within favored categories may find it easier to attract investment. Those outside them may face higher financing costs.

From the perspective of policymakers, the goal is to steer the economy toward what has been deemed cleaner energy and lower emissions. But the mechanism through which this occurs is worth examining carefully. Critics also note that many so-called “green” technologies carry significant environmental costs of their own, including the resource-intensive mining required for batteries and electric vehicles.

Rather than relying primarily on legislation debated in parliament, much of the transition is being implemented through financial rules that operate quietly in the background.

These rules are highly technical. They involve capital ratios, stress-test scenarios, and disclosure frameworks that few citizens ever hear about. Yet they influence decisions that affect jobs, energy prices, housing markets, and industrial development.

Consider a practical example. Suppose regulators determine that properties in flood-prone regions carry increased climate risk. Banks may be required to assign higher risk weights to mortgages in those areas. That raises the capital banks must hold against those loans.

The result could be higher interest rates for borrowers in those regions—or fewer mortgages available at all.

The same logic can apply to entire industries. If regulators judge that certain sectors face long-term policy pressure during the transition to lower emissions, lending to those sectors may become progressively less attractive for banks.

This is not a conspiracy. It is a policy strategy.

Financial regulators believe that by incorporating climate risks into capital frameworks, they can reduce systemic instability and encourage a smoother economic transition.

But there is an important political question that deserves open debate: who decides which risks matter most and how they are measured?

Financial regulation is often presented as a purely technical exercise. In reality, the models used to measure risk inevitably reflect assumptions about the future. When those assumptions influence the price and availability of credit across the entire economy, they become deeply consequential policy choices.

That is why transparency and democratic oversight matter.

If decisions about responding to climate change are implemented primarily through financial regulation rather than visible legislation, voters may have little opportunity to weigh the trade-offs. Meanwhile, the underlying scientific debate about the causes and scale of climate change remains contested — a subject I examine in greater detail in my book Climate CO2 Hoax.

The stakes are significant. Credit allocation shapes economic development. It determines which technologies receive investment, which communities grow, and which industries decline.

If climate objectives are embedded into the core formulas governing lending and investment, they will influence those outcomes for decades.

Whatever one’s view on climate policy, the growing use of financial regulation to steer economic activity deserves serious scrutiny.

The modern financial system is extraordinarily powerful. When regulators adjust the rules governing capital and risk, they influence trillions of dollars in investment decisions.

For that reason, climate policy implemented through finance should not remain an obscure technical discussion among central bankers and regulators. It should be part of a broader public conversation about how economic decisions are made in a democratic society.

Americans deserve to understand how these mechanisms work, because they may soon shape everything from energy markets to mortgage rates.

Climate policy is no longer only about environmental targets. Increasingly, it is about how the financial system allocates credit.

And whoever sets those rules ultimately helps decide the future of the economy.

Mark Keenan is a former United Nations technical expert and an independent writer on science, technology, political economy, and human freedom. He is the author of Climate CO2 Hoax, Godless Fake Science, The AI Illusion, and The Debt Machine. He publishes essays at markgerardkeenan.substack.com and comments on X (@TheMarkGerard). His work is archived at Reality Books.

Image: Jasmin Sessler, CC BY 4.0, via Wikimedia Commons, unaltered.

SUPPORT AMERICAN THINKER

Now more than ever, the ability to speak our minds is crucial to the republic we cherish. If what you see on American Thinker resonates with you, please consider supporting our work with a donation of as much or as little as you can give. Every dollar contributed helps us pay our staff and keep our ideas heard and our voices strong. Thank you.

© American Thinker