This course examines how financial systems govern risk, why climate change challenges their conventional decision-making frameworks, and how regulators and financial institutions have attempted to respond.

The course begins with the foundations of risk governance. Learners explore how risks are identified, assessed, treated, transferred, retained, and monitored, and examine the complementary roles played by communities, public authorities, financial institutions, and markets. They then consider the conditions required for financial systems to price and allocate risk efficiently, including measurability, adequate information, horizon alignment, transferability, and the correct distribution of costs and benefits. Against this framework, the course introduces the three principal channels of climate-related financial risk—physical, transition, and liability risk—and explains why climate change is particularly difficult for financial systems to manage. Climate risk is non-stationary, long-term, uncertain, highly correlated, and shaped by externalities that market prices do not fully reflect. These characteristics limit the usefulness of historical data, reduce the benefits of diversification and risk transfer, and create the horizon mismatch described by Mark Carney as the “Tragedy of the Horizon.” Learners then examine the regulatory and institutional architecture developed to improve climate-risk integration. The course traces the evolution from the TCFD’s disclosure-led approach to the European Union’s broader sustainable finance framework, including the EU Taxonomy, corporate sustainability reporting, financial-institution disclosures, sustainable investment products and climate benchmarks, and the attempted integration of climate risk into prudential regulation. Throughout, the course critically assesses the design and implementation of this architecture. It considers why disclosure is necessary but insufficient; how disclosure categories can become de facto product labels; why portfolio decarbonisation does not necessarily support real-economy transition; and why backward-looking credit, capital, and reserving models remain poorly suited to forward-looking climate shocks. By the end of the course, learners will be able to explain how financial systems govern risk, identify the distinctive features and transmission channels of climate-related financial risk, interpret the main components of the sustainable finance regulatory architecture, and evaluate how disclosures, product standards, prudential rules, and financial incentives influence decision-making and capital allocation. They will also be able to distinguish what finance can genuinely contribute to climate mitigation, adaptation, and transition from what it cannot achieve without credible public policy. The course ultimately presents sustainable finance as an important but limited part of climate governance. Financial regulation can improve information, strengthen risk management, support transition financing, and amplify policy signals. It cannot, on its own, internalise climate externalities or substitute for carbon pricing, subsidy reform, environmental standards, industrial policy, public investment, and other measures that directly change incentives in the real economy.