The climate crisis is a major challenge that will undoubtedly be at the centre of policymaking in the coming decades. To support the transition to a low-carbon economy, sweeping reforms will be needed which will have profound effects on the efficiency and competitiveness of the European and Belgian economies. In this regard, the financial system has three important objectives to meet, namely (1) ensuring the efficient allocation of capital to promote the transition, (2) helping hedge climate risks, including transition risks, and (3) increasing transparency so as to avoid greenwashing and facilitate price discovery. This article provides a detailed overview of the discussions on the impact of the low‑carbon transition on financial markets.

First, it summarises the latest research on the pricing of transition risks by financial markets, in particular the possibility of a green premium (greenium) in the stock and bond markets. Several studies have provided convincing evidence of a greenium and have revealed the significant dimensions over which it varies. However, this high degree of variability means it is difficult to generalise results across studies and brings up significant limitations which should be addressed in the future.

Second, the article summarises the most recent regulatory developments in the area of green finance, at the European and Belgian levels, and briefly discusses the most commonly used green bond standards. These regulations aim to redirect financial flows towards sustainable activities and a low-carbon economy, while increasing investor confidence in the underlying assets (through a uniform taxonomy and standards, reliable and comparable information, etc.).

Finally, the article presents the results of an empirical study on green bond holdings in Belgium, Germany, France and the Netherlands and provides evidence of growing supply and demand for this type of financial instrument. Compared to the green bond market in Belgium, the markets of neighbouring countries appear more developed and offer a greater selection. Whereas initial issuances were mostly by governments, in recent years we have seen a growing share of issuances by financial and non-financial corporations. In terms of demand, investors are devoting a larger share of their bond portfolios to green bonds. This is especially true in neighbouring countries where, according to the data, green bonds represent between 3 % and 4 % of total bond holdings. Belgium is rapidly catching up, though, with green bonds representing around 2 % of total bond holdings in 2022.