Integrating Societal Dynamics into Financial Pathways for Decarbonization

Accelerating decarbonization requires significant shifts in financial investments. However, dominant approaches in sustainable finance and climate modeling have primarily emphasized policy, regulation, and risk-based mechanisms. Relatively little attention has been given to how societal dynamics influence financial decision-making processes and how these processes can be incorporated into analytical frameworks used to explore transition pathways. This paper examines the effects of societal dynamics, such as changing social norms, collective action, and climate-related litigation, on financial markets and the resulting feedback loops that can either accelerate or impede low-carbon transitions.

We conduct an exploratory qualitative synthesis of the empirical literature to identify robust evidence on how societal processes influence financial system behavior. Our results reveal links between societal pressures and financial outcomes, including balancing and reinforcing feedback loops. Shifts in social norms and perceptions of legitimacy affect investor preferences and expectations, altering the valuation of carbon-intensive and low-carbon assets. Collective action and climate litigation introduce reputational and legal risks reflected in asset pricing and financing conditions, thereby reinforcing capital reallocation dynamics. Meanwhile, countervailing forces, such as incumbent interests and advocacy, can dampen or delay these processes. Together, these interactions may produce nonlinear dynamics that lead to tipping behavior in investment patterns once critical thresholds are reached.

The framework identifies and links the empirical relationships identified. It highlights that financial markets are shaped not only by formal policy signals, but by societal influences and pressures that affect perceptions of risk, acceptability, and future profitability. The framework clarifies how governance arrangements, institutional legitimacy, and societal acceptance influence the feasibility of transition pathways. It does so by making these mechanisms explicit. We present an initial structured approach to representing society-finance interactions in climate modeling. This has implications for the pace and direction of decarbonization.

This study advances the integration of social science insights by translating scattered empirical evidence into a coherent conceptual framework that can inform future modeling efforts. The results identify leverage points within the society-finance system and provide a structured basis for future empirical research and quantitative modeling that can progressively capture feedback between society and finance in climate transitions.