Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 6.1.1 Money systems, which describes the parts, relationships and functions of money systems
Section 6.1.3 Modern money creation, which explains how forms of money are created in modern money systems
Section 6.2.1 What is finance?, which defines finance and describes the main tools of finance
Section 6.2.2 Purpose of finance, which distinguishes between regenerative and extractive finance, and between values and financial valuation; and discusses the extent to which profit-oriented finance can support regeneration
Section 6.2.3 Financial power and inequality, which defines financial power and identify key actors and factors that influence where money flows
Section 6.3.1 Why redesign money and finance?, which addresses the questions of who has access to finance, what goals are being financed and what rules shape financing
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Learning objectives:
discuss how states can direct the flow of finance toward regenerative goals through public banks, credit guidance and blended finance and the challenges they face in doing so
After WWII, many countries had to rebuild. Homes, roads, schools, and factories were destroyed (Figure 1). People needed jobs, housing, energy, and public services.
Instead of waiting for markets to recover and provide what was needed, states stepped in. In Germany, a new public bank called KfW directed money into infrastructure. In South Korea and Japan, governments guided bank lending to support industries like steel, electronics, and transport.
Today, countries are still rebuilding after war, pandemic, economic collapse, or climate disaster. At the same time, the world faces long-term challenges: climate change, ecosystem damage, poverty, and inequality. Finance is needed, but markets alone won’t get us there.
This section looks at how states can guide the direction of finance. States can use public institutions, rules, and incentives to steer both public and private investment. The next Section 6.3.6 focuses on new thinking on how states can finance their own public actions. Here, we ask: how can states direct the flow of money where it needs to go?
Figure 1. Photograph of Hamburg, Germany from World War II.
(Credit: Imperial War Museum, public domain)
Why do we need state direction for finance?
Why do we need state direction for finance?
The United Nations estimates a $4 trillion annual shortfall to meet the Sustainable Development Goals (SDGs). The biggest gaps are in low-income countries.
Private finance tends to flow toward what is profitable, not necessarily what is needed, so much investment flows to luxury property and fossil fuels, rather than care services, clean water, or reforestation (Section 6.2.2). States have the power to guide finance in different directions. Public tools can shape who gets money, for what, and under what conditions.
But according to Mariana Mazzucato, states too often engage in gap-thinking, focusing on the missing money and using all kinds of incentives and de-risking to encourage private investment. This approach has yielded poor results, with huge shortfalls in financing and not enough attention to social and ecological goals.
Mazzucato proposes that states should instead use mission-thinking (Section 5.1.6). Mission-thinking is rooted in systems thinking, which helps us understand how purpose and structure shape outcomes. Mission-thinking asks: what must be done, and how can we design finance to serve that goal?
Figure 2. The difference between gap thinking and mission-thinking for regenerative finance
(Credits: Noun Project, various artists)
How do public development banks support regenerative investments?
How do public development banks support regenerative investments?
Public development banks are owned by the state. Because they do not need to earn quick profits, they can support long-term projects that serve public goals like renewable energy, housing, or clean transport.
They use different tools to support regeneration. Most commonly, they:
offer low-interest loans and share risks, making it easier to invest in projects like building retrofits, wind farms, or sustainable farming
increase lending during economic downturns, helping protect jobs and stabilise economies.
But development banks can do more than lend. They can also:
provide grants that do not need to be paid back, especially for training, research, or early-stage projects
offer guarantees, promising to cover part of a loan if the borrower cannot repay, to encourage other lenders to join
make equity investments, meaning they take partial ownership in projects or companies working for public benefit
For example, in Europe, cooperation between the European Investment Bank (EIB) and Germany’s KfW helped create what some researchers call a European investment state. After the 2008 crisis, they expanded green lending and financed projects for building efficiency, small business innovation, and clean transport.
The impact of public development banks depends on their mission, governance, and accountability. When guided by clear public goals and open decision-making, as in KfW’s renewable energy programmes, they can drive lasting change. Without strong public leadership, however, they risk supporting harmful industries like fossil fuels or mining. Public oversight is essential to make sure they serve a regenerative economy.
How can credit guidance support regenerative investments?
How can credit guidance support regenerative investments?
Credit guidance means governments or central banks influence where commercial banks lend, shaping their behaviour. Credit guidance was widely used after WWII. France, South Korea, and Japan all used credit guidance to support key manufacturing sectors to grow their economies. Today, it’s being revived for climate and wellbeing goals.
Green and social credit guidance can:
lending targets: banks must direct a set amount of lending to priority sectors, such as renewable energy or affordable housing;
capital requirements: central banks can make green and social loans cheaper and fossil fuel loans more expensive by changing the rules for how much money banks must hold in reserve relative to the amount of loans they make in harmful industries (Section 6.1.3);
collateral rules: collateral are the assets that borrowers must offer to get credit. By accepting green assets and rejecting polluting ones as collateral, central banks can incentivise climate-positive lending. The European Central Bank will use this approach from starting in 2026.
Critics argue central banks should stay neutral. By choosing not to act, central banks allow money to keep flowing into polluting and speculative sectors when they have the power to stop it. Green credit guidance recognises that financial power already shapes the economy and uses that power to meet urgent climate and social needs.
Figure 4. The European Central Bank (ECB) will change collateral rules from 2026 to make it less attractive for banks to invest in fossil fuel assets.
(Credit: Masood Aslami, Pexels license)
How can blended finance support regenerative investments?
How can blended finance support regenerative investments?
Blended finance, which can occur from national or international financial sources, enables states to combine public and private money to achieve goals. States can use a number of tools to make it more attractive and less risky for private investors to participate. These include grants, guarantees, and first-loss capital, which is public money that absorbs initial losses so private investors face less risk. For example, in blended finance a state might guarantee part of the cost of a solar farm. If it fails, the public covers some losses. If it succeeds, investors earn profits.
In theory, this approach uses public funds to ‘crowd in’ much larger private sums. In practice, blended finance has contributed a disappointing $15 billion a year, under 0.5% of what’s needed globally. Most of this funding is still public and it tends to go to middle-income, rather than low-income countries. And it tends to fund large infrastructure projects, rather than areas like care services or ecosystem restoration (Figure 5).
Figure 5. Share of total blended finance by sector (2022-2024)
(Credit: Mazzucato, M. & Vieira de Sá, R.)
Critics argue that risk and reward in blended finance are often unfair. Public institutions take losses. Private investors keep the gains. It can also lead to privatisation of services that might better remain public.
Still, blended finance can help. It can support early-stage technologies, small firms, or partnerships that build local capacity. But it must follow clear public missions. Economist Mariana Mazzucato argues that blended finance must start with a clear goal and design tools to meet it (see Figure 2 again). Private investment should support, not override, that mission.
Table 1. Traditional blended finance vs. Mission-led blended finance
What are the challenges for national strategies on regenerative finance?
What are the challenges for national strategies on regenerative finance?
To lead finance for regeneration, states need strong public institutions. But many have been weakened by austerity policies cutting state staff and budgets. States have also been relying more on private consultants rather than hiring and training in-house teams. This ‘hollowing-out’ of the state reduces public expertise and makes it more likely that state finance will serve private interests.
Coordination is another challenge. Ministries, central banks, and agencies often act separately. Regenerative finance needs shared goals, strong laws, and joint action. These goals also take time. Political cycles are short, but regenerative projects can take decades. States need long-term commitment to keep public missions on track. Finally, state direction for regenerative finance needs public trust. Without transparency and participation, even good policies may fail. Finance must be seen to serve people and planet, not profit alone.
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These strategies show that the state can guide finance even when it does not spend directly. But to do so, it must be strong, accountable, and mission-led. The next Section 6.3.6 explores how public money is created, and how it can fund regenerative economies.
Figure 6. There are some current barriers to state direction for regenerative finance
(Credits: Noun Project, various artists)
6.3.5 Activity
6.3.5 Activity
Concept: Systems, regeneration
Skills: Thinking skills (transfer, critical thinking, creative thinking)
Type: Individual, pairs or small group
Option 1: Design a regenerative investment strategy
Time: 40 minutes
Individually, in pairs or small groups, imagine your country wants to invest in one of the following public missions - choose one to focus on:
Making all homes energy-efficient
Restoring wetlands and rivers
Expanding community care services
Building a clean public transport system
2. Design a basic investment strategy using at least two of the following tools:
A public development bank (what role would it play?)
Credit guidance (what would banks be required to do?)
Blended finance (how would you attract private investors?)
Use the Table 2 to help structure your plan. Share your ideas with another group, or with the class.
Table 2. Your investment strategy
Option 2: Gap thinking vs. Mission thinking
Time: 40 minutes
Work in small groups. Your task is to explore two approaches to public investment: gap thinking and mission thinking. Imagine your government wants to improve healthcare access in rural areas. You’ll explore how each approach would shape the plan.
Use the questions below to guide your group discussion. Write your answers in a shared document or worksheet.
Use the example of rural healthcare to answer the questions in Table 3.
Discuss with your group:
Why do you think governments often rely on gap thinking?
What are some reasons (political, economic, cultural) that might make mission thinking harder to implement?
Can you think of any examples from your own country or region where finance followed gap thinking? What were the results?
Your teacher may collect your notes or ask a few groups to share what they found most surprising or important.
Ideas for longer activities and projects are listed in Subtopic 6.5
Table 3. Distinguishing between gap thinking and mission thinking.
Checking for understanding
Checking for understanding
Coming soon!
Further exploration
Further exploration
Green Credit Guidance - a short video by the New Economics Foundation on why we need credit guidance and how it could work. Difficulty level: easy
Why should we care about blended finance? - a short video by The Asset, an Asian financial website, that explains the advantages (but not the limitations) of blended finance, with a few concrete examples. Difficulty level: easy
Sources
Sources
Brusseler, M. (2025, June 19). Explainer: What is green credit guidance? How central banks can support the energy transition and green prosperity. Common Wealth. https://www.common-wealth.org/publications/explainer-what-is-green-credit-guidance
Chang, H. (2010). 23 Things They Don’t Tell You About Capitalism. London: London: Allen Lane.
Convergence. (2025). State of blended finance 2025. Convergence Blended Finance. https://www.convergence.finance/resource/state-of-blended-finance-2025/view
European Central Bank. (2025, July 29). ECB to adapt collateral framework to address climate-related transition risks [Press release]. https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.pr250729_1~02d753a029.en.html
Hickel, J. (2024, August 20). Credit guidance: How we achieve degrowth. https://www.jasonhickel.org/blog/2024/8/20/credit-guidance-how-we-achieve-degrowth
KfW (n.d.). Geschichte der KfW. https://www.kfw.de/About-KfW/F%C3%B6rderauftrag-und-Geschichte/Geschichte-der-KfW/
Krebel, L. & van Lerven, F. (2022). Green credit guidance: A green term funding scheme for a cooler future. New Economics Foundation. https://new-economicsf.files.svdcdn.com/production/files/NEF_GCG.pdf?dm=1662367372
Mazzucato, M. & Vieira de Sá, R. (2025). Mind the Mission, Not the Gap: Rethinking blended finance for public purpose. Working Paper 2025-09. UCL Institute for Innovation and Public Purpose. https://www.ucl.ac.uk/bartlett/sites/bartlett/files/2025-06/Working_Paper_Blended_Finance.pdf
Mertens, D., & Thiemann, M. (2017). Building a hidden investment state? The European Investment Bank, national development banks and European economic governance. Journal of European Public Policy, 26(3), 1–21. https://doi.org/10.1080/13501763.2017.1382556
Mishra, V. (2025, April 28). UN warns of $4 trillion shortfall threatening global development goals. UN News. https://news.un.org/en/story/2025/04/1162671
Terminology
Terminology
Coming soon!
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