The challenge we face

The world is facing a polycrisis of economic, social, and environmental challenges. In 2024, global temperatures reached record highs, six of nine planetary boundaries were breached, and wildlife populations declined by 73% over 50 years. Climate change is expected to push an additional 68 to 135 million people into poverty by 2030.

Funding for emerging and developing economies (EMDEs) via official development assistance has declined, while financial flows towards fossil fuels continue to exceed investments in decarbonisation. In 2023, US$1.5 trillion went to fossil fuel subsidies, exceeding the US$1.5 trillion in global climate finance. Nature-negative private finance remains at US$5 trillion annually, dwarfing the US$200 billion directed at nature-based solutions.

Market forces alone are insufficient to drive the transition to sustainability. While global financial markets surpassed US$1 quadrillion in value, there remains a lack of scalable, financeable projects to absorb redirected capital. Insurance markets are also under pressure, with climate risks making some areas uninsurable.

The change we have seen

Over the last decade, several initiatives emerged to integrate sustainability into finance, such as the Task Force on Climate-related Financial Disclosures, UNEP FI, GFANZ, and Climate Action 100+. These have supported disclosure and regulation.

Green industrial strategies have influenced market shifts. For example, the U.S. Inflation Reduction Act catalysed US$115 billion in clean energy investment and created 90,000 jobs. The EU, Japan, China, and the UK are also directing substantial capital towards low-carbon transitions.

International financial architecture reforms, such as the Bridgetown Initiative, are pushing for alignment between development and climate goals. Despite these efforts, resistance to ESG and volatile political conditions have limited lasting transformation.

Why we failed

Systemic change has been impeded by short-term incentives and political instability. Financial actors face misaligned remuneration structures, short CEO tenures, and short-term product horizons. For instance, stock holding periods have dropped below one year, and most insurance contracts operate on 12-month terms.

Negative externalities are not priced into financial decision-making. Two-thirds of S&P 500 companies have assets exposed to physical climate risks, yet these risks are largely excluded from financial models. Nature and climate risks are inadequately reflected in capital charges or policy frameworks.

There is limited coordination between real economy pathways and financial instruments. Voluntary leadership has helped, but systemic change requires integrated regulatory and policy support.

The three shifts for the financial system

Three core shifts are necessary:

• Shifting industrial and financial policy – Policy must create market incentives aligned with sustainability, including investable Nationally Determined Contributions and biodiversity plans. Regulatory frameworks should use taxation, subsidies, and prudential regulation to manage systemic risks.
• Shifting narratives and mindsets – Transition narratives must shift from cost and compliance to value and competition. Capacity building is needed across finance, business, and government to embed sustainability understanding and skills.
• Shifting core financial structures – Financial models should internalise environmental and social risks. Standardised investment structures are required to scale finance. Greater flows to EMDEs must be facilitated through blended finance and reforms in international architecture.

A new action plan for shifting finance

The report proposes five focus areas:

• Strengthening the evidence base for policy and regulatory frameworks.
• Shifting sentiment and building leadership capacity, particularly in EMDEs.
• Developing financial models that reflect real-world risks and long-term value.
• Demonstrating scalable solutions and case studies for capital allocation.
• Unlocking cross-border finance and advocating coherence in international financial architecture.