Introducing the problem

Climate change poses severe risks to economies, ecosystems, and societies globally. Despite the Paris Climate Agreement’s aim to limit warming to 1.5°C above pre-industrial levels, current Nationally Determined Contributions (NDCs) fall short of what is needed. Global climate investment must increase at least sevenfold by 2030, reaching $4.13 trillion annually. In emerging markets, private sector contributions must grow from 40% to 90% of total climate finance by the same year.

Private capital flows remain misaligned with climate objectives, continuing to favour unsustainable activities. The report examines these barriers and highlights the need for collaboration between policymakers and investors to redirect finance effectively.

Background

The report introduces the PIVOT framework, identifying five systemic barriers hindering sustainable finance:

• Policy vacuum: Lack of clear, consistent climate policies, such as carbon pricing and national transition plans, creates uncertainty for investors.
• (Self-)interest: Short-term performance metrics and incentives discourage long-term sustainability goals.
• (Mis-)valuation: Valuation models, such as Discounted Cash Flow (DCF), fail to incorporate climate risks, stranded assets, or natural capital.
• (In)active ownership: Insufficient engagement from investors, especially in large passive funds, limits progress on systemic issues.
• Transition misalignment: Conflicts between current business models and climate goals hinder the adoption of transition strategies.

These barriers are interconnected, requiring coordinated action across multiple fronts.

The policymaker investment dilemma

Policymakers often expect private capital to fund the climate transition but fail to address the structural barriers investors face. Meanwhile, investors hesitate to act without policy certainty, perpetuating a misalignment of incentives.

The report recommends that policymakers create comprehensive frameworks to guide investment, while investors must engage proactively in policy discussions. Collaboration is critical to align policy frameworks with market realities and accelerate the transition.

It’s time to pivot the system

Systemic change is needed to realign financial flows with climate objectives. The report emphasises actionable steps under the PIVOT framework:

• Policy vacuum: Policymakers should develop National Transition Plans (NTPs) with legally binding targets, consistent carbon pricing, and the elimination of fossil fuel subsidies. Examples include France’s Low Carbon Strategy, which integrates carbon budgets, and Chile’s Sustainable Bond Framework, which mobilises private finance through green bonds.
• (Self-)interest: Reforms in corporate governance and executive compensation are necessary to shift focus from short-term returns to long-term sustainability. Policies should incentivise investments in renewable energy, infrastructure, and R&D through tax incentives and blended finance solutions.
• (Mis-)valuation: Investors should modify DCF models to incorporate climate risks, natural capital, and long-term externalities. Governments should invest in tools to value ecosystem services and implement standardised frameworks for climate-related risks.
• (In)active ownership: Investors must adopt active stewardship strategies, engaging with high-emission industries on credible transition plans. Mechanisms such as shared stewardship costs can mitigate the free-rider problem in investor collaboration.
• Transition misalignment: Policymakers must create fiscal and regulatory incentives to support hard-to-abate industries, such as steel and cement, through carbon capture technologies and similar innovations. Public-private partnerships are vital to overcoming financial blockages and ensuring transition plans are credible.

Summary and next steps

The report highlights the importance of long-term strategies, collaborative action, and innovative financial instruments to address systemic barriers. Quantitative evidence underscores the urgency: $4.13 trillion annually in global climate finance is needed, with a focus on emerging markets.

Key recommendations include:

• Establishing National Transition Plans and a global carbon pricing framework.
• Enhancing valuation methodologies to integrate climate risks and externalities.
• Strengthening investor stewardship to align corporate actions with climate goals.
• Promoting public-private partnerships and innovative financing mechanisms like blended finance.
• Standardising ESG data reporting and developing metrics to track transition progress.