Financing a Low-Carbon Economy
An Investorʼs Guide to Leveraging Transition and Net-Zero Financing Strategies.
Climate change and its impacts on the planet, economy and society are among the most significant challenges of the 21st century. As the urgency to address climate change and transition to a lowcarbon economy mounts, there is increased focus on the critical role of the finance industry both to mobilize capital toward climate solutions and to influence the behavior of the companies for which they provide financing and investments.
Around $275 trillion of capital is needed globally to reach net zero by 2050, a crucial step in achieving the Paris Agreement's goal of limiting climate change to an average temperature rise of no more than 1.5ºC by 2100.
In response to this challenge, institutional investors and banks have launched a series of programs and products to support the transition to a net-zero world, leading to a dramatic increase in retail and institutional investment in sustainability-linked financial products, with sustainable assets under management increasing from $30.7 trillion in 2018 to $35.3 trillion in 2020.
There has also been a rise in netzero commitments, with 128 countries, representing 91% of global GDP and 83% of global CO₂ emissions, announcing net-zero targets, along with thousands of companies, cities, regions, and other organizations. Some financial institutions have also made net-zero pledges and are now working to set roadmaps to achieve their commitments.
Seeking to finance the global transition to a decarbonized economy, many have turned to two key investment strategies: net-zero investing and transition finance. Net-zero investing focuses on investing in climate solutions and excluding or minimizing an investor’s exposure to emissionintensive industries. Transition financing, a more recent strategy, focuses on improving the climate performance of companies, including in hard-to-abate industries, which are often excluded from investors’ net-zero portfolios.
In this briefing note, we explore the contextual factors that should be considered in developing financial strategies and initiatives to meet the climate change challenge and how both net-zero investing and transition finance work to address them. As we will see, both have a role to play, and institutional investors may choose to use one or both in achieving their climate goals.