This explainer outlines what capital mobilisation to support the transition is, why it matters to investors, and how it can be achieved. It’s the topic of an expert panel at the IIGCC Summit in London on 23 June, also available online.
‘Capital mobilisation to support the transition’ is a term used to describe how investors can support the transition to a decarbonised and more climate-resilient economy.
The starting point is that certain activities need to be funded to make this happen, but currently there is a significant funding gap. Moreover, there are obstacles to overcome to increase the flow of capital required to close this gap. Our work focuses on addressing these obstacles.
The world needs to significantly ramp up investments in climate solutions. Our upcoming guidance proposes a definition of climate solutions as the activities, goods or services that, according to credible pathways, need to increase substantially to enable the global economy to reach net zero. This includes the COP28 target to triple renewables by 2030.
Transition finance to support hard-to-abate sectors is another important area of focus. Our discussion paper, From Concept to Capital Flows, found broad investor agreement that to be considered, investment activity should show clear intent to support the energy transition and accountability to measure success.
All of the above is much more material in emerging markets and developing economies (EMDEs). In those markets there is greater need for financing; the funding shortfall is greater; and so too are the obstacles. A united effort is required to overcome this issue.
“If we ignore the developing world, we won’t solve climate change,” stressed Stephanie Pfeifer, IIGCC CEO, at a recent strategy update with IIGCC members.
Investors are increasingly considering climate-related risks and opportunities that could affect the assets they are trusted to protect and grow responsibly. A 2024 report from the Financial Markets Law Committee (FMLC), commissioned by the UK government, identified that sustainability may reduce risk, improve return, or align with the long-term interests of beneficiaries.
It concluded that this is a necessary consideration for pension fund trustees. As it considered the question of Fiduciary Duty, the FMLC’s findings are also relevant to advisors and investment or fund managers.
With that necessity in mind, capital mobilisation to support the transition presents numerous investment opportunities. For example, the world now invests almost twice as much in clean energy as it does in fossil fuels, according to the International Energy Agency (IEA).
Renewable energy, particularly wind and solar, has become in some instances the most efficient and economically viable energy sources. This is an unignorable secular trend as global power demand soars.
The IEA reported that despite impressive momentum, current investment levels are estimated to meet just two-thirds of the funding required to triple renewables capacity by 2030. Moreover, investment is unevenly distributed: EMDEs (excluding China) account for only 15% of global clean energy spending, with the least-developed countries most in need.
Informed by investors, all of our work stresses that the focus should be on financing reduced emissions, not reducing portfolio financed emissions. This includes in the Net Zero Investment Framework (NZIF), the most widely used guidance by investors to set net zero targets and strategies.
NZIF recommends that for climate solutions, investors can use a quantitative objective for scaling up investment where possible. In most cases, this is a less than 10-year objective to allocate a proportion of capital to climate solutions, underpinned by disclosure, transparency and standardisation.
For transition finance, our discussion paper established that any such activity should have clear intent and accountability to measure success. For example, investing in a steel plant alone would not qualify as transition finance: investing with the intent to support a just transition of any affected workers during the energy transition, with measurable milestones to measure progress, would.
Upcoming guidance on EMDEs establishes that investors can disclose their allocation and seek to increase it where there are viable opportunities. Activities here should incorporate fair share principles which take historic emissions into account, in line with the Paris Agreement.
That said, the high cost of capital in EMDEs is a barrier too great for the private sector alone to overcome. The IEA outlined in its report that, as well as policymakers, development finance institutions can do more to lower financing costs.
Mobilising capital to support the transition is a strategic imperative for shaping the net zero economy of tomorrow. This isn’t a linear journey – nor should investment strategies be.
Flexibility, innovation and long-term thinking, by both policymakers and investors, are essential to navigate the complexities of the transition. Directing capital towards transition opportunities is one of the most powerful levers investors have to manage the opportunities and risks presented by climate change.
Together with our working groups, we will continue to explore how investors can harness these opportunities to maximise and strengthen the investment case.
We hope you can join us at the IIGCC Summit on 23 June, in London or online, where our expert panel will discuss this challenge and opportunity in more detail. Keep up to date with all the events to look out for at London Climate Action Week.