Insights
We outline a proposed definition of climate solutions at the activity level, why they matter to investors, and how they can be considered in investment strategies. It’s the topic of a member-only workshop at the IIGCC Summit, with afternoon plenaries open to partners and guests in-person and online.
The energy transition requires a system change to achieve the goals of the Paris Agreement. Carbon intensive assets must be phased down and low carbon alternatives scaled up.
Institutional investors play a crucial role in directing capital towards these low carbon alternatives, as well as influencing asset behaviour through stewardship and wider policy advocacy. This potential underpins our research on climate solutions, currently focused on mitigation to supplement the popular Net Zero Investment Framework (NZIF).
What are climate solutions?
In our upcoming guidance, informed by investors, we define climate solutions at the activity level as 'activities, goods or services that, according to credible pathways, need to increase substantially to enable the global economy to reach net zero.'
These solutions are considered essential for mitigating the financial risks posed by climate change at a systemic level, and can offer opportunities for portfolio diversification and attractive risk-adjusted returns.
Policy makers increasingly recognise the importance of attracting capital to this space, from the COP28 target to triple renewables by 2030 to a growing number of labelling regimes and Taxonomies which seek to promote transparency and facilitate capital flows.
Why climate solutions matter
Capital flows into climate solutions remain a strong structural trend, evident in developed regions and developing economies alike. India and China are perhaps the most striking examples, where clean energy investments are estimated to have reached USD 68 billion and USD 680 billion respectively in 2024, up 6x and 5x from 2020, according to the International Energy Agency.
Source: International Energy Agency (IEA). The definition of clean energy includes renewable energy sources like solar, wind, and hydro, as well as technologies and strategies that reduce greenhouse gas emissions and promote sustainability.
In 2022, FTSE Russell estimated that the total investment required to limit global average temperature rise to 1.5°C above pre-industrial levels between now and 2050 ranges from USD 109 trillion to USD 275 trillion. This report considered renewable energy, low carbon transport, energy efficient buildings, the electrification of industrial processes and more.
A combination of strong capital flows, improving competitiveness, and affordability indicate that climate solutions will continue to offer diversification benefits and the potential for strong financial returns. This comes alongside the clear benefits offered by investment in low carbon activities, which can lead to reduced greenhouse gas emissions, therefore helping to mitigate the systemic risks posed by climate change.
Though the opportunity is clear, the lack of a clear definition complicates target-setting and comparability for investors considering climate solutions activities. Also missing is a comprehensive method to define and track exposure across assets and asset classes.
How to consider climate solutions
It’s important to note that climate solutions assets have inherent potential for high emissions at first. This can lead to misalignment with linear, year-on-year emissions reductions when not considered in context.
However, emissions reduction objectives should not deter investment in climate solutions. We highlighted in the updated Net Zero Investment Framework (NZIF 2.0) that investors should focus on financing reduced emissions, not reducing financed emissions. NZIF is now the most widely used guidance by investors to set net zero targets and strategies.
An objective to scale up investment in climate solutions is one NZIF’s two portfolio level objectives. To support these efforts, in 2023 we outlined potential approaches that offer flexibility and nuance in our guidance: Investing in climate solutions: listed equity and corporate fixed income.
Subsequent guidance the following year offered support on how to quantify and communicate contributions to scaling renewable energy generation for the infrastructure asset class.
New supplementary guidance, launching in June 2025 to coincide with the IIGCC Summit, will address climate solutions specifically for the objective of climate change mitigation. Alongside an updated definition, it will outline the levers of influence available to investors and propose a three-step approach to measure and communicate contributions.
The guidance will offer alternatives to deal with the emissions of climate solutions, including a closer look at alignment focus, transition finance, and the nuances of emerging markets and developing economies. Our workshop on 23 June, for IIGCC members only, will explore the topic in depth, offering practical examples and best practice seeking with peers.
We hope you can join us at the IIGCC Summit on 23 June 2025, in London or online, where our workshop 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 through our dedicated hub.