Reason for Climate Finance Optimism
The Bigger Picture
In the midst of constant concerns about the world’s climate future, there’s reason for cautious optimism regarding the trajectory of climate finance, as revealed by a new investor survey conducted by the Rockefeller Foundation and BCG on December 1st, 2023. Investors are increasingly optimistic about global markets overcoming funding challenges.
While there’s a long road ahead, the OECD reports a positive trend. Public climate finance doubled from USD 38 billion to USD 73.1 billion between 2013 and 2021. As COP 28 unfolds, the momentum in both public and private investments is becoming clearer.
Investment Outlook
One source of hope lies in the comprehensive funds provided by the Inflation Reduction Act. The Progress Report on President Biden’s Climate Finance Pledge, published by the Department of State on December 2nd, 2023, outlines substantial progress. Climate financing surged by 286% from 2021 to 2022, and by 2024, annual climate finance is anticipated to surpass USD 11 billion, more than quadrupling the highest level of US finance. These impactful changes by the world’s largest economy will reverberate globally, ushering in a new era of projects and innovation.
Another promising area is the commitment of international organizations. In 2021, the Asian Development Bank pledged USD 100 billion for climate-related projects by 2030 and allocated over USD 7.1 billion in 2022 to achieve this goal. Furthermore, at COP 28 on December 1st, 2023, the World Bank declared an increase in the share of total financing going to climate-related projects to 45% by 2025. This commitment implies a push to allocate USD 40 billion per year to climate finance, approximately USD 9 billion beyond its previous target. International organizations, traditionally focused on development, are now actively addressing climate change as the paramount challenge of the century.
Private funding is also gaining momentum. Climate venture capital funding surged by 89% from 2021 to 2022, defying a broader ‘VC winter’ and flourishing despite a challenging economic backdrop. However, there is still significant room for growth in private financing. Redirecting just 5% of global assets under management toward green goals would enable the world to meet its climate financing targets.
The landscape is evolving, and opportunities for sustainable investments abound as global efforts align towards a more climate-resilient future.
Climate change is one of the most urgent problems the world is facing, and we are not solving it fast enough. However, it is worth appreciating the unprecedented growth in financing being directed toward this challenge. For asset managers looking to be part of the solution, Physis offers an easy way to tailor portfolios to have specific sustainability goals. Physis is an AI-driven data library providing investors with granular data making it easy to assess and compare investments. With Physis, actionable information about the sustainability of a portfolio is readily accessible within seconds. Learn more about how Physis helps investors here.