COP 27: How to Fund Net Zero Needs an Urgent Rethink

It took nearly 30 years from the time the term ‘global warming’ was first coinedi for the world to wake up to the urgency of addressing climate change. The 2015 Paris Agreement, which was adopted by 196 countries, laid out the goal to limit global warming to well below 2.0 degrees Celsius, and preferably to 1.5 degrees vs. pre-industrial levels, by peaking greenhouse gas emissions as soon as possible and transitioning the world to net zero emissions by mid-century. Following a slow start, which included the US withdrawing from and then re-joining the agreement, COP26 last year appeared to mobilise the world for Net Zero in a multi-stakeholder manner. Governments pledged higher interim carbon reduction targets, while financial firms managing c.US$130 trillions of private investment capital pledged to align their investments with the Net Zero goal .ii

However, despite these scaled commitments, the actual funding deployed in support of the climate transition remains little more than a trickle, with only US$632 billion deployed annually against a funding need that is more than five times this amount. Further, a perfect storm of slowing growth, rising interest rates, spiralling inflation, supply chain disruptions and rising energy and commodity prices, all exacerbated by Russia’s ongoing invasion of Ukraine, has further complicated matters.

National governments across the world have reversed course on phasing out fossil fuels in the name of energy security, with nearly US$1 trillion of additional fossil fuel investments announced through the end of the decade, far more than that deployed for climate transition. Further, high energy prices have led to record profits and stock market outperformance for the oil and gas sector, shifting global equity capital out of sectors like tech and other ESG friendly industries and into fossil fuels in pursuit of higher returns.

The resulting situation places climate finance flows at risk, at least over the short term, as governments focus on domestic and regional political issues and investors focus on near term return opportunities in the face of longer-term economic uncertainty. This month’s Sign of the Times looks at the current state of global climate finance in the face of these challenges, identifying its distribution, the current gaps and opportunities, and some of the important issues that need to be resolved for the world’s climate goals to be met.


The Changing Context for Climate Finance Since Paris

Wide-ranging environmental crises making the case for governments to push ahead on their Net Zero commitments. While 2022 is not yet the worst year on record for extreme weather, it has already brought fierce wildfires, powerful floods, and record-breaking heatwaves across the world. These events are making the impact of climate change more and more real for the vast number of people who to date have been only indirectly affected by it, if at all, especially with vivid images of Europe set ablaze through the early summer.

Recent studies continue to confirm the scientific and academic consensus on anthropogenic climate change, with c.99% of climate scientists agreeing that humans are causing global warming (a level of support similar to that shown by the scientific community for the theory of gravity, the Big Bang and the heliocentric model of the solar system)iii.

While the public’s conviction about anthropogenic climate change is lower than the scientists’, the belief is still shared by the majority of the population in virtually every country in the world - about c.65% of the public believes that there is a “climate emergency”iv – providing a strong potential mandate for governments to act. 137 countries, covering 83% of global greenhouse gas emissions have adopted net zero targetsv, many of which have been written into national law, with the climate transition declared to be a national priority.

World failing to meet clear targets established by the Paris Agreement. Beyond net zero targets, the 2015 Paris Agreement also included climate financing mechanisms for climate change mitigation and adaptation, funded by national and multi-lateral institutions.“The level of scientific support for anthropogenic climate change (c.99%) is similar to that of Einstein’s theory of gravity, the Big Bang and the heliocentric model of the solar system.” These foresaw investments in renewables, low carbon technologies, and electrification, as well as financial aid for mitigation and adaptation activities in less developed countries with estimates of the total cost of achieving global net zero by 2050 ranging from c.$100 trillion to $275 trillion.

Despite the growing commitments and increased climate financing since the Paris Agreement, funding levels from both public and private sources have fallen well short of even the lowest targets.

The coronavirus pandemic has created a renewed push for climate financing. The global coronavirus pandemic rocked the world in 2020 and 2021, serving as a stark reminder of the power of nature and the fragility of the global economic system. It also served as a critical lesson on the need for global cooperation to solve global issues and on the power of science to develop innovative solutions. With major countries recognising the need for both greater resilience and sustainability, green finance (for climate change and environmental sustainability) scaled new heights in 2021 year with total green bond issuances increasing 75% to US$522 billion.vii

Several large countries launched ‘green recovery’ programs, focusing on fiscal measures to promote economic growth while seeking to positively impact the environment and promote renewable energy, efficient energy use, nature-based solutions, and sustainable transportation, among other things.

However, actual action has been minimal, and short-term economics have been prioritised over climate. This year, the world has been shaken by a series of events whose interplay has created significant and unpredictable risks to global stability broadly, and to climate financing specifically. Global inflation was already rising following the pandemic-induced fiscal and monetary stimulus and supply chain disruptions, depressing economic activity at a time when most governments have limited headroom for any further stimulus. To make matters worse, Russia’s invasion of Ukraine has helped ignite these issues into a global economic, political and security firestorm that will impact the world for years to come and the resulting supply chain issues gave further fuel to inflation.

Despite significant spending the actual ‘green’ impact of the existing stimulus and recovery programs implemented by major countries has been minimal. Only about 6% of US$14 trillion of pandemic recovery spending by G20 countries has been allocated to areas that will reduce greenhouse-gas emissions, such as electrification, efficiency, and renewablesviii.“The world will not fail to meet its Net Zero goals, for a lack of capital, with the over US$400 trillion in global net liquid assets more than sufficient to fund the energy transition. The challenge for the world lies in how this capital can be mobilised, and by whom.”

Long-term climate transition is being traded against short term security risks. The need to address the interrelated security and economic crises of 2022 has fundamentally shifted the priorities of global leaders, who are now re-prioritising their long-term climate finance commitments versus shorter-term energy, spiralling inflation, stalled growth, and increased defence spending. These challenges will likely impact global funding commitments to climate finance from both the public and private sector, as governments and investors scramble to adjust to a world of slowing growth, rising interest rates, increased volatility, and a fall in valuation of tech stocks (which figured prominently in ‘ESG’ driven investment strategies), mirrored by a rise in oil and gas stocks.

It is against this backdrop of risk and uncertainty that the necessary long-term investments in the global energy transition are being made today.

A look at the current state of global climate financing, highlights both a series of gaps that need to be urgently addressed and potential long-term opportunities for investors.


The Current State of Global Climate Financing

  1. The Time to Act is Running Out with the World’s Total Carbon Budget Used up by 2037

    Net Zero by 2050 cannot be achieved with ‘back-ended’ action and spending that allows the world to continue with business as usual in the near-term. Achieving Net Zero depends on the world staying within an absolute CO2 emissions budget that cannot be exceeded. At current levels of emissions, this budget will be fully exhausted by 2037, rather than by 2050, implying the need for significant near-term emissions reduction (and spending).



  2. Immediate 5x Increase in Spending Required to Meet Net Zero

    Climate finance needs to increase more than five-fold from current levels for the world to achieve net zero by 2050, from c.US$632 billion in 2020 to over US$3 trillion annually in current decade on energy systems, buildings, industry, transport and other mitigation and adaption measures, reaching US$4 trillion by 2030 and increasing further to nearly US$6 trillion by 2040.



  3. Only c.7% of Current Spend is on Adaptation

    Current spending is heavily weighted toward climate change mitigation, focused on preventing or reducing the emission of greenhouse gases, rather than climate adaptation, adjusting to the inevitable current and future effects of climate change, with over 90% of spending focused on the former. The Paris Agreement includes an aim to balance climate finance between mitigation and adaptation, and the UN Secretary General has repeatedly called for half of all climate spending to go to adaptation, implying the need for significant investment increases.



  4. The Private Sector Accounts for Only 2% of Current Adaptation Spending

    Increasing spending on climate adaptation will require a greater use of private sector funding. However, while private capital represents nearly 50% of total climate finance, it represents only 2% of current adaptation investment. Creating opportunities for private capital to profitably invest in adaptation will require solving a number of challenges, including financiers’ inability to adequately capture the environmental and social benefits of their investment and the often decades long planning and investment horizon required for adaptation measures.



  5. Cross-Border Climate Finance is Only 25% of Total Spending

    Over 75% of climate finance is domestic in nature. While spending will naturally skew domestically given that nearly 20% of total spending is funded by national development finance institutions, climate change is a global phenomenon, with many developing nations, particularly in South Asia and Africa, requiring significant assistance to finance the required mitigation and adaptation investments. Copenhagen’s COP15 in 2009 included a pledge by advanced industrialised economies to provide US$100 billion in climate finance annually to developing countries, a goal that is likely to be met for the first time in 2022.



  6. Investments in Renewable Energy Need to Increase 2.5-3.5x

    Over half of global climate finance, and an even greater portion of private sector funding, is being spent on renewable energy production, seeking to reduce the c.75% of global CO2 emissions currently contributed by the sector. While there are several different spending scenarios for the world to achieve Net Zero, the actual annual spending of c.US$324 billion will need to more increase at least 2.5-3.5x to US$0.8-1.2 trillion p.a. for the world transition to carbon neutrality on even the most cost-effective pathway (which seems a highly unlikely one that assumes a world powered by nuclear energy and hydrogen)



  7. Industrial Decarbonisation Represents a Significant Opportunity

    There are a series of proven technologies, specifically (heat) electrification, carbon capture, biomass, and hydrogen, which could help some of the highest emitting sectors achieve a partial or full decarbonisation if adopted at scale. However, their implementation across these industries varies, ranging from research to commercial scale, with only US$36 billion (or 5% of total climate finance) spend on industrial decarbonisation. Scaling these technologies represents a potentially significant opportunity for carbon reduction, with the projected widespread implementation of carbon markets providing clear financial incentives for operators to partner with private capital to do so.



  8. Savings of US$7 trillion in Decarbonisation Costs Expected from Improving Energy Efficiency

    Improving energy efficiency has a critical role to play in decarbonisation, not only by reducing overall energy demand but also through its impact on the amount of funding required to decarbonise major greenhouse gas emitting sectors, including shipping and transport, infrastructure, and manufacturing. Improving energy productivity is projected to reduce total decarbonisation costs for these sectors by c.40%, saving up to US$7 trillion between 2040 and 2050.



A Lack of Capital is Not the Issue

Should the world fail to meet its Net Zero goals, it will not have been for a lack of capital. The over US$400 trillion in global net liquid assets in the world today, (and the c.US$25 trillion in annual fixed asset spending) are more than sufficient to fund the energy transition. The challenge for the world lies in how this capital can be mobilised, and by whom.

Only months after COP26, governments perceived a real constraint or conflict of priorities in deploying capital at scale over the near term for climate it seems due to the felt impact of both the record stimulus spending in 2020-21 and supply chain issues leading to rising global inflation, recession risk and a deteriorating global security situation. However, given the over US$2 trillion funding gap, public spending increases alone will be insufficient to bridge this gap, pointing to the need for significant increases in private sector capital deployment.

There appears to be little common understanding among this diverse group of banks, asset managers, insurers, and asset owners on how the transition will be executed following COP26, where the private sector finance industry committed over US$130 trillion of global assets to Net Zero under the umbrella of the Glasgow Financial Alliance for Net Zero. However, not all of these funds are discretionary in terms of deployment (for example, over US$10 trillion are passively managed in index or tracker funds), and while theoretically the assets managed by these institutions could be more than sufficient to fund the gap if channelled to the necessary uses, it is unclear they will be.

Backloaded commitments are likely too far out to be relied on where the life of the CEO and key executives is far shorter. While a significant portion of financial institutions have committed to reaching net zero portfolios by 2050, a much smaller number has committed to interim targets by 2030 or taken concrete transition steps to date. Given that the current rates of CO2 emissions will exhaust the total global carbon budget by 2037, critics argue that without concrete immediate action, 2050 commitments are largely meaningless. Usual investor practice discounts the future given the many risks that can arise, including the replacement of executives that made these commitments, and backloaded commitments which naturally come with caveats, may prove to be too uncertain to rely on.

Moving to Net Zero requires financial institutions to navigate a number of very real risks for which there is not agreed solution. In particular, the challenge of engaging vs. divesting fossil fuel investments is complicated by the risk of leaving trillions in stranded assets unable to generate economic returns prior to the end of their economic life. In addition, private sector climate finance needs to continue to generate acceptable risk-weighted returns to be viable at scale, and managers who fail by this measure will be punished by the market, and potentially by legislators, regulators, and courts as well.

Importantly, populist politics have successfully divided Americans on their political and social choices and are now focused on climate and ESG.The political blowback to climate aligned (and broader ESG) investing is growing in the US, the world’s largest financial market,“Your anti-drilling coercion threatens our national security, hurts Americans struggling to buy a tank of gas and appears to violate antitrust laws. By collaborating with other investors, you … appear to be acting like a climate cartel.”
US Senator Tom Cotton, Letter to BlackRock CEO, 13 July 2022
where legislators are introducing a series of bills to require managers of public funds to select and maintain investments based solely on monetary factors, or banning the investment of public funds with asset managers with ESG policies against fossil fuels or firearmsix. And investors seeking to lead on climate change related matters are being denounced by politicians for running a “climate cartel” to the detriment of investors. If global investors cannot address these challenges, they will remain unable to execute on their net zero commitments, no matter how sincerely they have been made.


Conclusion: Building the Blueprint to Achieve Global Net Zero

Of all the challenges laid out above, the threats of legal and antitrust action against investors cooperating on climate change is particularly pernicious, since the challenges of climate change and its funding are clearly ones that require collective action and coordination, not just between regulators and the markets, or between the public and private capital, but within the private sector as well. “Half of all climate finance should go to adaptation. Everyone in climate- related high-risk areas should be covered by early warning systems within the next five years
UN General Secretary Antonio Guterres, Opening remarks, 2022 High-level Segment of ECOSOC, 13 July 2022

As the breakdown of climate finance flow in Chart 3 above shows, the diversity of sources and uses of global climate funding requires not just a global alignment of priorities, but also a common blueprint for execution. Without such a blueprint the world is likely to fail to meet the 1.5-degree targets laid out in the Paris Agreement, regardless of how much money it can mobilise.

Creating this blueprint will require a multi-stakeholder effort, including governments, regulators, multi-lateral institutions, the finance industry, the corporate sector, and communities. Importantly, it will require asset managers to receive the mandate from asset owners to deploy climate finance at scale, and the creation of legal and regulatory pathways to do so efficiently and profitability, thereby fully unlocking private sector capital.

Such a multi-stakeholder blueprint will need to resolve a series of key issues, the solution to which could include the following elements:


Key Elements in a Multi-Stakeholder Blueprint, Partial List

Estimated Annual Total Spending Need

(US$ trillion) 

Key Climate Finance Challenges

Elements of the Potential Solutions




1.      Absolute Spending – Closing the Gap

§  2% of GDP Spending Commitment. Multi-lateral climate spending commitments by G20 members with annual public spending equal to 2% of GDP (following the NATO defense investment guideline)

§  Greening 20% of Private Fixed Asset Spending. Creating climate friendly investment options and incentives for at least 20% of the US$26 trillion of global annual fixed asset spendingx




2.      Spending Timing – Accelerating Deployment


§  Aggressive Emission Phase-Outs. Accelerating existing legislative phase outs of emission intensive technologies to spur near-term decarbonised investments (e.g., bans on new internal combustion engine car sales)

§  Carbon Pricing Premiums. Implementing short-to medium term global carbon price adjustments to increase the value of near-term carbon reductions vs. those in later years.




3.      Destination of Spending – Deploying Capital Where Most Required

§  Creation of IMF Climate Fund. Creation of a global climate fund under the IMF (or other multi-lateral institution) pooling global funding support to emerging markets, with needs based annual disbursements beginning at the current US$100 billion funding commitment[ND1] 

§  ‘Washington Consensus’ for Climate Finance. Creation of a global investment framework for emerging market climate finance, including standards for recipient policies, disbursement, and reporting.




4.      Sources of Capital – Maximising Private Funding and its Impact

§  Pricing Externalities. Developing standards to value major climate related externalities on public goods and to fully integrate costs and benefits into corporate financial statements

§  “Bretton Woods” of Global Carbon. Develop international trade rules under the WTO or other governing body to harmonise and globalise existing regional carbon offset markets to increase adoption and their value to users




5.      Adaptation Spending – Addressing the Inevitable


§  Global Climate Infrastructure Fund. Manage the physical risk of climate change through a multi-lateral climate infrastructure initiative based on China’s Belt and Road Initiative, using public funds

§  Building Scaled Climate Derivative Markets.  Manage the financial risk of climate change through the development of financial instruments and markets (e.g., climate insurance and derivatives), unlocking private capital




6.      Mitigation Spending (I) – Accelerating Renewables

§  Fossil Fuel Subsidy Repurposing Reallocation of the US$6 trillion of annual fossil fuel subsidies to renewables based on an accelerated timetable

§  Democratise Renewable Technology for Global Scaling.  Democratise global access to renewables through technology transfers and global IP licensing schemes to scale manufacturing and reduce costs





7.      Mitigation Spending (II) – Driving Efficiency

§  Efficiency Tax and Trade Schemes. Sector specific tax and trade schemes based on energy usage, following template of carbon trading schemes

§  National Insulation Funds. Creation of scaled government funds (at the country level) subsidising home insulation using a stack of proven technologies at scale to minimise costs.




8.      Mitigation Spending (IIII) – Increasing Industrial Decarbonisation

§  [Fully Internalise Cost of Corporate Emissions. Accelerate the global roll-out of carbon pricing programs to fully internalise the cost of emissions for global corporates]

§  Preferential Patent Concessions. Creation of decarbonisation patent schemes granting of preferential patents terms for industrial decarbonisation technologies to drive R&D activity in the space. 

1. Long-term run rate. 2. Current gap. 3. COP15 Pledge. 4. Assuming private sector capital provides half of total funding. 5. UNEP estimate for developing countries. 6. IRENA estimate. 7. IRENA estimate. 8. IRENA estimate, includes electrification


At the core of such a plan needs to be the shared recognition that the world’s short term security needs are not in conflict with long-term climate change goals, but intrinsically intertwined with them. Climate change, if left unchecked is likely to create the very events – supply side shocks, wars, migration, health crises, extreme weather and natural disasters – that risk diverting the world’s attention away from the energy transition.

The world does not have the headroom to address climate change without addressing its short-term security issues, and conversely will be overwhelmed by security issues if it does not address climate change. This recognition of interdependence is critical for the blueprint to be resilient in the face of the short-term shocks and events that will inevitably arise and threaten to derail both global leaders’ priorities and more importantly their spending commitments.

Despite its best intentions, the world’s spending on climate change remains well short of the levels required to meet the goals of the Paris Agreement. While COP26 looked to be a turning point in global climate action, actual capital deployment has been impacted by a series of global shocks and disruptions, including the war in Ukraine, post-covid disruptions, inflation, slowing growth and the resulting energy crisis. Existing levels of spending point to a massive shortfall and several imbalances, the closure of which represents not just an urgent priority for the world, but a significant investment opportunity for private sector capital if innovation and risk taking prevail over fear and uncertainty. The world has more than enough money and sufficient innovation to manage the energy transition and hit Net Zero by 2050 but lacks a global blueprint on deploying this money in structured fashion that is resilient to short term shocks. COP27 will bring together the stakeholders required to develop this blueprint. Its challenge will lie in actually making it happen.


  1. Popularised by NASA researcher James Hanson in his 1987 testimony to United States Senate Committee on Energy and Natural Resources
  2. Source: Reuters
  3. Sources: Lynas, Mark; Houlton, Benjamin Z.; Perry, Simon (19 October 2021). "Greater than 99% consensus on human caused climate change in the peer-reviewed scientific literature". Environmental Research Letters. 16 (11): 114005. doi:10.1088/1748-9326/ac2966. S2CID 239032360., and Myers, Krista F.; Doran, Peter T.; Cook, John; Kotcher, John E.; Myers, Teresa A. (20 October 2021). "Consensus revisited: quantifying scientific agreement on climate change and climate expertise among Earth scientists 10 years later". Environmental Research Letters. 16 (10): 104030. doi:10.1088/1748-9326/ac2774.
  4. Source: UN Development Program Survey,
  5. Source:
  6. Sources; IEA, and McKinsey, respectivelySource; Climate Bond Initiative. Note: Green bonds fund projects related not only to climate change but also biodiversity, sustainable agriculture and resource use, pollution prevention and control, sustainable water management, and the circular economy.)
  7. Source: Nature, March 2022
  8. E.g. Texas Senate Bills 13 and 19, which took effect Sept. 1, 2021
  9. Source: IMF World Economic Outlook Database, April 2022, Based on 2021 nominal world GDP of US$96.3 trillion and 26.7% global investment rate