As investors and international policy makers gather at COP29, The Global Sustainable Investment Alliance (GSIA) released its report Transforming Global Finance for Climate Action: Addressing Misaligned Incentives and Unlocking Opportunities. In addition to offering specific recommendations to the policymakers at COP29, the report identifies barriers to sustainable investment and the actions needed to encourage the flow of capital to the projects needed to address climate change.

Dubbed the ‘Finance COP’, COP 29 is expected to see a new climate finance goal dominate headlines, but GSIA have identified systemic misalignment keeping private investment and policy making out of step. National plans currently fall far short of what is needed, and significant private finance must be mobilized to avoid climate disaster. GSIA have set out a systems-change approach to aid the financing of that change, with academics from the University of Tokyo, Columbia University, London School of Economics, and investment professionals from World Bank Group, PRI, Berkeley Law and others contributing to the report’s findings.

“Investor and policymakers’ incentives are misaligned,” said James Alexander, CEO of UKSIF and Chair of GSIA. “At COP 29, policymakers, investors and civil society negotiators can help address the key barriers to meaningful and actionable change. We need supportive policy action to align incentives and catalyse capital to unlock the opportunities that a climate transition presents.”

The report groups incentive barriers into five categories, which GSIA has called the PIVOT framework:

• Policy vacuum – Policies can act as barriers that prevent investment from flowing to the climate crisis. At the same time, there is a lack of positive policies that encourage climate-positive investments.
• Interest – Companies and investors may focus on quick wins for near-term financial return or sustainability, ignoring long-term goals (e.g. net-zero by 2050). This short-term thinking prevents investments in sustainable projects and innovations to meet climate targets.
• Valuation – Environmental and social factors are traditionally not accounted for in financial models causing money to flow into environmentally harmful industries as “hidden costs” aren’t considered. A short-term focus on financial reporting can further undermine long-term value creation.
• Ownership – Some institutions and investments are managed without active involvement. A hands-off approach, whether due to cultural or structural challenges, means redirecting capital is difficult, and met with resistance from the current system.
• Transition misalignment – Certain business models and industries naturally conflict with the goals of the energy transition, making it challenging to create and put into action long-term plans that include these sectors.

The report then sets out the interlinking actions to facilitate capital flow and enable effective action on climate change.

GSIA undertook the report to highlight the need for coordinated action from both policymakers and investors. The report aims to facilitate more informed conversations among investors and policymakers at COP29 and beyond, providing a foundation for developing comprehensive strategies to align global finance with goals of the Paris Climate Agreement.

“The current system incentivises investors to invest in unsustainable and un-equitable activities, but by aligning financial incentives and creating the necessary regulatory frameworks, policymakers worldwide have the opportunity to spur sustainable investing practices and drive public and private collaboration which will drive a just and equitable transition across markets,” said Maria Lettini, CEO of US SIF, a member of GSIA.

“Self-interest and short-termism in the financial system are blocking essential progress,” said James Alexander, CEO of UKSIF and Chair of GSIA. “Financial institutions continue to finance destructive activities and flows of investment into climate solutions are insufficient. In the long term, these organisations are acting against their own interests and the interests of global economic stability. Policymakers must incentivise active stewardship, and remove barriers to green investment in the real economy in order to see investment start to flow.“

To read the full report, click here