Climate change brings enormous challenges to societies and economies. Climate change mitigation scenarios leading to temperature outcomes aligned with the Paris Agreement goals highlight the need for significant shifts in sectoral characteristics (IPCC, 2022[1]; Pouille et al., 2023[2]; IEA, 2023[3]). At the same time, increasing the ability to adapt to the adverse impacts of climate change and fostering climate resilience requires adaptation and resilience considerations to be embedded in all economic and human activities. While climate change and policies to mitigate climate change and its effects can pose significant risks to the financial system, finance also plays a crucial role in addressing climate change challenges. Required transformations and opportunities across economic sectors need large investments.
The scale of investment and financing needs for climate action require significant shifts in the financial system. Estimates of global climate mitigation and adaptation finance needs are between USD 5.9 and 12 trillion annually by 2030 (CPI, 2023[4]). Such a wide range can be explained by the fact that such estimates may be based on different scopes, methodologies, and data (UNFCCC SCF, 2021[5]; Kreibiehl et al., 2022[6]; CPI, 2024[7]). In any case, these figures do not only highlight the need to scale up and mobilise climate‑aligned investments, but also to actively finance the climate transition of indispensable economic sectors, as well as to progressively phase out finance for certain activities incompatible with low‑greenhouse gas (GHG) and climate‑resilient development.
Article 2.1c of the Paris Agreement set a specific goal on “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate‑resilient development” (UNFCCC, 2015[8]), through which policymakers highlighted the critical role of finance in reaching the temperature goal (Article 2.1a) and climate resilience goal (Article 2.b). The formulation of Article 2.1c of the Paris Agreement, which sets a goal of making finance consistent with climate policy goals, contributed to the development of the concept of “climate alignment” of investments and financing – a term that has been picked up by policymakers, financial sector players, and civil society. More recently, the G7 stressed the need to accelerate efforts to make finance consistent with the goals of the Paris Agreement (G7, 2024[9]). The G20, through its Sustainable Finance Working Group, also developed approaches to align finance with the Paris Agreement and ways to operationalise them across jurisdictions (World Bank Group, IMF and OECD, 2023[10]).
As aligning finance with climate policy goals is crucial for a successful net‑zero transition and enhanced climate resilience, there is a clear need to assess progress on such alignment. Indeed, evidence‑based policymaking and investment decisions towards aligning finance with climate goals need to be informed by robust assessments. In this context, credible, transparent, and comparable metrics and data are required to prevent greenwashing and inaccurate claims of climate alignment or positive impacts (UN, 2022[11]; OECD, 2023[12]). As climate‑related progress metrics are often based on complex methodologies with a range of assumptions (Noels and Jachnik, 2022[13]; Noels et al., 2023[14]), their transparency and credibility provide the foundation for accurate progress assessments of aligning finance with climate goals.
Efforts to increase the climate alignment of finance are currently fragmented, in part due to the absence of a common framework to track progress. Different stakeholders that can inform and influence assessments of and developments in the alignment of finance with climate goals include environmental and financial policymakers, financial sector participants, and private sector decision makers. These different stakeholders are increasingly implementing climate‑related actions and policies. However, such actions and policies are often taken to address risks from climate change, which may not always contribute to aligning finance with climate goals. In the private and financial sector, the focus tends to be more on climate‑related risk management, which does not always result in financial decisions aligned with climate policy goals, notably in the absence of mechanisms to properly price climate externalities in investment decisions. Moreover, a range of existing policies still incentivise and result in investments and financing in high‑GHG and non‑climate resilient activities.
While further methodological and data developments are needed, progress towards aligning finance with climate goals should already be assessed based on best‑available estimates and data examples. Such assessments of the current climate alignment or misalignment of finance can help identify priorities to close the financing and investment gaps, finance the transition, and fulfil the goals of Article 2 of the Paris Agreement.
To contribute to addressing these challenges, this report takes stock of progress in aligning finance with climate goals by answering three questions related to assessing, tracking, and incentivising the climate alignment of finance, each addressed in a dedicated chapter:
How is the climate alignment of finance assessed, and what gaps and greenwashing risks remain? (Chapter 2)
What does existing partial available evidence about financial flows and stocks tell us about the current climate alignment or misalignment of finance? (Chapter 3)
What is the state of adoption of climate‑related financial sector policies and actions, and what evidence exists on their effects? (Chapter 4)
Chapter 5 concludes by providing suggestions for how answers to these questions and further actions by policymakers and the financial sector can, over time, inform a common and improved framework to better assess and inform progress on the climate alignment of finance.