The Global Sustainable Investment Alliance (GSIA) has revealed “systemic misalignment” that keeps private investment and policymaking out of step as COP29’s Finance Day is about to unfold in Baku.
The report – Transforming Global Finance for Climate Action: Addressing Misaligned Incentives and Unlocking Opportunities – identifies barriers to sustainable investment and the policy actions needed to encourage the rapid flow of capital to the projects needed to address climate change.
Earlier this week, KPMG also published research that supports GSIA’s findings, showing investor concern that continued investment in energy transition could slow down due to policy or regulatory risks. 40% of execs surveyed identified these as the top barrier to investment, with market volatility a close second at 36%.
GSIA’s report groups incentive barriers into five categories, which GSIA has called the PIVOT framework. These are:
Policy vacuum – According to the report, policies can act as barriers that prevent investment from flowing toward addressing the climate crisis. At the same time, there is a lack of positive policies and transition planning 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. Short-term thinking and narrow performance metrics could prevent investments in sustainable projects and innovations to meet climate targets.
Valuation – Additionally, environmental and social factors are often 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 further undermines 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 – Finally, certain existing business models and industries 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 set out the interlinking actions to facilitate capital flow and enable effective action on climate change. This includes developing and implementing national transition plans and biodiversity strategies; establishing regulatory frameworks, financial incentives and corporate transparency to promote sustainable investments; and fostering public-private collaboration, especially in areas beyond market reach.
“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.“
GSIA undertook the report to highlight the need for coordinated action from both policymakers and investors, 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.
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 the goals of the Paris Climate Agreement.
Maria Lettini, CEO of US SIF – a member of GSIA – added: “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.”
