Scaling Transition Finance: Insights from our Climate Week 2024 Convening 

Scaling Transition Finance: Insights from our Climate Week 2024 Convening 

Climate Week 2024 returned to New York City with the theme, It’s Time, revealing a strong appetite for aggressive action amid recognition that, despite positive momentum, the 1.5˚C climate threshold may be moving out of reach. Supporting this call for urgency, on September 23, the Council for Inclusive Capitalism hosted a convening on “Challenges and Solutions in Scaling Transition Finance.” Participants included leaders at the forefront of the energy transition finance challenge, including asset owners and managers, investors in public and private markets, providers of catalytic capital, companies and energy providers, and thought leaders from academia, policymaking, and civil society.  

This summary highlights key takeaways that emerged from the gathering held under the Chatham House rule. It includes an overview of the current landscape and potential new levers to unlock the scalable financing solutions required for the world to make a just energy transition. 

Seeking a Stronger Market Signal 

The discussion was led by speakers who are leaders in worlds of global finance, business and policy. Reaffirming the power of financial markets to drive faster climate action, they began by highlighting key challenges in the current environment. It was also noted that the promising growth of renewables represents energy addition rather than energy transition, drawing attention to the high cost and complexity of energy transition—estimated to the tune of 5-10% of GDP annually on average—in light of fossil fuels’ pervasiveness in the modern economy.  

Others noted that finance should be seen as a catalyst, which needs underlying policy that sets the direction to help move capital toward decarbonization. There was a strong sentiment that without a powerful market signal, such as a carbon price that’s missing in the United States, it is challenging for asset managers (AM) to steer investments toward renewables. But the desire for a stronger market signal is also felt across the Atlantic where the European Union has carbon pricing mechanisms, the EU Emissions Trading System (EU ETS) and the Carbon Boder Adjustment Mechanism (CBAM). A European asset owner (AO), for example, highlighted a lack of demand for capital-intensive green projects in the recent high-interest environment, questioning whether they can continue to invest in companies that are running out of cash.  Many pensioners, given the choice of lower returns for greener projects, are unwilling to accept the trade-off. 

On a more upbeat note, a US asset owner noted that the Inflation Reduction Act in the US has led to converging AM and AO interest in energy transition projects. Based on this experience, a global framework that incentivizes a net-zero transition , for example through carbon credits, for directing capital toward green projects holds promise.  

Addressing Critical Gaps 

The speakers identified several other factors getting in way of deploying capital at scale to activate commitments, shift business models toward net-zero, and manage a just transition.  These include:  

• Slow adoption of science-based targets:  There was considerable frustration expressed at the lack of transition plans based on concrete science-based targets, despite near-universal commitment to the Paris Agreement goals.  

• ESG backlash: AMs felt ongoing effects of the backlash to ESG-based investing, especially in the US, where ESG is a divisive term and issue at the corporate board level as well as in the broader media environment. There was also a reality check about public sentiment around climate change in western societies with speakers discussing challenges like disinformation among climate skeptics and disillusionment among young people.  

• Data Gap: It’s still hard to estimate the impact of investments flowing into energy transition. While progress is being made through disclosure frameworks like the Task Force on Climate-related Financial Disclosures (TCFD), what’s needed is an easily accessible global repository of open-source data in comparable form. Such a net zero data public utility could come online by the second half of 2025.  

• The conundrum of critical minerals mining: Critical minerals are essential for electrification and meeting corporate net zero targets, but their mining raises concerns about negative impacts on local environment and communities. Participants drew attention to the protests in Serbia and in the US state of Nevada against lithium mining projects.  

• Policy constraints: Shifting domestic priorities in the west is reducing the likelihood of more big bang climate policy.  In the United States, regardless of the general election outcome, the next White House administration will likely prioritize issues like inflation, poverty, and home affordability over climate.    

In the spirit of ‘progress over perfection’, represented by the Council’s commitment to action, the discussion also explored potential solutions that would help overcome some of these challenges to unleash the power of capital markets to achieve faster climate progress.  

Exploring New Solutions 

1. Forward looking data on social and environmental impact: An impact investment leader noted, “We don’t have a strong price signal because we don’t have reliable data.” Pointing out that ESG investments amounting to $30 trillion lack a reliable measurement system today, the impact investor discussed the importance of impact accounting. Corporates and investors would be able to translate social and environmental impacts into language comparable to financial performance if they could place a monetary value on externalities like carbon emissions, water pollution and social erosion.  Fortunately, collaborations between global investors and academics, within organizations like the International Foundation For Valuing Impacts (IFVI), the Impact Taskforce (ITF), and GSG Impact, are driving progress in building these methodologies and datasets.
2. An EU-US Carbon Border Adjustment Mechanism: An intriguing idea proposed by the speakers and supported by some participants is a potential EU-US collaboration on the CBAM. The advocates of this approach envision broadening the CBAM to include the US in a phased sector-specific manner, such as starting with steel and aluminum, as that would implicitly put a price on carbon within the US. Given the collective economic clout of the EU and the US, it could also have a powerful effect on driving global change. While some participants felt this kind of cooperation on internationally traded, carbon-intensive products would advance transatlantic cooperation, it also opens up new questions that would need to be explored, such as: how to make a mechanism like this equitable and fair for emerging markets that fear CBAM’s impact on their competitiveness.  
3. Engagement on social issues in mining: Deeper, more thoughtful investor engagement on social issues in the mining sector would help to advance a just energy transition. It was expressed that, for mining CEOs, the success or failure of a project hinges on social issues, where a significant gap exists between mining companies and investors in terms of engagement. A more sophisticated discussion on mining would open up new pathways for responsible mining, for example, scaling financial instruments like thematic bonds that support sustainable and responsible mining.    

 Conclusion:  

There was unanimous recognition that in an uncertain political and policy environment, the role of private capital in financing the transition will be more critical, especially in hard-to-abate sectors as well as emerging economies that are addressing energy transition while still facing an acute energy access challenge. The Council’s workstreams and future convenings will continue to advance research and advocacy on climate finance solutions to accelerate a just transition.