As the world grapples with the increasingly pressing consequences of climate change, the transition to a net-zero economy has emerged as a critical goal. Over the past twelve months, the global average air temperature was 1.62°C above the 1850–1900 pre-industrial average.[1] With this, we are crossing an important threshold that is putting us on a path towards weakened economic resilience and exponentially rising adaptation costs.

A net-zero future is therefore not only an ecological imperative, but also an economic one, especially against the backdrop of a growing world population and expanding middle class.

After all, the cost of inaction will be much higher over the long term than the cost of investing in the transition, ultimately boosting inflation, as Simon Stiell, Executive Secretary of the UNFCCC, told world leaders during COP29 in Baku, warning that, “worsening climate impacts will put inflation on steroids.”[2]

However, governments cannot meet the staggering financial requirements needed to achieve net-zero emissions alone. At this point, we are a long way off the trillions of dollars of climate finance that must be mobilised.

Private investors have the potential to help fill this funding gap by directing capital toward sustainable projects and technologies, acting as a catalyst for innovation and investment in sustainable practices and solutions.

But unlocking this potential is no easy feat. Sustainable investment strategies have disappointed many investors in recent periods, and in the current environment, investors are primarily focused on geopolitical news and market volatility.

Balancing short-term risks with long-term trends

However, apart from the immediate climate-related risks, climate change is largely unconcerned with short-term worries. Adopting a longer-term view is therefore key for harnessing the potential of private capital in the transition and building robust and resilient portfolios that can effectively mitigate short-term shocks, navigate long-term trends and optimise risk-adjusted returns across market cycles.

When adopting this sort of longer-term view, the financial case for investing in the decarbonisation journey becomes increasingly strong, with investment opportunities arising across a range of sectors, from energy, construction and agriculture to transport and industry.

While we see more investors expressing an interest in such investments, they encounter challenges in converting credible climate valuation and risk models into practical insights for investment decision-making. The lack of reliable information, coupled with the limited availability of financial instruments to support sustainable initiatives in critical transition sectors, constrains investors’ opportunities.

Nevertheless, there is a discernible positive shift in the market. Companies are progressively implementing reporting and transparency standards, speeding up R&D into sustainable, scalable, and competitive solutions, and aligning the goals of their leadership with environmental and social performance objectives, reflecting an evolving commitment to climate issues.

As this trend continues, investors will be in a better position to assess the sustainability and long-term viability of climate-related investments and have access to more opportunities to invest in the net-zero transition.

[1] https://climate.copernicus.eu/copernicus-2024-virtually-certain-be-warmest-year-and-first-year-above-15degc

[2] https://unfccc.int/news/worsening-climate-impacts-will-put-inflation-on-steroids-unless-every-country-can-take-bolder

– Author: Nicolas Barben, Global head of ESG Solutions, Union Bancaire Privée (UBP)

– This contribution is brought to you by UBP, a valued silver event partner of Building Bridges 2024.