Navigating The Climate Finance Landscape: Moving Forward With Caution

The climate finance landscape is in a period of transition. Since 2017, ESG investing has seen significant growth, but recent political pushback and concerns over greenwashing have led to liquidations, mergers and shifts in strategies of ESG funds. Despite these setbacks, sustainable finance inflows reached record highs in 2024, with assets under management (AUM) climbing to $3.5 trillion. However, high-profile exits from groupings such as the Net Zero Asset Managers initiative and the Net-Zero Banking Alliance suggest that the sector is reflecting and recalibrating. What should we make of these conflicting signals? Is net zero investing truly dying – or simply evolving? (See Verdantix Market Insight: What Actually Happens When Firms Miss Net Zero Targets.)

Amid regulatory whiplash, financial services firms must integrate both physical and transition climate risks into their investment strategies when these risks are financially material. A key part of this duty involves assessing and verifying emissions exposure within their portfolios. As 99% of a financial services firm’s emissions stem from financed emissions through investments, or facilitated emissions from off-balance-sheet activities, measuring these proves complex. CDP’s ‘The Time to Green Finance’ report shows that 49% of firms still do not analyse the climate impacts of their portfolios. Patchy regulatory structures, a lack of standardized data, and market fluctuations complicate efforts to assess financed emissions.

Voluntary frameworks such as the Partnership for Carbon Accounting Financials (PCAF) – with over 580 signatories, representing $94.7 trillion, and backed by the GHG Protocol – offer financial firms a starting point to measure emissions at the asset class level. However, PCAF does not cover all asset types, lacks forward-looking modelling, and does not require signatories to disclose all emissions. This gap allows firms not yet covered by Scope 3 reporting regulations to omit key data points that investors need.

A recent Morningstar Sustainalytics report reveals that over half of the 9,500 firms in its database with Science Based Targets initiative (SBTi) targets are on track for a 2- to 2.5-degree Celsius warming pathway, while a third are on track for a pathway under 2 degrees. Despite shifting political dynamics and a renewed focus on technological innovation, 95% of investors surveyed by EY still consider sustainability critical to long-term performance. For financial services firms, particularly those with long-term investment horizons, this presents a critical opportunity to engage with investee companies, drive accelerated climate action, and shape the trajectory of sustainability in the investment space.

Investment firms cannot tackle these challenges alone. They need platforms that integrate assured financed emissions data at both the asset and sector levels, along with attribution and portfolio optimization tools, scenario analyses, and engagement opportunities with portfolio companies (see Verdantix Strategic Focus: ESG & Sustainability Strategies In Banking And Financial Services). Investment firms that act now will stay ahead of upcoming enforcement in the EU, the UK, the US (state-level), Japan, the UAE and New Zealand. Investing in robust, compliant solutions will equip them to navigate the shifting landscape and keep abreast of regulatory deadlines.