Climate change is finally beginning to get the attention it deserves in the U.S. Public awareness is rising as more Americans are exposed to climate-related impacts each year. Policymakers are measuring risks more accurately and charting more actionable strategies to address them, as demonstrated in the Fifth National Climate Assessment and the White House’s National Climate Resilience Framework. And internationally, multilateral dialogues and global climate agreements are prompting some U.S. leaders to make new commitments and hit bolder emissions reduction targets than ever before.
But there’s also growing recognition that we are setting potentially unachievable targets—and that broad declarations such as those agreed upon at COP28 will not force enough climate action in the U.S. on their own. Think about the scale of needed investment: A fossil-rich energy system must switch to a larger, cleaner electricity system. Industrial facilities, commercial and residential buildings, and agricultural activities all need new machinery and material inputs to reduce emissions. All communities, and especially the most vulnerable, must also be protected from new climate impacts. All of this takes money, and lots of it.
Only financial markets—institutional structures that facilitate private-led investment—can move money at the scale America needs. These include markets for stocks, bonds, and other investment vehicles, while also depending on actors such as corporate banks and private equity firms to drive flows of capital. The actors in these markets transform technological progress and climate-related ambitions into physical investment. Expanding utility-scale solar installations, deploying new carbon-reducing technologies in industrial facilities, and building seawalls in vulnerable locations are all made possible through private financing.
The problem is our financial markets—for all their ability to move money at scale and with relative efficiency—are not governed by rules designed to prioritize climate change mitigation and adaptation, nor does private finance invest equitably across people and places. Instead, even with plenty of promises from major investors and many large commitments to match, too many private dollars continue to flow into polluting practices, avoid communities at greater climate risk, or both. Calling for more climate investment from the private sector is not new, nor are calls for financial market restructuring. But there have been fewer calls for how financial markets can ensure a more equitable transition to a cleaner, more resilient American economy.
If America wants to drive more equitable climate investment, then it’s imperative we begin to study the “pain points” in how our financial markets operate in a time of climate crisis.
It’s not hyperbole to say America’s climate response will be one of the largest capital investment efforts in the country’s history—one which the public sector alone will not be able to handle. While there is no single, consistent estimate for the total amount of investment needed in coming years, trusted estimates all point in the same, massive direction. One large, oft-cited figure is from Princeton University, whose researchers estimate that the U.S. needs $2.5 trillion over just the 2021 to 2031 period to meet decarbonization goals consistent with the 2015 Paris Agreement. A United Nations-associated estimate pegs the U.S. needing $5 trillion total by 2050. Yet these figures are only half the picture, and still don’t include all the cost savings from adaptation to manage growing weather-related risks. Adaptation is often framed through costs potentially avoided, like the $150 billion in annual costs from weather-related disasters per the Fifth National Climate Assessment.
Fortunately, there is already significant private-led climate investment happening. For instance, public and private financial actors are contributing nearly $175 billion annually in both the U.S. and Canada, and the private sector is responsible for around three-quarters of this financing. This private-led investment—further incentivized by recent federal legislation—has helped jump-start progress around clean energy generation, electric vehicles, and battery manufacturing. The emergence of green financial instruments such as green bonds is attracting additional investment. And the private sector faces added urgency to identify and insure against climate risk.
Major financial actors are also willing to publicly state the obvious: Private investors need to do more. The Glasgow Financial Alliance for Net Zero (GFANZ), which includes multiple U.S.-headquartered and U.S.-serving financial institutions, serves as a self-reinforcing agreement for its members to invest more to achieve net zero emissions. Banks such as ING, Citi, and Goldman Sachs have not only called for more climate investment in their annual reports, but also emphasized the need to focus on improved social outcomes. Meanwhile, private equity firms such as BlackRock are increasingly emphasizing the climate transition in investor guidance and reports. Regulators continue to sound alarms on how climate change creates pervasive risks, such as through an excellent Financial Stability Oversight Council report.
However, significant gaps remain. There is still not enough private-led climate investment in general, particularly relative to benchmarks established globally across all developed nations. Investments in mitigation (e.g., clean energy) continue to overshadow those in adaptation in the private sector, potentially limiting the visibility of a broader range of needed projects. Our lending markets do not adequately consider or price climate risks when determining where to construct new buildings. A national carbon pricing mechanism still struggles to find enough political support, while private investors tend to focus more on making money, even if that involves continued pollution. And this is just a sampling.
As financial market actors undertake more climate-friendly investment, they inevitably leave some communities behind. Even recent federal legislation—including the Inflation Reduction Act, which aims to incentivize more “equitable” climate investments across the private sector—struggles to provide clear guidance or benchmarks on these issues. Addressing heightened climate risks and costs, including distributional considerations across different communities, is not always a point of emphasis for private sector leaders (let alone local government leaders). For example, in agriculture, obtaining credit for new, more efficient equipment purchases may be a challenge for socially disadvantaged farmers and ranchers. Likewise, low-income households vulnerable to climate impacts have traditionally struggled to access enough insurance or other financial services.
Unlocking the power of financial markets will require identifying—and reckoning with—the market failures that limit more scalable and equitable climate investments. These include procedural hurdles that financial institutions and other private actors face to get enough capital to the people and places with the greatest climate need. A few outstanding questions include:
- How do financing pain points vary across implicated industries and asset classes? We know there is a need to invest more in a variety of improvements across energy systems, transportation networks, buildings, and industrial facilities, but we need to better recognize the different market-supported levers (e.g., policies, programs, and processes) that could be facilitating or limiting such investment.
- How can financial markets better define, price, and address issues around climate equity? By design, markets channel private investment toward certain types of projects in certain types of places that ultimately serve certain types of people—with a clear revenue stream or profit motive in mind. In response, private actors and public regulators need to explore where current accepted practices overly advantage some people and places over others.
- How can financial regulators promote scale and social equity? Financial regulators and policymakers—including those in the Treasury Department, Securities and Exchange Commission, and elsewhere—create laws and policy guidelines to manage climate-related investments, and consequently have a key role to play in facilitating market activity. Better understanding how existing (or new) regulations and guidelines can ensure more equitable private-led climate investment in the places of greatest need is a must.
We are confident that America is on the precipice of a grand reconstruction—one that helps build communities that can withstand more extreme weather and minimizes our harmful emissions. Yet we won’t accomplish those goals primarily through global handshakes, as helpful as those are. We need to increasingly look toward financial markets to help facilitate the flow of money at a scale that can deliver a cleaner, more resilient economy.