A pair of studies by our Institute underscore both the extent of the concern and the challenge at hand as delegates from nearly 200 countries assemble for COP29 in Baku:

• Fifty-seven percent of investors say that extreme weather and other climate-related physical risks are creating economic fallout and growing in severity sooner than current climate scenarios anticipate, according to a recent survey by our institute of 350 investors and risk professionals in every region. A plurality (42%) say that moderate to high levels of global warming could create both environmental and geopolitical tipping points. (In contrast, half of investors say emissions will peak in the coming decade while half say they will rise indefinitely.)
• Listed companies contribute roughly 20% of global greenhouse gas emissions annually and are on course to warm the planet by 2.8°C (5°F) above preindustrial levels this century, finds the latest edition of the MSCI Sustainability Institute’s Net-Zero Tracker, released on Monday.
• Listed companies in emerging markets contribute 54% of listed-company emissions globally, rising from 44% at the inception of the Paris Agreement.

These are among the realities that will form the backdrop to the negotiations in Baku, where governments are expected to look for ways to sharply increase funding for the energy transition and climate adaptation, especially in developing countries.

Though negotiation on financing hinges on government-to-government contributions, delegates will also be aiming to incentivize private investors to provide trillions of dollars for clean energy and climate resilience that is urgently needed. How much is realistic?

The Net-Zero Tracker examines the landscape for climate finance through the lens of capital markets. It finds that while the private sector has plenty of capital to deploy, the money tends not to flow far from home.

Consider that since the Paris Agreement only 2% of the capital raised through public debt or equity by companies in the emissions-intensive energy, utilities, industrials and material sectors was raised by companies in emerging markets outside of China or India. Or that just 10% of the roughly USD 540 billion invested in listed climate funds – a new and growing category within the USD70 trillion publicly traded funds universe – flows to companies in emerging markets and even less to countries in the most vulnerable regions.

As outlined in our report, a mix of approaches may be needed to get private money moving to developing economies. They include:

• Leveraging government and philanthropic funds to crowd in private capital. Though the use of blended finance approaches has achieved notable successes, it comes with limitations on its ability to scale by the magnitude needed to meet global climate goals. The obligation of the largest investors to maximize risk-adjusted returns for beneficiaries or meet liabilities can constrain allocations to emerging and frontier markets investments even when governments and development finance institutions take steps to mitigate project risk. Other types of private sector funds may have more latitude.
• Tapping the power of the market. Policymakers may find that market-based mechanisms can scale the flow of capital more quickly than approaches that demand one deal at a time and a high degree of tailoring. Carbon trading may offer one such alternative for attracting private capital to advance climate action. The Paris Agreement anticipates as much, with its provisions that authorize country-to-country trading of carbon credits and establish a new international carbon market for governments and companies alike — both of which will be on the agenda at COP29. The integrity of carbon projects (a prerequisite for the viability of carbon-credit trading) has faced challenges but is improving, driven by industry efforts and greater transparency.
• Creating policy certainty. Negotiators are expected to call on countries in national climate plans due next year to increase their ambition and detail credible sectoral pathways for their economy. That creates opportunity for governments to influence private sector capital flows and incentivize corporate climate action. We estimate that the nearly 9,000 listed companies and 65,000+ unlisted companies held in private-asset funds together are on track to contribute as much as one-third of global greenhouse gas emissions this year. A small share of these companies generates the vast majority of the emissions. Strong policies can provide the signal needed by market participants to sharpen their transition finance strategies for maximum effectiveness.

What we’ve learned is the market expects the energy transition to unfold unevenly, driving an outlook filled with extraordinary uncertainty. Conducted months prior to the U.S. election, half of investors surveyed in our study said they expect global greenhouse gas emissions to peak in the coming decade, while the other half expect emissions to keep rising indefinitely. They agree that while Japan, Canada and countries in Europe are likely to meet their climate goals, the U.S., China, India and Russia are not.

The uncertainty and unevenness that characterize the climate transition mean that asset prices do not fully reflect the magnitude of the risks and opportunities ahead, investors say. For investors, the mispricing itself presents opportunities. For governments and society at large, the fact that capital runs toward opportunity should spur more ambitious policies to harness its power.

The demands of domestic politics and the dangers of a more volatile world have not altered the essential facts: Our climate is still changing, and emissions defy borders. Capital and ambition will be needed in quantities that far exceed those pledged to date if society is to stave off the worst effects of a warming world. The negotiations in Baku promise to present a key test of our collective resolve.