Tracking the Transition: Global private financial institutions’ progress toward net zero – Climate Policy Initiative

Report on the Role of Financial Institutions in Achieving Climate and Sustainable Development Goals

Achieving the investment scale required for the global climate transition is contingent upon the central role of financial institutions (FIs). This transition is critical for realizing the economic and environmental benefits aligned with the Sustainable Development Goals (SDGs), particularly SDG 13 (Climate Action) and SDG 7 (Affordable and Clean Energy). Despite progress, recent withdrawals from climate coalitions and the disbandment of key alliances in 2024-2025 highlight significant challenges. While political and regulatory uncertainty has caused some FIs to reassess public commitments, many still recognize that decarbonization is essential for sustainable growth and mitigating climate, nature, and economic risks, which are foundational to SDG 8 (Decent Work and Economic Growth).

FIs that maintain momentum in decarbonization are best positioned to thrive. However, they face barriers including inconsistent regulations, data gaps, and a misalignment between commitments and capital allocation. In emerging markets and developing economies (EMDEs), these challenges are amplified, hindering progress on global decarbonization and the universal achievement of the SDGs. Independent, credible tools to track progress and guide action are therefore essential for accountability and accelerating investment aligned with the 2030 Agenda for Sustainable Development.

Analysis of Climate Commitments and Targets

The adoption of clear targets signals an FI’s ambition and creates accountability for climate action. As of 2024, target-setting has expanded, but the quality and comprehensiveness of these targets remain insufficient to drive the progress needed for SDG 13.

Mitigation Targets

• FIs representing 80% of Assets Under Management/Ownership (AUM/O) have set mitigation targets, but these often lack depth.
• Comprehensive, validated targets aligned with 1.5°C pathways are rare, indicating a gap between stated ambition and actionable plans to meet global climate goals.

Fossil Fuel Phase-Out and Exclusion Targets

• 59% of FIs by AUM/O have established fossil fuel phase-out targets. However, the credibility of these targets is limited.
• Policies frequently fail to cover the entire fossil fuel value chain or halt the financing of expansionist companies.
• Only 14% of FIs by AUM/O have credible fossil fuel policies, falling short of IEA recommendations and directly undermining the transition required for SDG 7 (Affordable and Clean Energy).

Climate Investment Targets

• Adoption of climate investment targets is limited, with FIs covering only 34% of AUM/O having set them.
• While adoption is low, these targets tend to be of higher quality, often incorporating specified timelines and clear methodologies that could accelerate financing for renewable infrastructure and support SDG 7.

Most target-setting remains voluntary, and the fragility of these commitments underscores the need for policy reinforcement. National climate targets must be translated into clear mandates for the financial sector to ensure portfolios are aligned with a net-zero, climate-resilient future.

Assessment of Strategy Implementation

Integrating climate considerations into governance and business operations is essential to translate ambition into meaningful change. FIs have shown progress in implementation, though best practices are not yet widespread.

Areas of Progress

• Climate Risk Disclosure: Covering 79% of FIs by AUM/O.
• Climate Risk Management: Implemented by FIs representing 83% of AUM/O.
• Internal Accountability: Established in institutions covering 77% of AUM/O.

Areas for Improvement

• Significant improvement is needed in policy engagement, disclosure of investment data, and strategies that do not rely on carbon offsets. Effective policy engagement is a key lever for creating an enabling environment for sustainable finance, crucial for SDG 17 (Partnerships for the Goals).
• Shareholder engagement has broadened, yet support for climate resolutions has declined. From 2021 to 2024, the proportion of FIs (by AUM/O) supporting over 75% of climate resolutions fell from 21% to 6%, reflecting a weakening of collective private sector action.

Evaluation of Real-Economy Impact

The ultimate measure of success is the impact FIs achieve in the real economy, directly influencing the trajectory of global emissions and resilience.

Financial Stability and Climate Risk

• Physical climate and nature risks pose a significant threat to financial stability and, by extension, to SDG 8 (Decent Work and Economic Growth).
• Projected portfolio losses are estimated at 5% globally under a +2°C to +3°C warming scenario, rising to 10-15% in climate-vulnerable EMDEs.

Energy Finance and Emissions

Despite these risks, progress in shifting energy finance remains mixed and insufficient to meet the goals of the Paris Agreement and SDG 13.

• Financed Emissions: Have shown only a slight decrease since 2019, with potential inconsistencies in self-reported figures.
• Energy Capital Stocks: Nearly 75% remain in fossil fuel holdings, with the majority of these companies expanding their operations. This directly contradicts the objectives of SDG 7.
• Credit Financing: Remains skewed towards fossil fuels, which received 70% of all tracked new credit finance from banks, compared to just 30% for clean energy.

Analysis of Capital Deployment

Direct and Indirect Finance

Direct finance for clean and transition energy projects grew by 18% annually from 2019 to 2024, reaching nearly USD 126 billion. However, this capital is not being deployed equitably, creating challenges for a just transition and the achievement of the SDGs globally.

• Geographic Concentration: Clean energy project finance is concentrated in advanced economies, with EMDEs receiving only 29% of global flows in 2024. This disparity hinders progress on SDG 7 in developing nations.
• Continued Fossil Fuel Funding: New fossil fuel projects continue to receive funding, contrary to IEA guidance that no new investment is compatible with a net-zero pathway. This exacerbates climate risk and locks in emissions, jeopardizing SDG 13.

Conclusion and Path Forward

The data indicates a significant gap between the financial sector’s stated climate ambitions and its real-world impact. While some progress has been made in setting targets and implementing risk management processes, capital continues to flow towards activities that are incompatible with global climate goals and the broader 2030 Agenda.

Aligning financial flows with the SDGs, particularly SDG 13 (Climate Action) and SDG 7 (Affordable and Clean Energy), is a fiduciary duty essential for mitigating systemic risk and ensuring long-term, sustainable economic growth under SDG 8. To bridge the gap between commitments and impact, it is imperative to strengthen policy and regulatory frameworks, enhance accountability through independent tracking, and foster genuine partnerships to accelerate the transition to a net-zero, climate-resilient global economy.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy: The article extensively discusses the financing of energy projects, contrasting investments in clean energy with those in fossil fuels. It highlights the need to shift capital towards renewable and transition energy sources to achieve decarbonization.
• SDG 8: Decent Work and Economic Growth: The article connects the climate transition to “sustainable growth” and mitigating “economic risks.” It argues that decarbonization is essential for long-term economic stability and that financial institutions that adapt will thrive.
• SDG 13: Climate Action: This is the central theme of the article. It focuses on the role of financial institutions in mitigating climate change through net-zero commitments, reducing financed emissions, managing climate-related financial risks, and investing in climate solutions.
• SDG 17: Partnerships for the Goals: The article underscores the importance of multi-stakeholder collaboration. It discusses climate coalitions (e.g., Net Zero Banking Alliance), the role of private financial institutions, the need for government regulation, and the use of independent data tools like the Net Zero Finance Tracker (NZFT) to hold institutions accountable.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Under SDG 7 (Affordable and Clean Energy):
   • Target 7.2: “By 2030, increase substantially the share of renewable energy in the global energy mix.” The article directly addresses this by tracking the growth of finance for clean energy projects, stating that “direct finance to clean and transition energy projects has been growing by 18% annually from 2019 to 2024.”
   • Target 7.a: “By 2030, enhance international cooperation to facilitate access to clean energy research and technology… and promote investment in energy infrastructure and clean energy technology.” The article discusses the flow of capital to energy projects, noting that “emerging markets receiving just 29% of global energy flows in 2024,” which relates to the need for enhanced investment in developing economies.
2. Under SDG 8 (Decent Work and Economic Growth):
   • Target 8.4: “Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation…” The article’s focus on achieving “sustainable growth” through decarbonization and shifting away from carbon-intensive assets directly supports the principle of decoupling economic activity from environmental harm.
3. Under SDG 13 (Climate Action):
   • Target 13.2: “Integrate climate change measures into national policies, strategies and planning.” The article points to a gap in this area, noting that while “most jurisdictions have adopted legally binding national climate targets, these have not yet been translated into equivalent mandates for the financial sector.”
   • Target 13.a: “Implement the commitment undertaken by developed-country parties to the United Nations Framework Convention on Climate Change to mobilize finance for climate action.” The entire article is about mobilizing and tracking private climate finance, which is a core component of this target. It analyzes the scale of investment needed and the current flows from financial institutions.
4. Under SDG 17 (Partnerships for the Goals):
   • Target 17.16: “Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology and financial resources…” The article discusses the rise and challenges of climate coalitions like the “Net Zero Banking Alliance” and highlights the role of the Net Zero Finance Tracker (NZFT) as a tool to “empower civil society, regulators, and investors to hold institutions accountable.”
   • Target 17.17: “Encourage and promote effective public, public-private and civil society partnerships…” The article emphasizes the “central role” of private financial institutions (FIs) and the need for “policy reinforcement” and consistent regulations to guide their climate actions, illustrating the interplay between public and private sectors.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions several quantitative and qualitative indicators used by the Net Zero Finance Tracker (NZFT) to measure progress:

• Financial Flows: The article provides specific figures on financial flows, such as “USD 126 billion for clean and transition projects financed” in 2024 and the ratio of credit financing, where “70% of all tracked new credit finance” went to fossil fuel companies and “just 30% for clean energy.”
• Target Adoption Rates: Progress is measured by the percentage of financial institutions (by Assets Under Management/Ownership – AUM/O) that have set specific targets. For example, “Mitigation targets had been set by FIs representing 80% of AUM/O” and “Fossil fuel phase-out and exclusion targets had been set by 59% FIs by AUM/O.”
• Financed Emissions: The article uses the level of emissions associated with investment and lending portfolios as a key impact indicator, noting that “Financed emissions have decreased only slightly since 2019.”
• Climate Risk Disclosure and Management: The article implies indicators related to implementation, such as the percentage of FIs disclosing climate risk (“covering 79% of FIs by AUM/O in 2024”) and implementing climate risk management (“83%”).
• Portfolio Composition: The composition of energy holdings is used as an indicator of impact, stating that “Nearly three-quarters of energy capital stocks remain in FF holdings.”
• Shareholder Engagement: The level of support for climate-related shareholder resolutions is used as an indicator of implementation, noting a decline where FIs “supporting more than 75% of climate resolutions declined from 21% to just 6% (in terms of AUM/O) in 2021 to 2024.”

4. Summary Table of SDGs, Targets, and Indicators

Source: climatepolicyinitiative.org