Understanding what climate investing is
Many businesses are working to reduce carbon emissions in alignment with the Paris Agreement. Its main goal is to limit the rise in the average global temperature to 1.5°C. This should help reduce the risks associated with climate change. Climate investing supports companies that contribute to this goal through various strategies, including direct emissions reductions and the development of sustainable solutions.
Ways businesses contribute to the Paris Agreement goals:
- Renewable energy – investing in technologies such as solar, wind, and geothermal energy.
- Energy efficiency – upgrading buildings, transportation, and battery storage to use less energy.
- Sustainable infrastructure – making systems like transport and waste management systems less carbon-intensive.
- Environmental, Social and Governance (ESG) strategies - implementing sustainable practices like carbon offsetting and ethical sourcing. However, ESG criteria vary widely, and some ESG funds may still include carbon-intensive businesses.
Types of climate investment instruments
Investors can choose from various climate-related financial products.
Sustainable equity funds
These invest in companies prioritising ESG factors.
Green bonds
Similar to regular bonds - loans issued by companies or governments that pay interest over time. However, green bonds specifically fund projects focused on climate and environmental issues.
Impact investing
Focuses on businesses intending to make a specific and measurable positive environmental or social change.
Thematic Exchange Traded Funds (ETFs)
Funds tracking climate-related sectors like renewable energy or sustainable agriculture.
Private equity and venture capital
Investments in startups or growing businesses developing innovative technologies to address climate challenges.
Climate investing opportunities
Climate investing supports efforts to reduce environmental and social risks. They also provide investors with long-term financial growth opportunities.
Supports a low-carbon economy
A low-carbon economy relies significantly less on carbon and produces less greenhouse gases. Companies reducing emissions may lower costs and boost profitability.
Green incentives and regulations
Government subsidies and tax breaks are available to companies aligned with green initiatives. Examples include:
- reducing the amount of tax paid when buying energy-efficient technology;
- the Boiler Upgrade Scheme; and
- business rate exemption on energy generation and storage.
New growth opportunities
Investor interest in sustainable investing appears to continue to rise. Private market investments in low-carbon solutions companies have delivered a cumulative growth of 123% between 2019 and 2024. One survey by Morgan Stanley found more than 80% of investors have increased interest in sustainable investments between 2022 and 2024. As a result, businesses with sustainable practices may find it easier to attract investment.
Reducing risk from ‘stranded assets’
Stranded assets are investments that lose value due to changes in regulations, market preferences, or technological advancements. For example, fossil fuels could become obsolete in a low-carbon economy.
Challenges of climate investing
The effectiveness of climate investing includes several challenges.
Data transparency
Non-standard reporting standards make it difficult to assess a company’s true environmental impact.
Greenwashing
Misleading or even false claims can make a product or service appear more environmentally beneficial than it really is. This could be done through vague terms, selective reporting, or weak certifications.
Regulatory uncertainty
These include changes in government policies, leadership, or international agreements. These can impact climate-related projects. For example, affecting green incentives, compliance costs, or market dynamics.
Climate investing & pensions
Pension funds manage vast sums of money. They have the potential to drive significant funding into sustainable investments.
PensionBee’s Climate Plan invests in an index of companies reducing their carbon emissions and supporting the transition to a future where less carbon is produced. It follows a decarbonisation pathway. This seeks to continually reduce the plan’s carbon output even if the global economy increases its output.
Episode 36 of The Pension Confident Podcast discusses the link between pensions and climate change and whether you could use your pension to make a difference.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 10-04-2025
