The central role finance plays in making climate action possible is acknowledged in the Paris Agreement. Article 2.1c sets the goal of aligning all financial flows with low greenhouse gas and climate-resilient development. Achieving this involves not only scaling up finance for activities contributing to climate goals (including climate solutions and transition activities), but also and redirecting finance away from activities undermining them.

Policymakers do not have a silver bullet to tackle climate change challenges and achieve net-zero GHG emissions. They must take into account economic stability, competitiveness, long-term costs of inaction and free-rider challenges. Influencing financial decisions is a good avenue to further explore, but a balanced approach is needed there too.  

Real-economy policies, such as carbon taxes or tax credits for low-carbon technologies, and their incentives are increasing the attractiveness of climate-related investments, which helps to drive the alignment of finance with climate goals. The adoption and stringency of such policies increased by 10% year-on-year between 2010 and 2021, although rates have slowed down in recent years. (Figure 1 Panel A).

At the same time, financial sector policies integrating climate considerations have progressively emerged. Since the adoption of the Paris Agreement, their number more than quadrupled (Figure 1 Panel B), with 81 countries and the EU having adopted such policies by 2023. These policies have mainly come in the form of transparency measures (notably disclosure requirements and taxonomies), with 77 countries and the EU adopting such measures, including all G20 countries and nearly all OECD countries.

A growing subset of climate-related financial sector policies comes from central banks and supervisors. By 2023, such policymakers in over 40 countries had introduced climate-related prudential or monetary policies. The effects of these policies on financial and price stability, as well as on climate goals, are not well understood yet, and there is ongoing debate about the role of central banks. However, climate stress tests and scenario analyses demonstrate that climate change will have a systemic impact on the value of assets and bring new risks to the financial system.

Progress on financing climate transition and resilience is often judged by growth in green bonds or green capital expenditures. However, such numbers only paint part of the picture and need to be placed in the context of total financial flows, while also shedding light on financing that remains exposed to greenhouse gas-intensive activities and physical climate risks. 

Low-carbon investments remain limited. Clean energy supply investments represent less than 6% of total gross fixed capital formation, a proxy for total real-economy investments (Figure 2 Panel A). Reaching international and national climate policy goals will require investors and financial institutions to broaden their perspective and integrate climate considerations in all financial decision-making. 

Large parts of the financial system remain exposed to fossil fuels or carbon-intensive sectors. For example, in 2022, fossil fuel energy supply accounted for 10% of global listed equity, compared to only 4% for low-carbon energy supply (Figure 2 Panel B). Moreover, data coverage is uneven across financial instruments. For example, less than 3% of private equity can be identified as flowing to low-carbon activities, while no such estimate currently exists for greenhouse gas-intensive activities. At the same time, there is some evidence that shows that such activities have increasingly looked for financing in parts of the financial system that are less regulated and where data availability is lower. To address these leakage risks, more efforts are needed to address blind spots across financial asset classes.

Investors need to consider important trade-offs when responding to this reality. Where finance is still flowing to carbon-intensive activities, divestment can send a signal. But it comes at the cost of influence and may simply shift assets to owners with different priorities. To date, evidence that divestment reduces real-economy emissions remains limited. Engagement, by contrast, can be slow and complex, but appears more effective in raising climate ambitions among firms in transition.

Policymakers can take individual and co-ordinated actions to better align finance with climate policy goals and improve evidence that underpins impactful investment practices. For example, governments can support climate transparency through interoperable quantitative metrics and provide information on national transition pathways. Financial system policymakers can shed more light on finance exposed to activities that support or undermine climate goals and, where consistent with their mandates, consider the impacts of existing policies on climate goals.

The evidence base is improving but remains incomplete. Differences in methodologies and data gaps increase greenwashing risks. Strengthening transparent and robust analysis of progress towards aligning finance with climate goals is therefore critical to inform effective decision- and policy-making.

The second edition of the OECD Review on Aligning Finance with Climate Goals is scheduled for mid-2026. It will provide the latest trends, expanded data, and updated insights on financial flows and stocks as well as on climate-related financial sector policies and their effects, at the global level and for selected country case studies.