{"id":27174,"date":"2025-09-18T10:46:42","date_gmt":"2025-09-18T15:46:42","guid":{"rendered":"https:\/\/blogs.law.columbia.edu\/climatechange\/?p=27174"},"modified":"2025-09-18T10:46:42","modified_gmt":"2025-09-18T15:46:42","slug":"how-banks-can-lead-the-transition-financing-climate-solutions","status":"publish","type":"post","link":"https:\/\/blogs.law.columbia.edu\/climatechange\/2025\/09\/18\/how-banks-can-lead-the-transition-financing-climate-solutions\/","title":{"rendered":"How Banks Can Lead the Transition Financing Climate Solutions"},"content":{"rendered":"
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This blog is the third in a three-part series<\/a> on sustainable finance metrics that better evaluate corporate climate risk, opportunity, and impact, and make metrics more relevant to financial decision-making. The first two blogs analyze the value of<\/span><\/i> CapEx<\/span><\/i><\/a> and<\/span><\/i> energy transition ratios<\/span><\/i><\/a> as key transition metrics.<\/span><\/i><\/p>\n

At the heart of it, financing brings the future into the present. When a lender or investor provides financial capital now for revenue generated later, it allows the creation of something that would not yet be able to happen otherwise. This is why financing is so powerful. Nowhere is this more true than in the deployment of climate solutions: it takes finance\u2019s greatest power \u2014 drawing the future nearer \u2014 and uses it to hasten the creation of a net-zero economy.<\/span><\/p>\n

In this third installment of a blog series on sustainable finance metrics, I focus on the value of climate solutions investing and the special role that banks have in doing it. This post draws on a recent paper I co-authored with Dean Granoff and Elina Rolfe for the Global Impact Investing Network (GIIN), titled<\/span> Climate Solutions Investing in Review: An Analysis of Key Issues and Recommendations for an Investment Framework<\/span><\/i><\/a>. While that paper was developed to inform GIIN\u2019s eventual<\/span> framework for asset owners<\/span><\/a>, the analysis has significant implications for banking as well. This blog summarizes some of the key elements of that framework, and applies them to the context of banking. Throughout, for simplicity\u2019s sake, I use the terms \u201cinvestment\u201d and \u201cfinancing\u201d in their broadest sense, comprising all different means for allocating financial capital.<\/span><\/p>\n

Banks are particularly important because they are often in the business of allocating new capital. Whereas much of sustainable finance has centered on the role of institutional investors managing already-allocated capital associated with the greenhouse gas (GHG) emissions of already-issued securities \u2014 through portfolio decarbonization, stewardship, or risk-weighting \u2014 banks often operate at the point of capital creation. They lend and underwrite, and, critically, they do so in ways that shape the real economy before emissions ever materialize. In this way, they directly influence where the material economy is poured, not polished. It is through the primary market \u2013 and particularly the power it has pre-investment \u2013 that finance becomes a central actor in creating a net-zero economy.<\/span><\/p>\n

Why is climate solutions financing important?<\/b><\/h2>\n

Creating the net-zero economy \u2013 whether by mid-century or otherwise \u2013 is a necessity. This is an important starting point that frames what sustainable finance should achieve. Reaching net zero requires replacing most high-carbon goods, services, and infrastructure with low- or zero-carbon substitutes. This process occurs when new capital is directed toward developing, deploying, and enabling those substitutes at scale. In other words, transition finance only becomes <\/span>transformative<\/span><\/i> of the real economy when it provides capital that enables businesses to deploy climate solutions to substitute for the high-carbon economy. Without climate solutions investment, sustainable finance would imply that many economic demands should simply go unaddressed. Where climate solutions address economic demands, on the other hand, they generate corporate income and create opportunities for investors and companies to further allocate capital toward climate solutions and recognize a return.<\/span><\/p>\n

Climate solutions investing is thereby the most direct sustainable finance mechanism by which to create the net-zero economy. The Glasgow Financial Alliance for Net Zero (GFANZ) offered a useful taxonomy of transition finance strategies that helps contextualize the special role of financing climate solutions. GFANZ defines \u201ctransition finance\u201d as enabling four things:<\/span><\/p>\n

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  1. \u00a0 \u00a0 <\/span>managed phaseout <\/b>of high-emitting assets;<\/span><\/li>\n
  2. \u00a0 \u00a0 <\/span>alignment of companies <\/b>and their business models with net zero;<\/span><\/li>\n
  3. \u00a0 \u00a0 <\/span>already-aligned companies <\/b>to deliver on their commitments and plans; and<\/span><\/li>\n
  4. \u00a0 \u00a0 <\/span>climate solutions <\/b>and their creation, deployment, and scaling.<\/span><\/li>\n<\/ol>\n

    Each of these plays a role, but finance is not equally powerful in each case. Of all these strategies, climate solutions investing is unique in its ability to align the return-seeking function of investment with a company\u2019s central function of generating revenue. Whatever a company\u2019s business, the core of it is to generate revenue by creating value for its consumers through the sale of its products, which are necessary to generate returns and growth for its investors.<\/span><\/p>\n

    In contrast, the first three categories often focus on financial institutions managing financial assets \u2013 and associated emissions \u2013 from companies to which they are already exposed. This often means they are exerting influence only at the margins \u2014 tweaking portfolio weights, cajoling management, or divesting. Financial institutions’ efforts are sometimes even in tension with the core revenue-generating business of the investee, so they must create value by managing risks that are often dispersed and challenging to internalize. In contrast, climate solution investing is explicitly centered on allocating capital to <\/span>create <\/span><\/i>an economy of goods and services delivered with net-zero emissions.<\/span><\/p>\n

    That is why in our paper we argue that climate solutions investing should be seen not merely as a fourth category of transition finance, but the most important one, where financial institutions have their greatest influence. Of all the ways investors may shape the real economy to achieve net zero, they may be at their greatest influence when providing new capital to companies to produce climate solutions.<\/span><\/p>\n

    That makes climate solutions investing uniquely capable of driving real-economy transformation.<\/span><\/p>\n

    What is climate solution financing?<\/b><\/h1>\n

    To understand climate solution financing, it is helpful to start by defining terms. In our paper, we define\u00a0 \u201cclimate solutions technology\u201d as a product or process that does one of three things: (1) <\/span>substitutes<\/span><\/i> GHG-emitting technologies, (2) <\/span>enables<\/span><\/i> that substitution, or (3) removes GHGs from the atmosphere. The ability to solve a climate problem depends in part on the nature of the technology, and in part on the nature of the market context in which it is being deployed.<\/span><\/p>\n

    A \u201cclimate solutions <\/span>investment<\/span><\/i>\u201d is a financing activity that enables the deployment of climate solutions technologies. This distinction is key since investing entails inherent uncertainty about the relationship between the financial activity and outcomes in the real economy. Navigating that uncertainty is crucial for financing to enable the development, deployment, and scaling of climate solutions technologies.<\/span><\/p>\n

    First, the nature of the financing can introduce uncertainty.\u00a0 A purchase of secondary equity in a company with a clean energy business unit does not directly enable any new deployment \u2014 it just shifts ownership. A loan to that same company for the purpose of building new production capacity would. The investor\u2019s position in the capital stack, the type of asset or company being financed, and the financial instrument used \u2014 all affect the financial activity\u2019s real-economy relevance to the deployment of climate solutions technologies. Said differently, climate solutions investment is not only about what is being financed, but how and through what financial relationship.<\/span><\/p>\n

    It\u2019s also essential to consider the nature of the financed entity. At its core, financing climate solution technology is about financing that enables a low-carbon product to scale and capture market share. This is typically achieved by supporting a company to bring that product to market. Sometimes, though, it also means financing consumers of the technology to acquire and deploy it.<\/span><\/p>\n

    The details of the financed entity matters, since financiers never actually finance climate solutions technologies directly: financing of climate solutions technologies is intermediated by a company (even project financing relies on a special-purpose company). In our paper, therefore, we encourage investors to consider the nature of the company receiving financing, distinguishing between:<\/span><\/p>\n