Climate finance
COP29, widely known as the “finance COP,” opened with a consensus related to carbon markets and the announcement that new international carbon market standards are being finalized by the United Nations Framework Convention on Climate Change (UNFCCC). These are aimed at increasing transparency and improving the efficiency of voluntary carbon trading systems worldwide.
Insights from our events
On November 14, McKinsey convened experts from across industries and sectors to discuss the status of the climate finance and investing space. Discussion focused on the following themes, among others:
Capital allocation and pricing are critical levers to enable both climate mitigation and climate adaptation.
- Experts agreed that capital availability is not itself a constraint; in fact, in some markets, panelists suggested, there is excess capital on the sidelines, waiting for investable opportunities.
- Investors across the capital stack are looking for opportunities with risk-adjusted returns and durations that match the needs of asset owners.
- Investors are seeing a maturing of the market with respect to providing these opportunities, with signs that offtake agreements, business models, and growth plans are becoming more robust and less speculative in a less frothy market environment.
- “First of a kind” (FOAK) projects remain a significant challenge for private investors. Private investors do not expect to be able to fund capital-intensive FOAK projects, and execution will require government financing in many situations.
- While subsidies can help derisk climate investing opportunities, investors also look with some skepticism at projects or companies that can show viable economics only with subsidies in place.
Voluntary carbon markets could help close a portion of the climate financing gap—but they would need significant growth compared with today.
- Experts underscored that greater transparency and globally consistent regulation could help create the right conditions to build trust and participation in voluntary carbon markets. The new UNFCCC standards may support progress on that front.
- Regulated depositories could play a significant role in scaling the markets, as they do in other securities markets, but they would need clarity on issues such as which credits can be counted as collateral, the role of insurance in providing capital relief, and transparency on the quality of credits.
- Panelists discussed the benefits of a minimum standard of quality, supported by a clear auditing process, as a promising approach.
- It remains unclear what the level of demand will be at the price of higher-quality, better-regulated credits, and whether that demand will be more diversified that it has been to date.
The financial sector is driving action to support the transition; long-term success will require close collaboration among finance, the real economy, and the public sector.
- Long-term success in financing decarbonization and energy security requires close alignment among sources of capital. Limited public capital needs to be deployed efficiently to close the most actionable gaps in private capital appetite.
- To some extent, new mechanisms and financing structures can help—for example, in matching durations of projects with investments—but much of the investment landscape relies on the underlying fundamental financial health of projects and companies and their ability to provide financial returns, which cannot be fundamentally altered through creative mechanisms.
- Leaders recognize that our ability to measure decarbonization impact will continue to mature, with better data and analytics available every year.
Adaptation
On November 15, McKinsey hosted a full day of sessions at COP29 that brought together a diverse group of experts—from the chief resilience officer of a large city in West Africa to the chief strategy officer of a major institutional bank—to explore actionable strategies for adapting to the accelerating impacts of climate change. As average temperatures rise, so do the frequency and severity of both acute climate hazards, such as heat waves and floods, and chronic climate hazards, such as drought and rising sea levels. Progress has been made, but more efforts are needed to bridge gaps in resilience to today’s climate events and prepare for a future changing climate. The conversation focused on identifying the most critical areas for investment, aligning stakeholders on shared goals, and driving the scale of action required to protect communities, economies, and ecosystems.
Insights from our events
Managing the impacts of both today’s climate conditions and a future changing climate is critical—both for communities and for businesses.
- Adaptation and resilience are critical to manage climate risks, including extreme weather, floods, and drought, along with indirect exposures such as disruptions to supply chains and vulnerabilities in infrastructure. Today, many parts of the world have a resilience deficit, and a changing climate is increasing the frequency and intensity of climate conditions across the world.
- One panelist underscored that adaptation and resilience are not stand-alone actions but rather lenses through which every sector must be viewed. Whether in infrastructure, healthcare, agriculture, or asset management, climate change will affect each industry differently.
The adaptation tool kit is broad and includes both technological and behavioral solutions.
- Adaptation isn’t just about technology—it also involves a range of behavioral changes. One expert discussed an example from farming: in response to changing climate conditions, farmers may need to adjust their planting seasons, select more climate-resilient crops, or adopt new irrigation practices to cope with water scarcity. One panelist shared that their company created a tool for flood forecasting that now covers 100 countries, predicting riverine floods up to seven days in advance, and that the company provides critical data for commercial risk assessments and financial institutions.
- Businesses can adopt similar behavioral shifts. For instance, shifting operating hours to avoid extreme heat or adverse weather, building up inventory levels to buffer against supply chain disruptions, and carefully choosing where to establish new facilities to minimize exposure to climate-related risks (such as flooding or drought) are all strategic moves.
- One panelist described how they used a parametric insurance product to provide financial relief through immediate cash payouts triggered by extreme temperature thresholds such as heat waves, benefiting vulnerable populations—for example, women working outdoors in India. This support allows recipients to cover essential needs like food, debt repayment, or equipment, and represents an innovative way to address the growing need for adaptation.
- Additionally, climate conditions may compel companies to rethink the locations of their operations, avoiding high-risk areas prone to natural disasters or relocating warehouses closer to suppliers to ensure business continuity during extreme weather events.
Leaders will need to apply a climate-risk-management mindset to their full business strategy.
- To manage climate risks effectively, leaders should assess both direct exposure, such as extreme weather, and indirect exposure, such as supply chain disruptions and community impacts.
- Given that multiple future climate scenarios are possible, it’s critical to anticipate how physical risks will evolve over time under different conditions and create appropriate adaptation plans. One panelist urged executives to determine their own risk preferences—what risks they are willing to accept, and where they want to invest to reduce risks.
- But this isn’t a one-and-done exercise. It will be important to monitor the impact of plans periodically and adjust as needed.
- A common theme of the discussion was integrating adaptation considerations into long-term decisions (for example, where to locate facilities or how to effectively design new buildings).
Scaling up adaptation finance is critical—and can present new investment opportunities.
- Current approaches to climate adaptation finance are already playing an important role but fall short of estimated needs.
- Filling the gap presents opportunities for investors through both public and private markets. Panelists described how investing in companies that provide adaptation solutions (for example, weather data providers, companies that produce permeable-concrete products, or companies that can support precision agriculture) offer opportunities to both gain financial returns and support adaptation.
- A panelist emphasized that blended finance can be a powerful tool to accelerate adaptation investment because it combines public and private capital to derisk investments, attract more private sector funding, and scale solutions in underserved regions.
- Availability of better data on climate risks and their impacts was described as a critical unlock. It can help identify areas that need financing, create the right incentives and imperative for communities and companies to spend on adaptation, and support the provision of insurance. For banks, it can also be incorporated into underwriting decisions, portfolio optimization, and credit allocation.
- The role of taxonomies in defining what constitutes adaptation was also highlighted as an unlock to drive financial flows.
Beyond why to how: Three questions for leaders
- How do the carbon market announcements affect my investment portfolio and criteria?
- How can my organization help unlock and access the new sources of capital (including both public and blended finance) for both mitigation and adaptation?
- How do I incorporate adaptation in my organization’s business decisions (including strategic planning, capital allocation, and operations)?
McKinsey at COP29: Looking ahead
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