The global climate transition has lost momentum. Emissions are still rising, climate finance is falling short of what’s needed and investors are losing confidence in the funds designed to support change. The political tailwinds have shifted – tempered by rising interest rates, a backlash against ESG and the resurgence of short-termism in capital markets.
This poses a problem for an investment industry expected to finance the transition. We have entered a phase of collective hesitation: companies are cautious, capital is constrained, and funds are being pulled from climate-aligned strategies in favour of safer, shorter-duration plays. But delay doesn’t equal stability. The real risk lies not in action but in inaction.
A recent study, published in Ecological Economics, models the macroeconomic and financial dynamics of energy transitions and puts this into stark relief. It shows that a delayed and disorderly transition to net zero is more than a missed opportunity. It is a pathway to inflation, financial instability and stagnation – and not somewhere far off in the future – but as a direct result of the transition being mishandled today. The study builds a detailed economic model to see how the energy transition might play out under different scenarios – whether we act early and plan properly or leave it too late. It shows how those choices affect growth, inflation, financial stress and ultimately, investment risk. Its findings are sobering. In the delayed scenario, economic and financial systems don’t adapt gradually. They buckle. Green investment arrives too late to offset declining fossil productivity. Stranded assets accumulate. Fossil firms default. Capital is destroyed faster than it can be replaced, and financial institutions are caught in the fallout.
The logic is straightforward. As fossil fuel energy becomes harder to access or less efficient to produce, its energy return on investment declines. That means we spend more energy (and capital) just to maintain supply, which in turn reduces productivity across the economy. Clean alternatives – while not always delivering higher returns at the outset – can scale, improve over time and offer more stable longer-term energy output. But if they’re not built early, the system has no buffer. By the time the transition becomes unavoidable, it hits in the form of inflation, volatility and contraction.
As things stand, capital markets are withdrawing from climate finance just as it’s most needed. Global outflows from climate-focused funds topped $30 billion last year, reports Morningstar. Some of the largest asset managers have stepped back from net zero alliances. Sustainable funds are under scrutiny – not just for greenwashing, but for underperformance too. Investors are, understandably, sceptical.
Yet the need for investment has never been more urgent. According to the IEA, global clean energy investment must rise to $4.5 trillion annually by the early 2030s to stay on track for net zero. That won’t happen without private capital, and private capital will not flow at scale without confidence in policy, returns and the credibility of the transition pathway. This is where the paper’s real contribution lies. It shifts the conversation away from the idea that climate risk is distant or external. Instead, it shows how financial risk emerges from within the system – when economies are slow to adapt, and investment misaligns with structural change. The risks are not just about the floods, fires or stranded oilfields. They are about credit losses, inflationary pressure and productivity decline.
This perspective matters for investors. Passive positioning – waiting for clearer signals, better policy or firmer commitments – is not a neutral stance. It’s an exposure to increasing macroeconomic fragility. A chaotic transition is not just bad for the climate, it’s bad for portfolios, especially those tied to debt, energy and real assets.
Investment in the transition must be early, targeted and ambitious – not just to avoid climate catastrophe, but to preserve economic resilience. The transition should not be framed as a drag on returns but as a shield against system-level shocks. While investors alone cannot fix a fragmented policy landscape or overcome geopolitical risk, capital markets can demand better disclosure, push for clearer standards and allocate with an eye to long-term resilience, not just short-term yield.
The transition will happen; the only question is how. The difference between a managed dec-line and an unmanaged crisis is measured in years, not decades. We are squandering them.
