Making national climate action investable: why and how?

Despite the growing backlash against environmental, social and governance (ESG) investing and mounting geopolitical turbulence, it would be short-sighted for investors to disregard the evolving climate policy landscape. This year, countries adhering to the Paris Agreement must submit updated Nationally Determined Contributions (NDCs), setting emissions reduction targets for 2035. The slow pace of these submissions is, in itself, an indicator of the uncertainty investors face in assessing the trajectory of the climate transition.

NDCs provide crucial insights into the direction and ambition of sovereign climate action. These pledges not only shape environmental policy but also influence broader public policy domains, including fiscal measures, subsidy frameworks, and public investment priorities. Therefore, they have implications for investors too. 

For sovereign bondholders, how a government intends to fund climate action may affect a country’s fiscal sustainability path. Evidence is also emerging that failure to adapt to climate change may negatively impact countries’ borrowing costs. At the same time, for investors in corporate financial instruments, governments’ industrial transition policies matter as they shape the business environment in which companies operate. 

Some climate-focused investors have started to call for NDCs to be ‘investable’. Importantly, because climate risks are becoming more apparent and quantifiable, climate action is also beginning to form part of investor engagement with sovereigns. 

Such engagement is conducted differently than with corporates as it involves a dialogue with policymakers at various government levels (e.g. debt management offices, ministries, regulators and central banks). When done effectively, investors have the opportunity to share their investment analysis and advocate for actions that can reduce climate risk. 

However, while investor–sovereign engagement is not new, attention to climate policy within these discussions remains limited and many investors are still unsure how to engage effectively on this topic. 

To bring greater consistency to this dialogue, the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) project, curated by the TPI Global Climate Transition Centre (TPI Centre) at the London School of Economics and Political Science, offers a transparent, comparable framework for evaluating governments’ climate ambition, policy measures, and financing transparency. Complementing other tools, some of which focus on exposure to physical risks such as the ND-GAIN index, ASCOR was developed through an investor-led approach to support more structured and evidence-based discussions. 

Importantly, ASCOR is now actively used by collaborative sovereign engagement initiatives, such as the one supported by the Principles for Responsible Investment (PRI) which is building on an initial pilot project with the government of Australia. Similarly, ING and Robeco are in the process of forming a coalition of investors to engage with governments on climate action, informed by the ASCOR framework and insights.

Countries should not underestimate the significance that NDCs hold for investors. As part of strategic national transition planning, NDCs can mobilise the whole government towards a collective goal to guide policymaking, investment planning, communications and accountability. Encouragingly, practical guidance and best practice for climate-related economic analysis and modelling have been compiled by the Coalition of Finance Ministers for Climate Action. Countries can use these resources not only to learn from peer practices but also to improve transparency and clarity around how climate goals will be financed – a critical component of credible policy implementation.

Drawing on the ASCOR findings on emerging good practice, key learnings can help governments improve coordination towards the low-carbon transition:

 

NDCs are more credible if governments specify how they will be funded. One tool that countries have at their disposal to finance climate action and signal their commitment to the Paris Agreement is labelled debt such as green, social, sustainability or sustainability-linked (GSS+) bonds. The market for such bonds has grown in recent years and the public sector represents 34% of the cumulative US$6.6 trillion of issued GSS+ bonds. 

A national climate strategy that is funded through GSS+ bonds is not necessarily more credible than one financed through conventional bonds; however, these instruments have signalling power and other benefits. They are appealing to investors with green portfolio mandates, they may contribute to mitigating risks and, especially when linked to a strategic plan, they can make the country’s overall debt more attractive. 

Moreover, alignment with international targets and standards can enhance government accountability and transparency. Finally, local context is a key factor in understanding technical capacity and scalability. 

Lessons can be learned from governments that have issued labelled debt, such as the UK and its Green Financing Programme. This programme attracted investors who had not previously purchased UK sovereign debt and facilitated coordination across ministries. Ahead of the first issuance, an interdepartmental board chaired by HM Treasury advised on the design and implementation of the bond framework, the management of proceeds and post-issuance reporting on allocation, environmental impacts, as well as social co-benefits such as job creation, a distinctive feature of the UK’s green gilts. Finally, the UK Debt Management Office engaged with investors and other stakeholders and responded to their call for green gilts to be liquid instruments.

Other countries have also tapped into the GSS+ markets: since the inaugural issues of Poland and France almost ten years ago, Saudi Arabia has issued a green bond, while Uruguay, Chile, Thailand and, more recently, also Slovenia, have issued sustainability-linked bonds. The pace of sovereign issuance of GSS+ bonds may seem slow but that is not unusual: it also took several years before issuance reached critical mass in the corporate market.

Secular drivers, including energy security and price competitiveness, are likely to underpin the case for country climate action going forward, especially in countries that are dependent on fossil fuel imports. 

Admittedly, the immediate comparative benefits for countries taking such action are not clear-cut: the current geopolitical turbulence is raising competing funding challenges (e.g. with defence spending). Moreover, many countries have limited spending capacity, amid high debt burdens, aggravated by the measures taken during the pandemic. Finally, climate change is a global problem that requires country action in unison. Therefore, if efforts are uneven, some countries may be tempted to ‘free-ride’ those leading the charge.

Nevertheless, the costs of inaction are beginning to attract increased attention from credit rating agencies, as they can affect the likelihood of an entity repaying its debt. Of the 155 sovereigns assessed by Moody’s, 50 have been identified as being exposed to physical risk and 22 to transition risk. This analysis shows an annual climate investment gap of US$2.7 trillion by 2030, with global government spending having to increase by about 1.8% of GDP annually until 2030. This share differs widely by country. Nevertheless, all else being equal, credible NDCs may help cushion the near-term credit impact of higher climate-related spending and early investment. 

The next milestone past 2030 is crucial. New NDC targets for 2035 were due in February but only 64 countries had published one by the extended deadline in September, representing just over 18% of global emissions (this share excludes the United States which officially withdrew its NDC in January 2025). Coupled with earlier signs that support for the Paris Agreement may be faltering (notably, from the United States and Argentina), these cracks are concerning: they make company investment planning and decision-making more difficult in light of the recent erosion of policy predictability. A disorderly, more expensive low-carbon transition could threaten financial market stability. Although most countries missed both the original and extended deadlines for this year’s NDC updates – which we explore further in an upcoming commentary – COP30 presents an opportunity to refocus on Brazil’s Action Agenda. Without rapid and coordinated implementation of existing and new targets, investors will soon have to grapple with the cost of climate inaction which will have far-reaching effects on the real economy and the lives of people everywhere.  

The TPI Centre’s forthcoming State of the Sovereign Transition 2025 report will be published on 11 November 2025. It will shed more light on the climate progress made by 85 countries, representing 100% of major global government bond indices.