Professor Hisham Farag
Professor of Finance
Professor Farag 's work spans FinTech, corporate governance, and sustainable finance.
Driving climate finance
Understanding the role of responsible institutional investors
Why climate finance in essential to build a greener future
Ahead of COP30, Izzi Davies-Friend meets Professor Hisham Farag to unpack the critical role of finance in tackling climate change. They discuss how policy frameworks can unlock green investment and help institutions fund sustainable solutions.
In 2009, developed nations committed to mobilising $100 billion annually by 2020 to support climate action in developing countries. The Paris Agreement extended this target through 2025 and called for a higher finance target beyond that date. However, a 2024 UNFCCC analysis of Nationally Determined Contributions (NDCs) from 142 countries estimates that between $5.036 and $6.876 trillion in investment may be required to meet climate goals. Negotiations for a new post2025 finance goal began at COP26 in Glasgow (2021) and continued at COP27 in Sharm el-Sheikh (2022). At COP28 in Dubai, parties agreed to develop a draft negotiating text ahead of COP29 and to continue discussions through 2024 and 2025.
The IPCC has made clear that while sufficient global capital exists, significant barriers prevent its redirection toward climate action, especially in developing countries. Institutional investors play a crucial role in bridging this gap by mobilising private capital through green financial instruments. Financial systems and investors must align with global mitigation and adaptation objectives if we are to meet climate goals. Yet adaptation financing, especially from private sources, remains critically underfunded. Perceived risks, and uncertain returns make such investments less attractive.
Understanding what motivates institutional investors’ is crucial to unlocking the capital needed to close the climate funding gap and support more equitable, resilient outcomes. The University of Birmingham research explores what drives institutional investors globally to invest in green financial instruments and whether responsible investors can strengthen firms’ Environmental, Social, and Governance (ESG) performance.
Policy Recommendations
UK national
- The UK Government should design innovative incentive packages to encourage institutional investors to direct private capital towards adaptation-focused projects.
- Regulatory bodies should accelerate efforts to harmonise sustainability-related disclosures and align the UK’s proposed green taxonomy with the implementation of IFRS S1 (General requirements for disclosing sustainability related financial information) and IFRS S2 (Climate-related disclosures) as set by the International Sustainability Standards Board.
- The UK regulator should foster financial market innovation by promoting the development of climate-related financial instruments tailored to local sustainability priorities.
- Government and financial regulators should work together to establish a regulatory framework for innovative financial instruments and invest in the technological infrastructure needed to scale climate-related finance.
- Regulators should strengthen efforts to link executive compensation with measurable ESG performance to drive accountability and long-term impact.
- Facilitate knowledge exchange between institutional investors, local governments, and stakeholders to expand funding for renewable energy, resilient infrastructure, and energy efficiency initiatives.
International
- COP30 should consider establishing an International Research, Development, and Innovation (RD&I) fund to advance the development and deployment of technologies that address climate-related externalities in lower-income nations. The fund would facilitate technology exchange and promote international cooperation to accelerate the global adoption of climate solutions.
- Policymakers should take further steps to harmonise sustainability-related regulations and standards, establish clearer global taxonomies, and strengthen mechanisms for data sharing and cross-border collaboration. These actions will support more robust research and enable informed, evidence-based decision-making.
- Develop a more effective mechanism for international communication and collaboration among institutional investors as part of a global engagement strategy. This should include structured cooperation between major financial institutions, both bilateral and multilateral, to address climate-related risks and investment challenges.
- Governments should reduce financing barriers for scaling climate investments by aligning public finance strategies to lower regulatory hurdles, reduce financing costs, and de-risk investments. Improving the risk-return profile of investments will help mobilise greater private sector participation.
- Enhance international cooperation in access to finance, technology, and capacity building to accelerate mitigation and adaptation efforts, boost climate action, and support the effective implementation of NDCs.
- Encourage international dialogue on restructuring future COP meetings and advocate for global regulatory frameworks that empower shareholders climate activism and corporate accountability
These recommendations are based on research led by experts at the University of Birmingham including:
Professor Yuli Shan
Professor in Sustainable Transitions
Dr Shan researches how human activity drives climate change and explores low-carbon pathways to a net-zero future.
Dr Xiaofei Xing
Lecturer (Assistant Professor) in Finance
Dr Xing specialises in corporate and behavioural finance, with a focus on mergers and acquisitions.