From an investment perspective, policy shapes the decisions made by investors and by companies on where they allocate and where they do not allocate capital. Public policy also shapes the terms on which capital is allocated, including factors such as the cost of capital, the risk premia that are applied, the security or collateral that is needed, the duration of the investment, and the target returns.

Private capital is recognised by governments as having a critical role to play if we are to successfully transition to a low carbon economy and respond effectively to unavoidable physical climate change. It has therefore been a focus of international, regional and domestic monetary and fiscal policy and this has catalysed significant growth in climate finance flows over the past decade.

Perhaps the most striking feature of the policy landscape has been that the level of ambition has grown dramatically in recent years. The US Inflation Reduction Act – with its ambition to integrate climate objectives into industrial policy and to manage energy security in the United States – is perhaps the most high-profile example of this trend.

This analysis of how investors are responding to this new generation of policy interventions suggests that good climate policy frameworks, i.e. policy that enables and accelerates the investment needed to meet the goals of the Paris Agreement, is underpinned by eight key features:

1. Clear commitments to action
2. Clear short-, medium- and long-term targets
3. Comprehensive and at scale
4. Sector-specific policies
5. Provide the right incentives
6. Just transition
7. Transparency
8. Transition planning