At S2G, we believe the climate megatrend is an opportunity to drive more sustainable growth in a volatile world. In our new report - The Climate Finance Relay Race - we explore how asset owners are approaching climate investing and opportunities for a more coordinated approach to funding a sustainable productivity leap for the 21st century.

For the past 10,000 years, one secular economic trend has endured wars, pandemics, mass migrations and revolutions - the human ability to make continued progress on natural resource productivity.

Humans have constantly transformed ‘useful energy’ into ‘useful materials’ to feed, power, and build economies and societies. From harnessing photosynthetic efficiency in early agrarian societies to the extraction and consumption of fossil fuels to power the industrial revolution, this has led to enormous wealth creation and enabled unprecedented population growth - especially in the last 100 years. The history of human survival and development, and our future prosperity, can only be understood in light of this most fundamental megatrend: ever-increasing productivity.

However, humankind’s scale of success means that the thermodynamic demands of our current economic system require 1.7 Earths of energy and materials. The pressures on our natural system are now showing up in a 21st Century characterized by unprecedented market volatility. Historic geopolitical shifts are also putting pressure on the economic formulas of the last 30 years. And most worryingly, without systems change, the alarming and inevitable environmental physics of climate change will impose crippling costs on business, economies and society. The productivity of our current system is unsustainable, putting future progress at risk.

The global community has begun to respond to this challenge and, if successful, we believe will herald new ways of transforming ‘useful energy’ into ‘useful materials’ - and deliver another major productivity leap for a complicated, ten-billion-person planet.

Like the other productivity revolutions in the past 150 years, technological innovation won’t be enough. Venture capital sprouted to finance the computing productivity revolution. The bond market grew six times to finance the expansion of railroads. The 30-year mortgage democratized and financed housing ownership.

We believe we need a ‘fit-for-purpose’ capital market system to fund a more sustainable productivity engine for the 21st-century. From our perspective, the most impactful and perhaps swiftest approach to designing a fit-for-purpose capital market system is partnership with asset owners.

Global asset owners (e.g., family offices, pensions, insurers, sovereign wealth funds), who represent over $250 trillion in wealth, hold significant market influence. Their allocation decisions determine which companies and sectors get financed, thereby influencing how our economies function. Many asset owners are already beginning to invest within the new climate paradigm, harvesting market-returns within existing asset classes and portfolios. We believe the asset owners that engage thoughtfully in this new productivity leap over the next decade have the potential to increase climate investment levels by orders of magnitude and to create wealth by building a more sustainable economic system.

Asset owners with the most experience in climate investments have recognized that we are at the early stages of designing a fit-for-purpose capital markets system and that the promised productivity leap will not happen without change. For instance, climate finance is currently significantly skewed toward early-stage or infrastructure-focused funds, with limited available capital at the growth stage.

The spectrum of asset owner involvement in climate finance - from family offices to pension plans to insurers - is also highly varied. The handoff of risk and reward across parties required to scale the climate transition - the Climate Finance ‘Relay Race’ - is stunted due to several market and asset owner barriers. These barriers include limited climate track record and performance, misaligned or unclear asset owner KPIs and incentive structures, and complex organizational structures.

Developing an enabling ecosystem that supports asset owners’ consideration of climate opportunities could enhance the coordination of this ‘Relay Race.’ This enabling ecosystem - including consultants, policymakers, convenors, and beyond - can help individual asset owners overcome institutional barriers to climate focus. Enablers can also connect asset owners across strategies to inspire fit-for-purpose capital solutions, the presence of which can allay historical performance reservations.

For those looking to explore further, we invite you to dive deeper by reading The Climate Finance Relay Race report. Additionally, tune into our latest S2G Podcast episode, where I’m joined by Régine Clément and Tom Rotherham-Winqvist to discuss the critical role of asset owners in scaling climate finance.