The Missing Link in Transition Finance: Why Capital Expenditure Matters More Than Climate Targets

Over the past decade, climate policy has evolved from a niche environmental agenda into a central pillar of economic policy. Across the world, governments are no longer asking only whether companies understand climate risks – they are increasingly asking how businesses intend to transform their operations and whether capital is actually flowing towards that transformation.

Despite today's geopolitical uncertainty, the global direction of travel remains remarkably consistent. Since 2020, the number of climate-related policy instruments across the G20 has tripled. While policy reversals at the US federal level and the ongoing recalibration of parts of Europe's sustainability framework have attracted considerable attention, they do not alter the broader global trend. Nearly three-quarters of the new climate policy instruments adopted since COP29 have originated outside Europe and North America, particularly across the Asia-Pacific region. The centre of gravity of climate policymaking is increasingly shifting south and east, reflecting the growing role of China and emerging economies in shaping the next phase of the transition.

As this policy landscape matures, three complementary instruments have emerged as the backbone of green and transition finance: climate-related disclosures, sustainable finance taxonomies and transition plans.

The first pillar – corporate sustainability disclosure – has advanced at extraordinary speed. Jurisdictions representing more than 60% of global GDP have adopted, are implementing or are aligning with the ISSB standards or equivalent frameworks such as ESRS in Europe. At the same time, an increasing number of jurisdictions are moving beyond financial materiality by incorporating an impact perspective into sustainability reporting. This recognises that understanding how climate change affects companies is only one side of the equation; understanding how companies affect the climate is equally important. While financial materiality remains inherently entity-specific – depending on a company's business model, strategy and time horizon – impact materiality provides a more consistent basis for comparable reporting by focusing on the significance of environmental impacts themselves. It also shifts the emphasis from managing climate-related financial risks towards identifying and preventing carbon lock-in, thereby supporting the real-economy transition rather than simply improving risk management. In this respect, the European Union pioneered the concept of double materiality, and China has recently embraced a similar approach, marking an important step towards more comprehensive and globally interoperable sustainability reporting.

The second pillar is the rapid emergence of sustainable finance taxonomies. Around 60 taxonomies are now operational or under development worldwide, covering approximately two-thirds of global GDP. While often viewed as technical classification systems, taxonomies perform a much broader function. They translate high-level climate ambitions into concrete economic activities, providing companies, investors and credit institutions with a common language for identifying which investments genuinely contribute to the transition.

The third pillar is transition planning. Governments are increasingly moving beyond disclosure alone by asking companies not only where they intend to go, but how they plan to get there. Across the G20, transition plan requirements are rapidly becoming part of corporate reporting expectations, reflecting a growing recognition that targets without implementation plans provide little assurance that the transition will actually occur.

Yet this remarkable expansion of climate policy has also revealed a credibility gap.

Today, most large listed companies publish climate targets, and many have committed to achieving net zero by 2050 or earlier. Yet the evidence suggests that far fewer have embedded those ambitions into corporate strategy, governance and investment decisions. Transition plans often describe long-term aspirations, but they do not always provide clear evidence of implementation. Targets may be revised over time – sometimes without a sufficiently transparent justification – and robust, independently verifiable reporting on progress remains uneven. In short, climate commitments are no longer the challenge; demonstrating credible delivery is.

Ultimately, there is one question that determines whether a transition plan is credible: where is the capital being invested?

Targets can be revised. Management teams change. Corporate strategies evolve. Capital expenditure – and, crucially, the investment plans underpinning it – leaves a tangible footprint. Together, they reveal what a company genuinely expects the future to look like and provide the clearest evidence of whether its transition strategy is being translated into action.

A business that announces ambitious decarbonisation objectives while continuing to invest heavily in carbon-intensive assets sends a very different signal from one that systematically redirects investment towards electrification, renewable energy, energy efficiency or low-carbon industrial processes. Capital allocation reflects priorities more clearly than corporate commitments ever can.

This is precisely why capital expenditure is becoming an increasingly important element of transition planning frameworks around the world. Many jurisdictions now require companies to disclose not only emissions targets but also how planned investments support those objectives, alongside information on exposure to fossil fuels and potential carbon lock-in.

This distinction matters because climate policy is ultimately about transforming the real economy rather than simply managing financial risks.

A stranded asset primarily represents a financial risk: an asset that loses economic value as markets, technologies or policies evolve. Carbon lock-in is different. It occurs when long-lived infrastructure continues generating emissions for decades despite low-carbon alternatives being available, making climate objectives progressively harder and more costly to achieve.

While stranded assets are largely a consequence of the transition, carbon lock-in is an obstacle to it. Managing stranded assets does not guarantee progress towards net zero; avoiding carbon lock-in does. This is why assessing whether capital expenditure avoids locking in future emissions – for example, by excluding investment in fossil-fuel activities – and is directed towards activities aligned with a 1.5°C pathway provides a far more credible measure of transition progress than emissions targets alone.

Europe offers perhaps the clearest example of this approach.

Alongside disclosures on companies' capital expenditure related to fossil-fuel activities – which provide valuable insight into potential carbon lock-in – the EU Taxonomy has established one of the world's most sophisticated frameworks for linking corporate reporting with investment decisions. Together, these complementary disclosures provide investors with a robust basis for assessing the credibility of companies' transition plans.

By requiring companies to disclose the share of their capital expenditure that is Taxonomy-aligned – and therefore aligned with the EU's environmental objectives, including climate neutrality by 2050 – the Taxonomy enables investors to assess not only a company's current transition performance, but also the credibility of its future transition strategy. In other words, it shows both where a company stands today and where its investment decisions are taking it.

The results are already becoming visible. Between 2021 and 2025, Taxonomy-aligned investment mobilised approximately €1 trillion in climate mitigation across Europe.

Much of this investment has naturally concentrated in renewable electricity generation and the electrification of energy and transport. Together, these sectors account for roughly two-thirds of the €1 trillion in Taxonomy-aligned investment, illustrating that Europe's electrification agenda is well underway. Today, almost half of the EU's electricity is generated from renewable energy sources, demonstrating how sustained investment is translating into measurable progress in the real economy.

The next challenge is considerably more difficult.

Hard-to-abate industry – including steel, cement, chemicals and other energy-intensive sectors – requires enormous amounts of capital to decarbonise while simultaneously facing increasing international competition and high energy costs. In contrast to the roughly 60% Taxonomy-aligned CapEx reported by electric utilities, these sectors average just 12–13%.

These industries face a climate transition Catch-22. They must invest heavily in breakthrough technologies – such as industrial electrification and green hydrogen – to remain competitive in a net-zero economy. Yet they often lack the financial capacity to undertake these investments while simultaneously facing high energy costs, international competition and tightening margins. These sectors require substantial support not to postpone their transition, but to enable it, as their future competitiveness depends on leading the development of green steel, low-carbon cement and other low-carbon industrial products and processes.

The Platform on Sustainable Finance, which I chair, was mandated by the European Commission not only to develop a methodology and conduct a first exercise of where capital is being invested, but also to analyse how that investment is being financed.

The response was clear: green debt financing is the principal driver of the transition in Europe. However, Europe faces a structural imbalance between green debt and equity. The challenge is therefore not only to identify credible transition investments, but also to finance them. Green debt has played a pivotal role in Europe's transition, particularly in the power sector. However, financing the next phase – industrial transformation – will require a broader mix of capital. The scale, duration and risk profile of investments in steel, cement and chemicals mean that debt alone is unlikely to be sufficient. Mobilising patient equity capital will be equally critical.

This is where Europe's capital markets become increasingly important.

The success of the Savings and Investment Union will depend not only on creating deeper and more integrated financial markets, but also on ensuring that private savings can be channelled efficiently towards productive transition investments. Green bonds and sustainable loans have expanded rapidly, but debt alone cannot finance the industrial transformation required to achieve climate neutrality. Stronger equity markets will be equally essential.

The broader lesson extends well beyond Europe.

As more countries develop taxonomies, implement sustainability disclosures and introduce transition plan requirements, attention should increasingly shift from whether companies publish climate commitments to whether financial systems can distinguish credible transition strategies from aspirational ones.

Capital expenditure provides that missing link.

It connects corporate strategy with financial markets. It transforms transition plans from narrative documents into measurable investment programmes. And it allows investors, regulators and policymakers to evaluate whether capital is flowing towards the activities needed to deliver net zero.

Climate policy has evolved remarkably over the past decade. Disclosure frameworks, taxonomies and transition plans are rapidly becoming global norms. The next stage is ensuring that these three pillars operate together to direct investment where it matters most.

Because, ultimately, the credibility of the transition will not be measured by the number of net-zero commitments companies announce. It will be measured by where they choose to invest and how successful those investments are.