Creating positive momentum for climate-aligned investment

Multilateral institutions such as the G20 and the IMF (International Monetary Fund) are increasing pressure to phase out fossil subsidies, citing inefficiencies and climate misalignment. Meanwhile, carbon pricing mechanisms are expanding, through national ETS schemes, the EU’s CBAM (Carbon Border Adjustment Mechanism), and initiatives in China and Canada, but most still fall short of fully reflecting the social cost of carbon.On the private finance side, sustainable finance regulations such as the EU Taxonomy, SFDR (Sustainable Finance Disclosure Regulation), and new ISSB (International Sustainability Standards Board) standards aim to steer capital toward net-zero-aligned assets. However, inconsistent subsidy regimes and weak enforcement dilute their impact. Only few countries, including Sweden, New Zealand, and Germany, are taking early steps by replacing fossil subsidies with targeted social support for vulnerable households.

Trends and outlook

Momentum is building for fossil subsidy reform, but progress remains uneven due to political sensitivity and energy price volatility. Governments are under increasing pressure to shift from blanket energy price interventions to more targeted instruments that shield vulnerable groups without distorting climate signals. At the same time, investors and civil society are demanding greater financial consistency with net-zero commitments. Transparent reporting, subsidy tracking, and climate-aligned budgeting are likely to gain prominence. As regulatory frameworks evolve, both public and private actors will be expected to demonstrate that their financial flows actively support, rather than contradict, long-term climate objectives.

Governments and other policymakers

Governments should phase out fossil fuel subsidies and redirect fiscal resources toward clean energy, energy efficiency, and just transition programmes. Public finance must be aligned with net-zero objectives across all instruments, including taxation, procurement, export credit, and national budgets.To correct market distortions and fund the transition, carbon pricing mechanisms should be introduced or expanded, ensuring the polluter-pays principle and generating revenue for climate investments. As subsidies are reformed, targeted compensation schemes and direct social transfers will be essential to protect vulnerable households and industries from regressive effects, maintaining social acceptance and political feasibility.

Companies and industrial players

Companies should disclose their exposure to fossil-related subsidies and actively support transparent, long-term financial frameworks that enable low-carbon business models. Implementing internal carbon pricing and using scenario-based planning can help future-proof investment strategies against subsidy phase-outs and rising carbon costs.Firms must engage constructively in policy discussions on subsidy reform, focusing on transition support rather than defending short-term relief. This includes shifting lobbying and influence spending away from fossil lock-in and toward innovation, clean infrastructure, and climate-aligned finance. Such actions are increasingly seen as indicators of long-term credibility and resilience in low-carbon markets.

Investors

Investors should assess portfolio exposure to fossil fuel subsidies and engage with companies on reducing subsidy dependence and improving transition readiness. Capital allocation and stewardship strategies must align with policy reform agendas, including active support for fossil subsidy phase-out through advocacy and dialogue with governments.Transparency is key, investors should demand clear disclosure of public support exposure and corporate alignment with Paris Agreement goals. Redirecting capital toward low-carbon alternatives that are currently disadvantaged by distorted market signals is essential to accelerate the transition and ensure long-term portfolio resilience in a decarbonizing economy.