Sustainability Newsletter – August 2025

Investing in a changing world, a new report by the CPP Investments Insights Institute, examines how public funds are adapting to the growing threat of climate-related physical risks, such as wildfires, floods, and storms. While investors previously focused on transition risks driven by climate policy and decarbonization, physical climate risks are becoming more frequent and severe. In 2024 alone, global losses from climate events exceeded $400 billion, illustrating significant vulnerabilities.

Quick recap: According to the report, climate-related physical risks are divided into chronic (gradual changes like rising sea levels) and acute (sudden events like hurricanes). These risks are inevitable and expected to impact asset values regardless of policy progress. Public funds are responding by employing a combination of macroeconomic scenario analyses and detailed asset-level evaluations, using various models. However, the report finds that many models often underestimate the true scale and financial impact of these risks, partly due to limited and inconsistent data. Key barriers include data gaps, model uncertainty, and a mismatch between the long-term nature of climate-related physical risks and shorter investment cycles. Adaptation measures and standardized metrics are also underdeveloped, making it difficult to fully integrate climate-related physical risk into investment decisions. To address these challenges, public funds are adopting advanced analytics, catastrophe modeling, and collaborating with industry bodies and data providers. They are also engaging directly with investee companies to encourage adaptation and resilience measures, viewing these as opportunities for value creation. Ultimately, integrating climate-related physical climate risks into investment strategies is becoming essential.

Why is this interesting? Physical climate risks are not limited to individual assets but can become systemic, impacting critical infrastructure, value chains, and asset prices. A pioneering new tool helping investors to identify, assess, and manage physical climate risks in their portfolios was recently launched by The Institutional Investors Group on Climate Change (IIGCC). The Climate Resilience Investment Framework 1.0 (CRIF 1.0) offers investor-focused guidance on integrating the Physical Climate Risk Assessment Methodology (PCRAM) to support risk identification, materiality assessment, adaptation planning, and decision-making. CRIF 1.0 is designed for asset owners, managers, and advisors and can be tailored for diverse mandates, risk appetites, and governance structures. Initially focused on infrastructure and real estate, it will expand to other asset classes.

The International Court of Justice (ICJ) issued a landmark advisory opinion in July, declaring that nations must address climate change by urgently co-operating to curb greenhouse gas emissions. The ruling, which is focused on sate obligations, ushers in the potential for increased climate accountability that could lead to more stringent regulation and litigation risk.

Quick recap: The ICJ has ruled that states have an obligation to act diligently and co-operate internationally to curb emissions under commitments made to environmental treaties, including the Paris Agreement, Kunming-Montreal Global Biodiversity Framework, Kyoto Protocol and many others. The ruling effectively asserts a ‘pay now or pay later’ approach, as failure to meet climate obligations would constitute a breach of international law increasing the potential for climate litigation risks and/or financial reparations. In its ruling, the ICJ emphasized that climate change poses an “existential threat”, affirming that the right to a clean, healthy, and sustainable environment is fundamental to the enjoyment of human rights. The case was initiated by the Pacific island of Vanuatu in 2021 and formally brought to the ICJ by a UN General Assembly resolution in 2023. It became the largest case in the ICJ’s history, with participation from 97 countries. While the ICJ’s advisory opinions are not legally binding, they carry legal and moral authority and help to shape international law. The ICJ’s opinion comes amid growing climate litigation worldwide, with nearly 3,000 cases filed across 60 countries, according to June figures from London’s Grantham Research Institute on Climate Change and the Environment.

Why is this interesting? The ruling could raise the potential for governments who have made binding climate commitments to regulate private actors more stringently or face legal challenges for failing to do so. So where do countries stand on their climate obligations? One measure was recently published by The World Economic Forum in Fostering Effective Energy Transition 2025. The report assesses 118 countries using the Energy Transition Index (ETI), a framework based on three system performance dimensions – security (stability and resiliency of energy supply), equity (access to energy) and sustainability (environmental performance of energy systems) – and five enabling dimensions of transition readiness (such as regulation, infrastructure, human capital, innovation, and finance and investment). While 65% of countries improved their ETI scores in 2025, only 28% advanced in all three performance areas. In terms of their ‘transition readiness’, growth slowed to 0.8% year-on-year, significantly below its 10-year average.

CDR.fyi published its Q2 2025 Durable CDR Market Update, noting a historic milestone for the durable CDR market, with 15.48 million tonnes of CO2 contracted (which refers to the total volume of carbon removal that buyers have committed to purchase through formal agreements with suppliers) – and surpassing all previous quarters combined. Also notable, Canadian startups led the investments charts in the quarter.

Quick recap: According to CDR.fyi, Q2 2025 saw record volumes of CO2 contracted. Microsoft was the dominant buyer of durable CDR, accounting for 93.8% of the quarter’s volume through five megatonne-scale offtake agreements totaling 14.5 million tonnes. Notably, Microsoft’s deals included two record-setting contracts: 3.68 million tonnes with Canadian-based CO280 and 6.75 million tonnes with U.S.-based AtmosClear. This brings Microsoft’s cumulative contracted volume to nearly 25 million tonnes, representing 79.5% of the total market since December 2020. Excluding Microsoft, other purchasers contracted 902,000 tonnes of CO2— second only to the record-high of 1.43 million tonnes in Q4 2024. Four of the top ten purchasers were newcomers, signaling growing market participation. Bioenergy with Carbon Capture and Sequestration (BECCS), comprised 90% of contracted volumes, largely due to its high technology readiness in comparison to other CDR methods today. In Q2 2025, CDR.fyi found that eight CDR companies raised US$122 million, down from US$137 million last quarter. However, Canadian startups led the investments charts this quarter, with Exterra, Carbon Upcycling, and SkyRenu raising over US$32 million.

Why is this interesting? The bulk of demand for durable CDR currently comes from the voluntary carbon market, supported by early adopters like Microsoft. However, some corporations will soon be able to buy carbon removal credits in a regulated market. The UK recently committed to legislating the integration of CDR, such as direct air capture and enhanced rock weathering, into its domestic emissions trading system (ETS) by 2028. This means UK companies would, for the first time, have a predictable, price-driven demand signal for removing carbon from the atmosphere, and could help the CDR sector shift from tech demonstrations to projects that institutional investors, insurers, and utilities can underwrite.

The Energy Transitions Commission (ETC) recently published Global trade in the energy transition: Principles for clean energy supply chains & carbon pricing. The report highlights a pivotal distinction in the global energy transition, between the sectors where clean technologies have reached or are nearing cost parity with fossil fuel alternatives, and the sectors where a “green cost premium” persists.

Quick recap: According to the report, sectors at or near cost parity—such as solar PV, onshore wind, batteries, and electric vehicles—have experienced dramatic cost reductions over the past decade. For example, solar PV module prices have dropped by 94% since 2011, average lithium-ion battery costs have decreased by 92% since 2010, and 60% of electric vehicles sold in China in 2023 were cheaper than their internal combustion engine (ICE) counterparts. This has enabled mass, cost-effective deployment, making rapid decarbonization feasible. However, the report warns that many sectors still face persistent green premiums—notably heavy industry (steel, cement, chemicals) and long-distance transport (aviation, shipping). While decarbonization technologies for harder-to-abate sectors can be technically viable, they remain more expensive than fossil-based alternatives. Since new technology applications in these sectors face a green premium, the report makes the case for policy tools, such as carbon pricing or equivalent regulation, to support competitive low-carbon options and prevent “carbon leakage” (referring to industry relocation to a region with weaker climate policies). An example is the EU’s Carbon Border Adjustment Mechanism (CBAM) which puts a carbon price on certain imports equivalent to the carbon price of domestic production.

Why is this interesting? While a green premium still exists for some, sectors with clean tech at, or near, cost parity are showing they can drive rapid, affordable emissions reductions if supply chain risks are managed. Take China, a dominant force in global clean energy manufacturing, accounting for an estimated 70% of total production across six clean technologies – including 80% of the world’s battery cells and solar PV modules, 65% of wind nacelles, and two-thirds of all electric vehicles. According to the Energy Transitions Commission, factors enabling China’s dominance include economies of scale, supportive policies, access to financing, development of a fully integrated supplier ecosystem, and guaranteed local demand, which have helped them become more cost-competitive than other countries across all major clean energy technologies.

The volume of sustainable finance debt in Q2 2025 stood at $357.4 billion, compared to $323.2 billion in Q2 2024.

Below is a breakdown of volumes by product type.

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