With billions on the move, Europe can become a go-to destination for climate-focused investment. If it can match its green ambition with high-growth opportunities.
Since the start of the year, roughly EUR 46 billion (USD 54 billion) in climate-themed capital has flowed to European companies, boosting the continent’s share of assets in global climate funds by 6.3 percentage points. The movement marks a homecoming of sorts: 60% of public climate funds are based in Europe yet a majority of their assets are invested elsewhere.
Geographic exposure in climate-themed funds
(seven years ended Aug. 31, 2025)
Source: MSCI ESG Research, data as of Aug. 31, 2025.
To be sure, some of the shift reflects a broader reallocation away from the U.S., with a plurality (45%) of investors in an informal poll by our firm indicating further geographic diversification in response to macroeconomic volatility. Still, the shift in climate investment to Europe has outpaced the broader reallocation by 5 percentage points.
With mature capital markets and innovative companies, Europe has an opportunity to become a destination, not just a supplier, for the next wave of climate capital flows. Capitalizing on the moment, however, will require policymakers to focus on three key areas.
Look to where investors are headed
The energy transition has evolved from a race to zero into a race for resilience and adaptation as climate-related physical risks intensify. Investors now face an unavoidable opportunity to finance a myriad of products and solutions that can help governments, businesses and consumers adapt to a warming world.
Europe, the fastest-warming continent, should be at the forefront of innovation to boost private-sector investment in adaptation. Policymakers should focus on creating incentives alongside national adaptation plans that give investors clear, sector-specific signals indicating where to place their bets on future high-return opportunities. The EU’s pledge with China to enhance adaptation efforts by accelerating action at scale marks a critical first step.[1]
Underpin ambition with enabling policy
While the energy transition remains a priority, investors are becoming more sophisticated, aiming to reduce greenhouse gas (GHG) emissions in the real economy while maximizing risk-adjusted returns. Investors are now armed with analytical tools such as MSCI’s Energy Transition Framework that help pinpoint where the opportunities in financing the transition lie.
Investors are increasingly aware that a company’s transition risk is not proportionally related to its GHG emissions. Hence, investors are assessing investment opportunities based on the combination of market, technology and policy pressures on companies to transition. That means they’re looking beyond emissions trajectories alone.
Policymakers play a critical role in creating transition pressure and fostering scalable innovations. Ambition in national climate targets is needed as well, as most EU countries exceed a 2°C-degree warming path, based on MSCI’s analysis of countries’ emissions trajectories relative to their fair-share carbon budget. But ambition translates to investment if it’s tied to sector-specific roadmaps that guide companies while enabling investors to better assess transition risks and opportunities.
Projected temperature alignment of EU countries
(Implied Temperature Rise in °C)
Source: MSCI ESG Research, data as of June 30, 2025. Listed companies represented by the MSCI ACWI Investable Market Index (IMI), which includes large-, mid- and small-cap companies across 23 developed and 24 emerging market countries.
Prioritize regulatory predictability
The EU has made bold strides on sustainable finance, but ongoing regulatory adjustments introduce uncertainty that can weigh on capital formation. The number of new Article 8 and 9 funds launched across the EU in the first three months of this year fell 37% from the prior quarter, the lowest total in more than a year.
Sustainable funds launched in the European Union (number of funds)
Source: MSCI ESG Research, data as of Aug. 31, 2025.
The wait for reviews and the need to catch up to evolving guidance on multiple pieces of proposed regulation has led fund managers, for example, to spend time relabeling existing financial products, with less time for developing innovative strategies. More than 260 Article 8 and 9 funds rebranded in the first quarter this year alone, part of a broader trend that has seen funds with EUR 660 billon (USD 806 billion) in AUM renamed in the past 15 months.
Regulatory ambition is important. But a clear and consistent set of rules, delivered with predictability, is critical for enabling innovation in investment products that attract capital flows.
Earning the confidence of markets will be Europe’s strongest lever for attracting climate-aligned capital. In a fragmented global landscape, Europe can stand out not only through climate ambition, but through regulatory clarity and a strategy that embraces private-sector investment as an essential component of competitiveness.
References
[1] “Joint EU-China press statement on climate,” European Commission, July 23, 2025.
