Paris Agreement

The Paris Agreement is an international climate treaty adopted on 12 December 2015 at the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC). Its central aim, set out in Article 2, is to hold the rise in global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C. Almost every country in the world is a party. It entered into force on 4 November 2016, once at least 55 parties accounting for at least 55% of global emissions had ratified it.

The agreement matters to finance as much as to diplomacy. Article 2 also commits parties to making finance flows consistent with low-emission, climate-resilient development, and many banks, pension funds and asset managers now describe their climate targets as "Paris-aligned". It sits behind initiatives such as Climate Action 100+, the Net-Zero Asset Owner Alliance (NZAOA) and disclosure frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD). To meet their pledges, governments can price emissions directly through a carbon tax or create tradable emission rights, an approach that draws on the reasoning of the Coase theorem.

Think of a group of neighbours who agree that the street is getting too hot and noisy. Nobody can force anyone else to change, so each household writes down its own promise, pins it to a shared noticeboard, and agrees to update it every few years with something more ambitious. Everyone can see what everyone else promised, and every so often the street holds a meeting to check whether the promises add up.

That is roughly how the Paris Agreement works. It sets a shared goal on temperature, but each country chooses its own plan for cutting emissions. The pressure to do more comes from transparency, regular review and peer pressure rather than from fines. Investors watch these national plans because they shape energy policy, carbon prices and which industries grow or shrink.

The treaty is built on a cycle of national pledges and collective review rather than binding emissions quotas.

• Nationally determined contributions (NDCs). Under Article 4, each party prepares and communicates an NDC setting out how it will cut emissions, and submits a new one every five years, each expected to be more ambitious than the last.
• Enhanced transparency framework. Article 13 requires parties to report on their emissions and progress so that pledges can be compared and tracked.
• Global stocktake. Article 14 provides for a collective assessment every five years. The first stocktake concluded at COP28 in Dubai in December 2023.
• Climate finance. Developed countries are expected to provide financial support to developing countries for mitigation and adaptation, building on earlier UNFCCC pledges.
• Cooperative approaches and carbon markets. Article 6 lets countries trade emission reductions and sets up a UN-supervised crediting mechanism, with detailed rules agreed at later COPs.

The targets themselves are not legally binding in the sense of penalties for missing them; what is binding is the obligation to prepare, communicate and report on NDCs.

US participation has changed several times. The United States joined in 2016. In June 2017 the Trump administration announced its intention to withdraw, and the exit took effect on 4 November 2020, the earliest date the treaty allowed. On 20 January 2021 the Biden administration began the process to rejoin, and the United States became a party again on 19 February 2021. On his first day back in office in January 2025, President Trump ordered a second withdrawal; the United Nations received the notice on 27 January 2025, and under Article 28 the withdrawal took effect one year later, on 27 January 2026. As of November 2026 the United States is not a party to the agreement, although many US states, cities and companies say they continue to pursue its goals.

For capital markets, the Paris Agreement works less as a rulebook and more as a reference point. Several practical uses stand out:

• Portfolio targets. Asset owners and managers set "Paris-aligned" or net-zero targets for their portfolios, usually measured as reductions in financed emissions or carbon intensity.
• Disclosure rules. Climate reporting standards, including IFRS S2 from the ISSB family that absorbed SASB and the TCFD framework, ask companies to describe how they would fare under scenarios consistent with the Paris goals.
• Labelled debt. Issuers of green bonds and sustainability-linked bonds often cite Paris-consistent targets to show that funded projects or performance targets are credible.
• Policy and transition risk. NDCs feed into carbon pricing, energy regulation and subsidies, which affect the valuation of utilities, carmakers and oil and gas producers. Analysts treat these as part of market risk and credit risk.

Corporate energy buyers also link their purchases of power purchase agreements and renewable energy certificates to Paris-consistent emissions goals, and the agreement's language on finance flows is often quoted in sustainable investing policies.

The agreement's flexibility is both its strength and its main weakness. Because NDCs are self-set and unenforceable, the sum of national pledges has repeatedly fallen short of what scientists estimate is needed to meet the 1.5°C or 2°C goals, a gap highlighted by the 2023 global stocktake. Developing countries have criticised the pace and scale of climate finance from richer nations. Others argue that the treaty's reliance on voluntary pledges leaves it exposed to political change, as the two US withdrawals show.

In finance, critics on one side say "Paris-aligned" labels are used loosely and can amount to greenwashing; critics on the other say that investors pursuing climate goals are straying from their duty to maximise returns. These debates shape how institutions approach ESG integration, investment stewardship and the Sustainable Development Goals (SDGs), of which climate action is Goal 13.

• UNFCCC: The Paris Agreement
• United Nations Treaty Collection: Paris Agreement status