Green finance in a changing climate: Adapting to an uncertain future

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This article is part of the series—Raisina Edit 2025

The global financial system is facing an unprecedented challenge: adapting to the economic, environmental, and social disruptions caused by climate change. With economic losses from climate-induced disasters exceeding US$320 billion in 2024 alone and the estimated global investment gap for achieving net-zero emissions by 2050 at US$4 trillion annually,  green finance has never been more critical. As climate risks intensify, green finance must evolve, incorporating new mechanisms, innovative instruments, and risk-mitigating strategies to ensure financial resilience and sustainability.

Climate change is no longer a distant externality but a central force shaping financial markets. A warming planet is straining infrastructure, reducing agricultural yields, exacerbating water stress, and escalating disaster-related losses. The World Bank estimates climate change could push 132 million people into poverty by 2030, disproportionately affecting vulnerable economies. At the same time, the transition to a low-carbon economy is creating financial shocks for carbon-intensive industries, with stranded assets in the fossil fuel sector projected to reach US$1.4 trillion by 2036. In response, financial markets must integrate climate risk assessments, rethink investment strategies, and shift capital flows toward climate-resilient assets.

A warming planet is straining infrastructure, reducing agricultural yields, exacerbating water stress, and escalating disaster-related losses.

Green finance has historically focused on Environmental, Social, and Governance (ESG) principles, driving investment toward cleaner energy, sustainable infrastructure, and responsible corporate practices. However, as climate risks become more immediate and severe, the financial sector is adapting in three key ways. Regulatory frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) are pushing financial institutions to enhance transparency on climate risks. Central banks, including the European Central Bank (ECB) and the Reserve Bank of India (RBI), are conducting climate stress tests to assess systemic vulnerabilities, ensuring financial institutions are prepared for climate-induced economic shocks.

Innovative financial instruments are also emerging to align capital with sustainability goals. Sustainability-linked bonds (SLBs), which tie financial returns to sustainability targets, saw market growth to US$100 billion between 2020 and 2021, reflecting a shift toward performance-based green finance. The voluntary carbon market surpassed US$2 billion in 2023, enabling businesses to offset emissions while funding carbon sequestration projects. Blended finance models, through public-private partnerships, are mitigating investment risks in climate-adaptation projects, especially in emerging markets. The Global Environment Facility (GEF) and Green Climate Fund (GCF) have mobilised billions to de-risk private investments in climate resilience.

Financial regulations are also evolving to reinforce the green transition. The European Union’s Taxonomy for Sustainable Activities sets clearer standards for green investments, reducing greenwashing risks and ensuring capital flows toward verifiable climate solutions. India’s recent issuance of sovereign green bonds, raising over US$2 billion in 2023, signals the increasing role of government-backed instruments in channeling climate finance. The United States Securities and Exchange Commission (SEC) is advancing mandatory climate risk disclosures, reinforcing investor confidence in green financial markets.

The European Union’s Taxonomy for Sustainable Activities sets clearer standards for green investments, reducing greenwashing risks and ensuring capital flows toward verifiable climate solutions.

Despite these advancements, green finance faces structural challenges in scaling up effectively. Limited access to climate finance in developing countries remains a significant barrier. While emerging economies require over US$1 trillion annually to meet their net-zero targets, international climate finance flows remain insufficient, with Africa receiving only 12 percent of its required adaptation finance. High perceived investment risks deter climate projects, particularly in adaptation, due to long payback periods and ambiguities in returns. The adaptation finance gap is projected to reach US$359 billion annually by 2030. Regulatory and market fragmentation also pose hurdles, as inconsistent definitions and varying regulatory approaches across countries hinder cross-border investment in climate finance. Investors are increasingly wary of greenwashing, where funds claim sustainability benefits without verifiable impact, highlighting the need for stronger third-party verification mechanisms.

To adapt to the challenges posed by climate change, green finance must undergo systemic shifts. Climate adaptation finance must be strengthened, as it receives only 7 percent of total climate finance despite mounting risks. Financial mechanisms such as resilience bonds, parametric insurance, and nature-based investment funds should be scaled to bridge this gap. The Asian Development Bank (ADB) recently committed US$9.8 billion in climate adaptation financing for Asia, signaling the growing need for institutional investment in climate resilience.

Public-private collaboration must also be enhanced. Governments must de-risk private investments through concessional financing, credit guarantees, and blended finance models. The Just Energy Transition Partnership (JETP) model, which mobilised US$8.5 billion for South Africa’s coal transition, demonstrates the potential of leveraging public and private capital for climate transitions in emerging economies.

Climate adaptation finance must be strengthened, as it receives only 7 percent of total climate finance despite mounting risks.

Technology and data innovation play a crucial role in climate finance. Artificial Intelligence (AI) and satellite data are revolutionising climate risk assessments, improving the accuracy of financial modelling for climate-exposed assets. Blockchain-based green finance instruments, such as tokenised carbon credits and decentralised green bonds, enhance transparency and efficiency in climate finance transactions.

Green finance must also integrate social equity considerations to ensure climate investments support marginalised communities, address job transitions, and foster inclusive growth. The European Investment Bank (EIB) has launched social impact bonds linking climate finance with job creation and social inclusion, setting a benchmark for equitable green finance models.

As climate change reshapes economies, green finance must become more adaptive, resilient, and inclusive. Financial institutions, regulators, and investors must move beyond incremental changes and embrace transformative approaches that integrate climate risk into core financial decision-making. The evolution of green finance—from ESG frameworks to climate-resilient investments—must accelerate to ensure that financial systems not only withstand climate shocks but also drive the global transition to a sustainable and just future.

The stakes are clear: green finance is no longer an optional frontier. It is the bedrock of economic resilience in a climate-altered world. The faster financial markets adapt, the better positioned societies will be to navigate the turbulence of an uncertain climate future.

Aparna Roy is a Fellow and Lead Climate Change and Energy at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation.

• Economics and Finance
• Climate Change
• India
• adaptation finance
• carbon markets
• climate disclosures
• climate risk
• financial resilience
• green finance
• investment strategies
• net-zero
• public-private partnerships
• regulatory frameworks
• sustainability

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