The year 2025 presents an urgent call for financial institutions, investors and governments to navigate the growing economic risks of climate change. As extreme weather events and regulatory shifts reshape global markets, the financial sector faces unprecedented challenges and opportunities. Climate-related risks are increasingly destabilising financial markets. Extreme weather events, including hurricanes, wildfires and floods, are causing massive economic losses. Insurance companies are under strain as payouts surge, while banks and asset managers must reassess the risk exposure of their portfolios. Central banks worldwide are introducing stress tests to evaluate the resilience of financial institutions against climate risks.
Besides, the demand for green finance is accelerating as governments and corporations commit to net-zero targets. Green bonds, sustainable loans and ESG (Environmental, Social and Governance) investments are witnessing unprecedented growth. Investors are shifting capital towards renewable energy, electric mobility and climate-resilient infrastructure. Financial institutions are also aligning with global sustainability frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) to enhance transparency and accountability.
Criticism of COP29 climate financing agreement for developing countries
Conference Of the Parties (COP)29 ended with a pledge from developed nations to mobilise at least $300 billion annually in climate financing to support poorer countries with mitigation and adaptation.
However, this figure resulted in outrage in many developing countries which had sought over $1 trillion in assistance to fight the climate crisis. They called the amount “insultingly low” and said the financing pledge was too little, too late.
It is important to note that these countries bear the disproportionate impact of climate change compared to their counterparts. Indian negotiator Chandni Raina described the proposal as “abysmally poor and nothing more than an optical illusion,” stating it would not enable the necessary climate action for survival.
It’s clear that global warming and its cascading impact will shape the global socio-political-economic landscape for the foreseeable future, and the pressing need to solve this crisis is only going to increase exponentially with each passing year.
Solutions we can implement
When addressing the climate crisis, it is clear that finance is undoubtedly the lifeblood of most of the solutions. Nearly every strategy has climate finance as its focal point. While options such as green financing and orange bonds can be explored as a step in the right direction, the only long-term solution to the climate crisis, keeping in mind its magnitude and omnipresence, requires a re-evaluation of the entire financial ecosystem—starting right from creating awareness.
Financial institutions need to view this not just as the need of the hour, but as an opportunity. This would require due diligence in the form of designing adequate systems, processes and supporting documentation such as having agencies evaluate environmental ratings, create impact reports and more.
Public and private sector cooperation will also need to take centre stage. There is no dearth of data available on the shortfall in the budgets required to fund the necessary climate initiatives. The government can play an active role in leading this effort by creating windows of financing opportunities and supporting such transactions in addition to providing advisory.
Apart from it, collaborations between various government and non-government stakeholders can significantly reduce duplication of effort/costs. Financial agencies can work with many non-financial ones and ride on the strong network of some excellent government programmes instead of having to establish new ones. Timely sharing of data with relevant stakeholders can also play a critical role in rolling out new initiatives as well as making the existing ones more effective.
Microfinance companies, in particular, can play an effective role in taking the financial inclusion agenda to the next level by facilitating digital financial inclusion and insurance penetration (which is low at present), especially for women. They can also help the government implement certain schemes, such as funding for skill development and micro enterprises to help address job creation at a scale, more cost-effectively. The microfinance network can also be used to roll out important initiatives (like health programmes, disaster mitigation and relief efforts), particularly in remote and rural areas.
The financial landscape in 2025 is deeply intertwined with climate challenges. Institutions that proactively integrate climate considerations into their strategies will emerge as leaders in the transition towards a sustainable economy. With innovative financial solutions and adaptive regulatory frameworks, the global economy can navigate the climate crisis while unlocking new opportunities for growth and stability.
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