RFI Newsletter Articles

Blake Goud 21/07/2025 Blake Goud 21/07/2025

Where do financial institutions fit into the Just Transition?

The UNFCCC meetings in Bonn that ended recently resulted in some modest optimism, with the release of an informal note on Just Transitions by the co-chairs to be further discussed at COP 30 in Brazil in November 2025. Progress has been relatively slow on the United Arab Emirates Just Transition Work Programme, but it fills an important gap in the global climate transition that completements efforts by financial institutions, especially at the domestic level.

The informal Just Transition draft covers several important topics. It connects the emissions reduction required by the Paris Agreement with corresponding efforts to ensure the costs and opportunities are shared equitably as countries chart out their individual pathways. It also acknowledges that making sure the process by which countries develop their own just transition pathways is effective, inclusive and participatory.

Meanwhile, the Just Transition Finance Lab highlights ways in which the country-specific nature of just transitions can allow for substantial progress through ‘closer-to-the-ground’ monitoring. This research builds on efforts underway within the G20 Sustainable Finance Working Group to highlight how emerging & developing countries are incorporating monitoring through domestic policymaking channels. This supplements the measurement of progress with metrics showing whether the process and outcomes are supporting just transition outcomes.

Domestic efforts provide a more localised approach while connecting internationally through climate finance, business ownership, and trade links. The financial sector, through its own transition planning and engagement with its customers, can complement efforts by governments and providers of climate finance by adding a Just Transition focus itself.

This is not just a problem that can be solved through a technical solution to collect the right data and make sure it is accurate and used in an effective way. A Just Transition requires a much more intentional effort to build trust with customers and other stakeholders, which is most effectively built up over time through repeated (even if small) interactions with stakeholders.

While the financial sector works with its customers and stakeholders (of both FIs and their customers) to cultivate the relationships and trust needed in the just transition, they should align with the direction of travel both domestically and globally.

Blake Goud 09/06/2025 Blake Goud 09/06/2025

Short-term climate scenarios can provide an input to help rewire the financial system

The Network for Greening the Financial System (NGFS) has released its first short-term climate scenarios. These are designed as a tool to evaluate the impact of climate change on the financial sector over a period that is in line with the policy and planning horizons for most businesses and governments.

The dynamic of climate change as a source of economic and financial risk did not emerge naturally. It arose as a result of two hundred years of historical emissions, and the process of generating those emissions involved significantly unequal sharing of the benefits. For the process of addressing the impacts of climate change, the costs should be similarly skewed towards developed countries to produce an equitable outcome for humanity.

Although there are some limitations of short-term climate scenarios in capturing the most likely outcome, they can be useful if users acknowledge the limitations and don’t allow their expectations of future climate risk to be anchored to either the most optimistic or pessimistic scenarios. These tools also shouldn’t be used in a vacuum because they could create unintended consequences for OIC markets and other emerging & developing markets by inhibiting flows of investment and climate finance that are already insufficient.

If short-term scenario analysis is instead viewed as a way to prioritise projects based on their ability to mitigate climate change, support the transition or invest in adaptation, then it may be able to play a more constructive role. The efforts to ‘rewire finance’ will still be necessary to reduce barriers to the flow of finance to OIC markets and others that are EMDEs, and efforts to improve the realism of outcomes covered by short-term climate scenarios will be more fruitful in directing capital where it can be most effective.

Blake Goud 18/02/2025 Blake Goud 18/02/2025

For resource-intensive economies, physical and transition risks could drive a ‘climate change risk trap’

On a global level, and in guidance for financial sector regulators, climate change actions are often presented as a sliding scale between climate mitigation – efforts to reduce emissions – and climate adaptation – efforts to make countries more resilient to the impacts of climate change. The dichotomy arises within the financial sector through a similar sliding scale between different scenarios.

Many OIC countries face a different outlook, however, where higher transition and physical risks coexist, especially at the sub-national level. A new paper terms this outcome a ‘climate change risk trap’, and evaluates it by considering the impacts of climate change physical and transition risks on Kuwait following the release of the country’s first flash flood hazard map.

Governments, regulators and financial institutions will all have to chart their own path to respond to the elevated risks of climate change where this 'risk trap' is most likely to be present. The impact on a response to climate change goes beyond mitigation and increases the benefits of domestic financial sector development and efforts to produce a Just Transition.

Blake Goud 31/01/2025 Blake Goud 31/01/2025

Will climate financial stability risk assessment produce headwinds for climate finance in emerging markets?

The Financial Stability Board is developing an assessment framework to evaluate the risks to financial stability relating to climate change. In broad terms, it will translate a conceptual framework for how climate risks generate financial risks, and how these could cascade into a systemic risk.

Many of the risk metrics are being developed with reference to developed economies and specifically reference the way that “global financial stability risks may arise from climate shocks in EMDEs [including those that] originate in the real economy and transmit internationally [such as] in some EMDEs that provide agricultural and mining products to the rest of the world”.

There is a clear connection between economic shocks in large EMDEs and global financial institutions and markets. Climate-related risks are among the types of risks that can spill over widely into global markets. However, often the application of macroeconomic metrics to identify sources of risks to global financial stability can have the impact – even if unintended – of raising barriers to flows of climate finance to EMDEs.

Blake Goud 20/05/2024 Blake Goud 20/05/2024

What is holding back sustainable financial flows to lower middle-income countries?

At the end of April, the European Commission’s High Level Expert Group (HLEG) on scaling up sustainable finance in lower-middle-income countries (LMICs) returned their final recommendations. These build on the position that public sector funding is insufficient to fill the US$3.5 trillion of annual financing for climate and nature risks and achieving the Sustainable Development Goals (SDGs) and that private sector investment is required.

The volume of investment needed for these goals in LMICs in particular outstrips the public sector financial resources available either domestically or through international climate finance from developed countries. A large share of the international climate finance to meet climate and other sustainable development goals will need to come from private sector investors who have sufficient assets to fill the gap. However, these investors face numerous barriers that limit the flows of financing to LMICs that need it.

The European Commission’s HLEG on sustainable finance in LMICs acknowledged the gap between the current flows and what is needed and provided evaluation of several points where action could overcome them.

Blake Goud 14/04/2024 Blake Goud 14/04/2024

The transition teething process often means two steps forward and one step backwards

The development of frameworks and supporting policies to guide more finance towards the green transition (both into green projects and to enable energy transition in line with global Net Zero 2050) is a positive, but there remains uncertainty about which policies will be effective and which will be counterproductive. In addition to the policy uncertainty, there is also substantial doubt about whether the financial system as a whole – comprised of regulators, management and staff at financial institutions, investors, capital markets (domestic and international) and ratings agencies – is able to row in the same direction at the same time.

One recent example of the pitfalls that lie close to the surface under the structures being built to transform the financial and non-financial corporate sectors was when the Science Based Targets Initiative (SBTi) outlined a proposed change to its net zero targets that would allow companies to use carbon credits to abate Scope 3 emissions, which quickly sparked a significant backlash.

At issue is where to draw the line about responsibility for emissions within a value chain. One argument in favor of allowing offsets for Scope 3 emissions is that they are generally outside of a company’s control, and the requirement for offsets retains a financial incentive to do more than disclose Scope 3 emissions. The mechanism of carbon credits provides a way to direct finance towards projects that could reduce global emissions.

The challenge – which ties into the process of experimentation in the way financial systems are being adapted – is that although companies don’t usually have operational control of their Scope 3 emissions, it could still influence their behavior in sub-optimal ways.