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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.
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.
Making sustainability work for OIC financial institutions & Islamic finance
Systemiq Ltd. released a “Blue Whale Inquiry” seeking to combine insights into the current challenges facing sustainability gathered from 50 leaders. The resulting report outlines a range of changes across business, governments, NGOs and the financial sector to reinvigorate sustainability for the next stage of advancement towards global goals. It also includes a frank discussion of the challenges, but also potential breakthrough areas where past efforts could bear fruit even in an environment full of headwinds.
For the financial sector, three of the key catalysts highlighted are breaking the hold of short-term financial returns on decision-making, leadership among the Global South countries through adoption and delivery on more sustainable economic models, and the use of technology including AI to avoid “being trapped in an acronym-heavy compliance regime” that has developed within ESG.
For financial institutions in OIC markets seeing recalibration of externally imposed sustainability disclosure standards, there may be value in concentrating efforts on practices that provide a better balance between investor expectations and other stakeholder needs. For Islamic Finance, the greatest opportunity may lie in leaning into the discussion of ethics that other financial sector stakeholders are wary of tackling. It may be more advantageous to be able to talk authentically about ‘just’ outcomes as the economy-wide climate transition accelerates, as our planetary debts come due.
Blue finance could make a meaningful contribution to the SDGs
Blue bonds could cover 10% of the funding needed for SDG14 – which is partly focused on protecting life in the oceans – by 2030, according to a report by SystemIQ. Blue finance has received far less attention than green finance, the broader category of finance of which it is often considered a subset, but has grown meaningfully since the first blue bond was issued in 2018 by the government of Seychelles.
Among the regions in focus in the report, MENAT is notable because it has not seen any issued blue bonds to date, although Egypt is expected to follow a previous green bond issuance with a debut blue bond. There are many promising types of blue finance that could be used across the MENAT region. This is a key part of the global shipping market, including within it the Suez Canal in Egypt and the Jebel Ali port in the UAE (one of the world’s dozen largest ports by volume).
There are challenges in linking together the co-benefits from investing sustainably in one sector of the blue economy with other investments in other ocean-related sectors, but a lot of opportunities as well. Seeing a focus placed on opportunities for blue bonds and other forms of blue finance across the MENAT region and Asia – which includes many OIC countries – should be a call to action to consider blue finance among other developing approaches to responsible finance by financial institutions within these markets.
The RFI Foundation is involved in coordinating an “Oceans Flagship Laboratory” announced during COP 28 which is a part of the BC100+ initiative focusing on blockchain and the SDGs. The Oceans Flagship Laboratory is working to explore the role of technology to increase flows of blue finance, particularly within the MENAT region. Contact us for more information.
Islamic finance is creating opportunities to provide leadership in responsible finance
The Islamic finance market has demonstrated impressive growth in recent decades, with several waves of growth propelled by different global trends. There has been increasing convergence with the development of responsible finance that has occurred over the decade since the agreement on the Sustainable Development Goals and the Paris Climate, which was a principal objective of the RFI Foundation when it was established in 2015.
One success of Islamic finance in adopting responsible finance has been demonstrating the operational compatibility of ESG screening alongside the core mandate for Shariah compliance. A new position paper from the Malaysian International Islamic Financial Centre (MIFC) Leadership Council provides a vision for the next phase of growth and development of Islamic finance. This is one of several initiatives to more firmly establish responsible finance in its core.
There has always been a strong ground for Islamic finance to play a more active and leading role in addressing global needs to address concerns such as the climate and nature crisis. What has taken time since agreement around global goals for sustainable development and restoring balance in planetary systems has been to demonstrate compatibility of climate and ESG approaches with Islamic finance. By conclusively demonstrating this compatibility, Islamic finance has also illuminated opportunities for the sector to lean into its concern for equity and justice and provide solutions as the momentum of interest in responsible finance produces opportunities to feasibly put them into action.
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.