climate-finance – Chasing Tales

Financing Climate Solutions – VI: Mechanisms

This is a quick post explaining the various common types of green finance mechanisms.

Financial Instruments¹ ² ³ ⁴ ⁵ ⁶
Before getting into specific instruments, it helps to see that every financial mechanism, at its core, answers the same small set of questions. Whether it is a bond, a guarantee, a carbon credit, or a crowdfunding campaign, the structure is really a way of formalising: who puts money in, who gets money out, under what conditions, over what time horizon, and with what risks attached.

The first design step is to be clear about purpose and users. A mechanism should specify: Who is this for? Is it aimed at sovereigns, cities, large corporates, project developers, households, or small farmers? And what is it trying to achieve—cheap long‑term capital for infrastructure, early‑stage risk capital for new technology, quick payouts after disasters, or a way for individuals to participate in small projects? The same high‑level tool (say, a bond) will look very different if it is structured for a G20 sovereign building a metro system versus a Small Island Developing State financing a mangrove restoration programme.

Then there is the cash‑flow logic: where the money comes from, and how it is repaid. Any mechanism should make transparent:

What is the return? This could be a fixed interest rate, a share of project revenues, a one‑off payout if a trigger event happens, or the sale of carbon credits over time, or any other means of return.
How is the return calculated? For a bond, it is a coupon (interest rate) on the face value; for a carbon project, it might be the number of verified tonnes of CO₂ times a contracted price; for a crowdfunding loan, it might be a fixed annual percentage of the amount invested.
Over what time horizon? Some mechanisms (like grants or one‑year parametric insurance contracts) are short‑term; others (like sovereign green bonds or infrastructure PPPs) can run 10–30 years. Matching the tenor of the finance to the underlying project is a key design choice.

Alongside cash flows, a good mechanism makes risk allocation explicit. Every contract should answer: What could go wrong, and who bears which risk? In climate projects, typical risks include:

Construction risk (the project is delayed or over budget),
Operating risk (it underperforms technically),
Market risk (power prices or carbon prices are lower than expected),
Policy risk (subsidies or regulations change), and, for some instruments,
Physical climate risk (storms, droughts, floods).

Different tools push these risks onto different shoulders: guarantees shift credit risk from banks to public guarantors; blended finance pushes first losses onto concessional funders; results‑based finance pushes performance risk onto the developer; parametric insurance transfers climate shock risk from farmers or governments to insurers. A “good” mechanism is not one where there is no risk (this does not exist), but one where risks are held by the actor best able to manage them.

Because these are contracts, not just concepts, they also need clear rules and triggers. This includes: what counts as success or failure; what data will be used to judge performance; who verifies it; what happens if targets are missed or events don’t unfold as expected (for example, does the interest rate step up, does a guarantee get called, does a results‑based payment simply not happen?). In climate finance, this is where measurement, reporting and verification (MRV) comes in: a mechanism that pays “per tonne of CO₂ avoided” or “per tonne removed” has to say exactly how those tonnes will be measured, by whom, and according to which standard.

Finally, every mechanism needs some thought on governance and alignment. Who decides which projects are eligible? How are conflicts of interest handled (for example, if the verifier is paid by the project developer)? How are environmental and social safeguards built in, so that climate finance does not create new harms? And how does the mechanism align with broader frameworks—national climate plans, sustainable finance taxonomies _{(A taxonomy is just a classification system: a structured way of deciding “what counts as what” and grouping things into clear categories. A sustainable finance taxonomy is a list of economic activities, with detailed criteria, that a country or region has decided will count as “environmentally sustainable” or “transition‑aligned”. The point is to give investors and regulators a common language so they can tell when an investment is genuinely green, and reduce greenwashing. The EU Taxonomy defines which activities (renewables, buildings, transport, etc.) are aligned with EU climate and environmental goals, and sets technical thresholds and “do no significant harm” rules)}⁷, or net‑zero standards? Answering these questions up front helps determine whether the instrument will attract serious capital and be seen as credible.

Once you see these common building blocks—purpose and users, cash flows and returns, risk allocation, rules and triggers, and governance and alignment—the individual instruments in the table below become much easier to understand. Each one is simply a different way of arranging those elements to solve a particular climate finance problem.

A note:

Use‑of‑proceeds instruments (green, blue, transition bonds, green sukuk, most multilateral loans) = money must be spent on eligible activities.8
Performance‑linked instruments (SLBs, some RBCF and AMCs) = money can be used broadly, but cash flows change depending on whether measurable indicators are met.¹

Here’s an explanation of typical green finance instruments:

1. Carbon Credits⁶ ⁹

First: what is a carbon credit? A carbon credit is a certificate that represents one tonne of CO₂ (or equivalent greenhouse gas) either not emitted or removed from the atmosphere. It’s like a “receipt” that a verified climate benefit has occurred somewhere.
How carbon credits work: A project (for example, a wind farm, a forest protection programme, or a direct‑air‑capture plant) is measured against a “baseline” of what emissions would have been without the project. The difference—verified by independent auditors—can be turned into credits. Each credit can be sold to a company or individual that wants to “offset” or compensate for their own emissions.
- Two big families: 1) Avoidance/reduction credits – the project prevents emissions (e.g., replacing coal power with wind, distributing clean cookstoves, avoiding deforestation). 2) Removal credits – the project draws CO₂ out of the air and stores it (e.g., reforestation, biochar, direct air capture with geological storage).
Why it matters: Carbon credits turn climate outcomes into a tradable product. That creates a revenue stream for climate projects, which can unlock financing from banks and investors.

2. Green bonds¹⁰ ¹¹

First: what is a bond? A bond is basically an IOU: an investor lends money to a government or company; in return, the issuer promises to pay regular interest and repay the principal at a fixed date. It’s like a structured loan that many investors can buy.
What is a green bond? A green bond is a regular bond where the money raised is earmarked for environmentally beneficial projects. The issuer commits that the proceeds will go only to qualifying “green” activities (renewable energy, energy efficiency, clean transport, green buildings, etc.), and usually reports on how the funds are used.
How it works in climate projects: Instead of financing “general corporate purposes”, a green bond might finance: a solar farm (emissions avoidance), a mass‑transit rail line (avoidance), or potentially large‑scale reforestation or wetland restoration (carbon removal). The bond itself doesn’t change financially—what makes it “green” is the use of proceeds and the issuer’s transparency and reporting.

3. Blue Bonds¹² ¹³

First: what is a bond? A bond is essentially a tradable IOU. An investor lends money to a government, development bank, or company; in return, the issuer promises to pay regular interest and repay the principal at a set maturity date. It’s a way for issuers to raise large sums from many investors at once.

What is a blue bond in simple terms? A blue bond is a special type of green bond where the money raised is earmarked specifically for ocean and water‑related projects. In other words, it is a debt instrument issued to finance activities that protect or sustainably use marine and freshwater resources—things like healthy oceans, coasts, rivers, and water systems.

Blue bonds are bonds issued by governments, development banks, or other entities to raise funds from investors for marine and ocean‑based projects that generate positive environmental, economic, and climate benefits. They are a “subset” of green bonds, with a narrower focus on the “blue economy”—the part of the economy that depends on oceans and water (fisheries, shipping, tourism, coastal infrastructure, etc.).

What kinds of projects do blue bonds finance? Proceeds must go to clearly defined “blue” uses, for example:

Marine conservation: Expanding and managing marine protected areas, coral reef and mangrove restoration, protection of endangered marine species.
Sustainable fisheries and aquaculture: Transitioning fisheries to sustainable quotas, improving monitoring and enforcement, supporting low‑impact aquaculture that doesn’t destroy habitats.
Coastal resilience and adaptation: Restoring mangroves and wetlands to act as natural flood defences, reducing coastal erosion, protecting communities from storm surges and sea‑level rise.
Water and wastewater management: Improving urban water supply, wastewater treatment, and preventing sewage or nutrient pollution from entering rivers and seas.
Pollution reduction: Cutting plastic leakage into oceans, improving solid‑waste management, and cleaning up polluted waterways.
Sustainable “blue economy”: Supporting eco‑friendly coastal tourism, low‑carbon shipping, and offshore renewable energy (e.g., offshore wind).

Who issues blue bonds?

Sovereign blue bonds: Issued by national governments—Seychelles (2018) was the first, using a US$15 million sovereign blue bond to support sustainable fisheries and ocean conservation.
Development banks and IFIs: Institutions like the World Bank or IFC issue blue bonds or blue loans to finance portfolios of water/ocean projects.
Sub‑sovereigns and corporates: State‑owned utilities, port authorities, or private companies involved in shipping, water utilities, tourism, or fisheries can also issue blue bonds.

How are blue bonds structured financially? Financially, blue bonds work like normal bonds: investors receive periodic interest payments and principal at maturity. What makes them “blue” is: (1) the use‑of‑proceeds commitment to eligible blue projects, (2) adherence to blue/green bond guidelines, and (3) ongoing reporting on how funds are used and what environmental benefits they deliver. Often, multilateral banks or climate funds provide credit enhancements—like guarantees or concessional loans—to reduce risk and make the bond attractive. In the Seychelles case, the World Bank guarantee and GEF concessional funding cut the effective interest rate from about 6.5% to 2.8% for the issuer.

Blue bonds and debt‑for‑nature swaps: In some cases, blue bonds are combined with sovereign debt restructuring. For example, Belize and Seychelles used “blue bond + debt‑for‑nature swap” structures to reduce their overall debt burden while committing to long‑term marine conservation (note: not all blue bonds are tied to swaps—some are plain use‑of‑proceeds bonds with no debt restructuring component)¹² Creditors accepted changes in the terms of existing debt in exchange for conservation commitments, while new blue bonds or blue loans financed marine protection. This hybrid model makes blue bonds especially attractive to small island and coastal developing states that are both ocean‑dependent and heavily indebted.

Why blue bonds matter in climate discussions: Healthy oceans and coasts are crucial for climate mitigation and adaptation: they absorb a large share of global CO₂, protect coasts from storms and sea‑level rise, and support livelihoods in many vulnerable countries. Yet “blue” sectors have historically received little climate finance compared to energy or land‑based projects. Blue bonds offer a way to channel large‑scale capital into the sustainable ocean economy, supporting: (a) mitigation via nature‑based solutions and low‑carbon maritime activities, and (b) adaptation via coastal resilience.

4. Sustainability‑linked bonds (SLBs)¹ ¹⁴

First: difference vs. green bonds. Green bonds restrict how the money is spent. Sustainability‑linked bonds do not; instead, they change the financial terms depending on performance.
What is an SLB? An SLB is a bond where the issuer (a company or government) promises to meet certain sustainability targets—for example, “reduce our greenhouse gas emissions by 40% by 2030.” If the issuer fails, the bond’s coupon (interest rate) usually steps up, meaning the issuer pays more to investors.
How it works in climate: The bond can finance anything (new factories, general operations, etc.), but the issuer is financially rewarded or penalised based on whether it hits climate‑related key performance indicators (KPIs). To reach these KPIs, the issuer might: invest in avoidance (efficiency, renewables, new processes) and/or removal (buying high‑quality carbon removals, investing in carbon capture). For investors, SLBs are a way of tying climate performance to money even when funds are not ring‑fenced.

5. Transition and Climate Transition bonds¹⁵ ¹⁶

First: what is “transition finance”? Transition finance is funding that helps high‑emitting companies or sectors move from “brown” to “green”, even if they’re not green yet. Think of steel, cement, aviation, oil and gas—industries that can’t decarbonise overnight.
What is a transition bond? A transition bond is similar to a green bond, but specifically aimed at financing credible transition activities in high‑emitting sectors—such as replacing old coal plants with much cleaner alternatives, upgrading industrial processes, or adding carbon capture equipment. The money must be used for projects that materially reduce emissions relative to business‑as‑usual. Climate Transition Bonds go a step further, following specific guidelines (e.g., by ICMA) requiring a science‑based transition plan and strong disclosure.
How it works in climate: Proceeds mainly support emissions avoidance (e.g., process efficiency, fuel switching), but can also finance removal‑enabling infrastructure, like CO₂ transport and storage hubs or BECCS/CCS installations on existing plants. The aim is to fund the journey from high emissions to low emissions in a transparent, Paris‑aligned way.

6. Blended finance¹⁷ ¹⁸ ¹⁹

First: what problem is it solving? Many climate projects (especially in developing countries or new technologies like direct air capture) are too risky or unfamiliar for purely commercial investors. Their returns might be fine on paper, but perceived risks (country risk, technology risk, policy risk) scare capital away.
What is blended finance? Blended finance is a structure, not a single product. It combines “concessional” capital from public or philanthropic sources with commercial capital from private investors. The concessional portion takes on more risk or lower returns—through first‑loss tranches, subordinated debt, or guarantees—so that private investors feel safer coming in.
How it works in climate: Imagine a fund where a development bank provides a junior, low‑return tranche, and private investors provide a senior, market‑rate tranche. If things go wrong, the public tranche loses money first, protecting the private investors. This can make renewables in emerging markets, efficiency upgrades, or early‑stage CDR projects bankable. Blended finance is thus a risk‑sharing tool to crowd in private capital to projects that serve the public good but would otherwise be under‑financed.

7. Results‑based climate finance (RBCF)²⁰ ²¹

First: what is results‑based finance? Instead of paying for inputs (like building a plant) or promises, results‑based finance pays only when measurable, verified outcomes are delivered—like “X MWh of clean electricity” or “Y tonnes of CO₂ reduced”.
What is RBCF in climate? In results‑based climate finance, a funder (often a government, climate fund, or development bank) agrees to pay a fixed amount per tonne of CO₂ reduced or removed, or per unit of a climate‑relevant result (e.g., number of clean cookstoves in regular use). Independent auditors verify the results; only then is money disbursed.
How it works in climate: For an avoidance project, payments might be made per tonne of emissions avoided by a renewable plant compared to a fossil baseline, or per hectare of forest not cut down. For a removal project, payments might be made per tonne of carbon actually stored in restored forests or wetlands. RBCF aligns finance with verified impacts, and can complement or substitute carbon credit revenues.

8. Concessional loans & grants²² ²³

First: what is concessional finance? Concessional finance is money offered on softer terms than the market—for example, loans with below‑market interest rates, longer grace periods, longer maturities, or even outright grants that don’t have to be repaid. It is usually provided by governments, development banks, or climate funds.
Grants vs. concessional loans: A grant is money given with no expectation of repayment, often used for project preparation, technical assistance, or to cover parts of capital costs. A concessional loan must be repaid, but on easier terms than commercial loans (cheaper and slower).
How it works in climate: Concessional finance is used to: (a) make marginal projects (like rural solar mini‑grids, resilience infrastructure, or new removal technologies) financially viable; (b) absorb early‑stage risks; and (c) support countries or communities that cannot afford purely commercial debt. It can directly fund projects or be used inside blended‑finance structures to crowd in private capital.

9. Guarantees²⁴ ²⁵

First: what is a guarantee? A guarantee is a promise by a third party (the guarantor) to repay part or all of a loan if the borrower defaults. This third party can be a development bank, a government agency, or a specialised guarantee fund. Think of it as “credit insurance”: it doesn’t provide money up front, but it stands ready to cover losses if something goes wrong.
Types of risk covered: Guarantees can cover commercial risk (borrower can’t pay), political risk (expropriation, currency transfer restrictions), or even certain performance risks of a project.
How it works in climate: Suppose a bank is hesitant to lend to a wind project in a lower‑income country. If a multilateral bank guarantees, say, 50% of the loan, the bank’s risk is effectively halved. That means it is more likely to lend and at a better interest rate. Similarly, future CDR projects might be financed if a public entity guarantees minimum carbon price or offtake payments, making long‑term investments less risky. Guarantees are powerful because a small amount of guarantee capital can unlock a much larger volume of private lending.

10. Multilateral climate funds²⁶ ²⁷ ²⁸

First: what is a multilateral fund? A multilateral fund pools money from many countries (donor governments) and sometimes other contributors, and channels it into projects in developing countries. It is usually overseen by a board representing those countries, and implemented through development banks or UN agencies.
Examples: The Green Climate Fund (GCF), Global Environment Facility (GEF), Climate Investment Funds (CIF), and Adaptation Fund.
How they work in climate: These funds provide grants, concessional loans, equity, and guarantees to support mitigation (emission cuts), adaptation (climate resilience), and sometimes explicit carbon removal (e.g., forest restoration). Because they are backed by governments, they can take on more risk or accept lower returns than private investors. They often act as anchor funders in blended finance structures, or provide results‑based payments to governments and project developers. For many low‑income countries, multilateral funds are the primary external source of climate finance.

11. Debt‑for‑Climate swaps²⁹ ³⁰

First: what is a “swap” in this context? In general finance, a “swap” is an agreement to exchange one set of cash‑flow obligations for another. In the sovereign context here, it’s more like a structured re‑negotiation of debt terms.
What is a debt‑for‑climate swap? A debt‑for‑climate (or debt‑for‑nature) swap is a deal where a country’s existing external debt is reduced, refinanced on better terms, or partially cancelled, in exchange for the government committing to invest in specific climate or conservation projects. Creditors might accept a discount on what they are owed, and the “savings” are ring‑fenced for climate activities.
How it works in climate: For a country heavily indebted and vulnerable to climate impacts, creditors might agree that US$X of debt is refinanced into a cheaper “blue bond” or climate bond, while the country commits to spend a portion of the freed‑up money on, say, coastal protection, forest conservation, or resilient agriculture. This simultaneously reduces debt stress and increases climate investment. Most current swaps focus on adaptation and conservation (i.e., resilience and avoided emissions), but in principle they could also fund large‑scale ecosystem restoration (a form of carbon removal).

12. Carbon pricing & CBAM‑linked flows ³¹ ³²

First: what is carbon pricing? Carbon pricing means putting a price on greenhouse gas emissions through either: (1) a carbon tax (pay a fee per tonne of CO₂ emitted), or (2) an emissions trading system (ETS), where companies must hold tradable “allowances” for every tonne they emit. If they emit less, they can sell spare allowances; if more, they must buy extra.
How this creates finance: Carbon pricing changes behaviour (by making pollution more expensive) and raises revenue for governments. Those revenues can be used to fund climate projects—grants, concessional loans, results‑based schemes, or subsidies for clean technologies.
What is CBAM? CBAM stands for Carbon Border Adjustment Mechanism. It is essentially a system (pioneered by the EU) that charges imports for the carbon embedded in them, so that foreign producers face a similar carbon cost as domestic producers subject to carbon pricing. The idea is to avoid “carbon leakage” (moving dirty production abroad).
CBAM‑linked flows: The money collected through CBAM can, in principle, be channelled back into climate finance—for example, supporting decarbonisation in poorer exporting countries, or buying high‑quality credits. Depending on design, this can steer finance towards both avoidance (clean production) and removal (credit purchases or CDR investments).

13. AMCs for CDR³³ ³⁴

First: what is CDR? CDR stands for Carbon Dioxide Removal—any process that actively takes CO₂ out of the atmosphere and stores it for long periods. This includes natural methods (reforestation, restoring peatlands, mangroves) and engineered methods (direct air capture, BECCS, enhanced weathering, biochar, etc.).
What is an AMC? An Advance Market Commitment (AMC) is a pledge by buyers—often governments or large companies—to purchase a certain amount of a product in the future at a pre‑agreed price, if that product can be delivered with agreed‑upon standards. AMCs were used successfully to accelerate vaccine development: companies invested in R&D and capacity knowing that a market would exist.
What are AMCs for CDR? AMCs for CDR are long‑term purchase commitments for future carbon removals. Buyers say: “If you can remove and durably store CO₂ to standard X, we promise to buy Y tonnes at price Z over the next decade.” This gives CDR developers the revenue certainty needed to secure financing for expensive plants. Without AMCs, many CDR businesses are stuck in the “valley of death” where costs are high and markets uncertain. AMCs therefore are a demand‑side tool to de‑risk investment in new removal technologies.

14. Parametric insurance³⁵ ³⁶ ³⁷

First: what is insurance in general? Traditional insurance compensates you for actual losses incurred: you prove your loss (e.g., damage from a storm), and the insurer reimburses you up to your policy limit, after assessment. This can be slow and administratively heavy.
What is parametric insurance? Parametric insurance pays out automatically when a specified event happens, based on a measurable parameter—such as wind speed above X, rainfall below Y, or an earthquake of magnitude Z or more. Payout is triggered by the parameter, not by proof of actual loss.
How it works in climate: For climate‑related risks (hurricanes, droughts, floods), parametric insurance can provide very fast, predictable payouts to governments, utilities, or farmers. For example, a country might get a pre‑agreed payout if a hurricane stronger than Category 4 passes within a certain distance. A solar farm might receive payments if cloud cover or wind speeds deviate too far from the norm. While this doesn’t directly reduce or remove emissions, it improves climate resilience, protects revenue streams for renewable projects, and makes banks more willing to finance assets in climate‑vulnerable regions.

15. Islamic green sukuk³⁸ ³⁹

First: what is a sukuk? In Islamic finance, charging or paying interest in the conventional sense is prohibited. A sukuk is a Shariah‑compliant financial instrument that is often described as an “Islamic bond”, but technically it represents ownership in an underlying asset or project, and returns are generated via profit‑sharing or lease‑like structures, not explicit interest.
What is a green sukuk? A green sukuk is a sukuk where the underlying assets or projects are environmentally beneficial—for example, a solar farm, a wind park, or a water treatment plant. It must satisfy both: (1) Shariah requirements (no prohibited activities, asset backing, fair risk‑sharing), and (2) green criteria (as defined by taxonomies or standards).
How it works in climate: Governments and companies in Muslim‑majority countries can issue green sukuk to finance renewable energy, clean transport, efficient buildings, or even nature‑based climate projects. Investors receive periodic distributions from project revenues (e.g., electricity sales), not interest, and gain exposure to both financial and environmental returns. Islamic green sukuk expand the pool of climate capital by tapping investors who prefer or require Shariah‑compliant instruments.

16. Crowdfunding platforms⁴⁰ ⁴¹

First: what is crowdfunding? Crowdfunding is when many individuals each contribute relatively small sums of money, usually via an online platform, to fund a project, business, or cause. In return, they might get rewards, interest, profit‑sharing, or simply the satisfaction of supporting something they believe in.
What are climate/green crowdfunding platforms? These are specialised platforms that allow people to directly invest in or donate to renewable energy, energy‑efficiency, conservation, or climate‑tech projects. Minimum investments can be very low (e.g., €10 or INR25), making participation broadly accessible.
How it works in climate: A developer might list a community solar project on a platform; hundreds of individuals fund part of the project and receive a fixed interest payment or share of revenues over time. This model is particularly well‑suited to small‑scale, local avoidance projects—like rooftop solar, community wind turbines, building retrofits—where community buy‑in is crucial. It is less suited (for now) to capital‑intensive, highly technical removal projects, but it plays a powerful role in democratising climate finance and building public support for the transition.

Sources

Financing Climate Solutions IV: Insurance

Economic and financial impacts of climate change
First, some explanations. In climate change contexts, economists use “Economic Loss” to mean the total monetary impact on communities, sectors, or entire countries, including uninsured damages and broader ripple effects.¹ ² Economic loss is further divided into two types of loss, pure economic loss and consequential economic loss.

Pure Economic Loss is financial harm that occurs without any associated physical damage to property or persons, such as when bad weather warnings keeping people away from events they would otherwise pay to attend.³ ⁴ Consequential Economic Loss is loss that happens as a consequence of that physical impact, even if not immediately obvious, for example if excessive rains damage a local shop, which then has to shut shop for repairs compromising sales for the period.³ ⁴

These distinctions matter because even when it is not immediately evident, climate change drives losses through the economy in multiple ways large and small. Think of unemployment in a region due to a climate exacerbated disaster such as a forest fire which burns down parts of a town or a city, let’s say some warehouses or farms burn down, not only are assets lost in such cases, so is future consumption due to loss in employment income for those who worked in those warehouses or farms. Further, not every loss is or can be insured, but losses such as those caused by consumption loss after considerable climate disasters tend to have ripple effects across economies with no clear physical starting point.

Financial Loss refers to losses in actual money or other financial instruments (for example unencashed cheques lost in a flood event). It’s a more direct concept and includes only what can be counted.² ³

Understanding these terms helps us understand the following statistics a little better, while also realising that they can never grasp the full magnitude of climate damages.

Economic losses from natural disasters totalled $368 billion globally, driven by hurricanes, severe storms, and record heatwaves. As mentioned, the first half of 2025 is trending higher. In India, climate disasters cost India over $12 billion in 2025, with floods and heatwaves hitting agriculture and productivity especially hard.⁵ Projections show GDP per capita losses could reach 2.13% by 2025 and exceed 25% by 2100.⁵ Indeed, if global warming reaches 3°C by 2100, cumulative economic output could shrink by 15–34%. The net cost of inaction translates to a loss equivalent to three times current global health spending by 2100.⁶

Insuring against climate risks helps manage losses from climate change impacts such as extreme weather events, floods, droughts, and tropical cyclones, as well as more mundane events like too much or too little weather that affect economic performance, such as agricultural output, disrupted sports matches, rained in vacation seasons, and so on. The costs and frequency of extreme weather events have soared, with $100 billion in insured losses recorded in the first half of 2025 alone,⁷ ⁸ which is 40% higher than the same period in 2024 and more than double the 21st-century average⁷.

Term	What it Means in Practice
Pure Economic Loss	Financial hit without physical damage—like lost ticket sales because a bad weather warning kept customers away, even if nothing broke.
Consequential Economic Loss	Costs that ripple out from a disaster—like lost income when a business shuts for repairs, or when workers lose jobs after a factory burns.
Financial Loss	Tangible money lost—cheques that float away in a flood, crashed stock market values, or direct property damage costs.

In summary

Risk
The standard formula for risk is: Risk = Probability × Impact, where probability is the simple likelihood of an event happening, like we studied in school (here’s a post that talks about probability in deeper detail), and impact is how severe the consequences of the event would be, if it were to happen.⁹

In practice, insurers and climate researchers use risk matrices or quantitative models to assess and rank multiple risks in order of urgency, severity and other metrics. The formula for these kinds of advanced risk models can substitute “probability” with metrics like frequency, exposure, vulnerability, or asset value, and here the formula can change to something closer to: Risk = Threat Frequency × Vulnerability × Asset Value.⁹ ¹⁰

Financial institutions increasingly conduct climate stress tests to assess resilience under various climate scenarios. These tests measure CRISK, which measures the expected capital shortfall under climate stress scenarios, and functions similarly to financial crisis stress tests but incorporating climate risk factors.¹⁰ During the 2020 fossil fuel price collapse, major global banks experienced substantial CRISK increases; Citigroup’s climate-related capital shortfall rose by $73 billion in 2020 alone.¹⁰

Stress testing involves three steps: measuring climate risk factors (often using stranded asset portfolio returns as transition risk proxies), estimating time-varying climate betas for institutions, and computing capital shortfalls under stress scenarios.¹¹

DON’T PANIC HERE’S AN EXPLANATION: It’s like asking, if climate disasters happen, how much trouble would this bank be in? A stranded asset portfolio is the collection of companies that the bank is lending to, or whose stocks it owns, that would suffer most if the world suddenly got serious about fighting climate change. From this we subtract the returns of some regular stocks so that we can isolate the impacts of climate change. So let us say an extreme climate event happens, and this portfolio crashes by 50% in market value (market value is the value the portfolio assets would get if sold in the open market). Climate beta is a way to understand how much the bank’s own share price responds to climate events, or to governments cracking down on transition sensitive industries that it owns in the stranded asset portfolio. If a bank has lent lots of money to an oil and gas company, it will have a higher climate beta. We use the share price of the bank because it provides a real-time, market-based reflection of how investors perceive the bank’s overall financial health and risk exposure, including its sensitivity to climate-related events, making it a practical and observable indicator for assessing potential future losses and calculating stress test outcomes, which basically means that markets process information faster than accountants. Continuing with our example, let’s assume the bank has a climate beta of 0.6. In extreme climate stress (50% fossil fuel portfolio crash), this bank’s stock price would fall by 30% (0.6 × 50%). The final step is to understand, if the worst possible climate scenario happens, how much money would the bank need to stay afloat, for which the following formula can be used: Capital Shortfall = (Minimum Required Capital that a bank must maintain as mandated by the government) – (Bank’s Remaining Equity After Climate Shock).

Another example: Portfolio crash = 50%, climate beta = 1.2, therefore the bank’s stock price crashes by 60%. Now suppose the bank has total assets (the market value of the loans it has given out, the shares it owns, and any other assets) of $100, and the government has said that at the minimum it must have 10% of this amount with it at all times (the bank cannot use this money), so 10% of $100 is $10. Now let us say that the same bank had $40 in equity share capital, but because the price of this $40 crashed by 60%, it is now only worth 40% × $40 = $16. Since the $16 > the $10 the government said the bank must always have, this bank is safe. It is easy to see that banks that have different combinations of numbers will have different results.

Climate risk is not an abstract concept any longer simply because it is happening all around us, and we’re all suffering from it (and also because financiers have made formulae). Areas that suffer frequent climate impacts, whether (hehe, weather) direct or indirect are likely to suffer more financial consequences and have poorer asset protection since insurers would prefer to limit losses.¹² ¹³ It just so happens that these geographies are also the previously colonised Global South now suffering from the extended consequences of colonialism and the industrial revolution they did not partake in.¹⁴ ¹⁵

In 2023, the global insurance protection gap reached 67%- only 33% of $357 billion in economic losses from natural hazards were insured.¹⁶ This gap widens dramatically in developing countries, most of which are the historically colonised nations, where less than 10% of disaster losses have insurance coverage;⁵ Africa insures merely 0.5% of climate-related losses.¹⁷ Without intervention, uninsured global losses could double to $560 billion annually by 2030.¹⁶ Regions may become effectively “uninsurable” as coverage becomes inadequate, inaccessible, or prohibitively expensive.⁹ Another relevant stat: research indicates each 1% increase in insurance coverage moves countries 5.8% closer to achieving Sustainable Development Goals.¹⁸ ¹⁹ ²⁰

The protection gap stems from multiple factors:

Unaffordable premiums: Rising climate-related losses push insurers to increase premiums to reflect heightened risk, further widening affordability gaps and leaving many unprotected.²¹ ²²
Insufficient local risk data: In many emerging markets and developing economies, hazard maps and exposure data are incomplete, outdated, or inaccessible, limiting confidence in risk assessment tools and complicating underwriting decisions.²¹ ²³
Lack of government coordination across ministries: Fragmented policy frameworks, inadequate integration of disaster risk management with financial protection strategies, and limited inter-ministerial collaboration obstruct the scaling of insurance solutions and premium support schemes.²¹ ²⁴
Inadequate domestic financial sector development: In many emerging economies results in underdeveloped insurance markets, limited technical capacity among insurers and supervisors, low financial literacy, and weak distribution channels. These structural weaknesses restrict both the supply of insurance products and the demand from potential policyholders, perpetuating the protection gap.21 ²⁵

Types of climate risk²⁶
Climate risk refers to the potential negative impacts on society, ecosystems, or economies resulting from climate change. These risks are typically grouped into three main categories: physical risks, transition risks, and liability risks.

Physical Risks: These arise from the direct effects of climate change and are further divided into two subcategories:
- Acute physical risks are event-driven, such as hurricanes, floods, wildfires, tornadoes, heatwaves, or intense storms. These can cause sudden and severe damage to property, infrastructure, and supply chains.
- Chronic physical risks develop over a longer time frame. These include rising sea levels, gradual increases in average temperatures, changes in precipitation patterns, persistent droughts, land degradation, water scarcity, and ocean acidification.
Transition Risks: These are risks associated with the shift to a low-carbon economy and include challenges related to changes in policy, technology, market preferences, and investments. Examples include regulatory changes (carbon pricing, emissions limits), sudden shifts in market demand (e.g., decline in demand for fossil fuels), technological disruption (rapid adoption of renewables), or reputational damage if organisations are slow to adapt. Such changes may render some business models or assets less viable or even obsolete (these are called “stranded assets”).
Liability Risks: These stem from parties seeking compensation for losses they attribute to climate change. As regulatory requirements around disclosure and climate responsibility tighten, companies face increasing legal actions over failure to adequately manage or disclose climate risks, or for contributing to environmental harm.

More about stranded assets: To limit warming to 1.5°C, approximately 60% of oil and gas reserves and 90% of coal reserves must remain unburned, creating potentially $1.4 trillion in stranded fossil fuel assets globally.²⁷ Coal-fired power plants face the highest stranding risk, requiring retirement 10-30 years earlier than historical patterns to meet Paris Agreement targets.²⁸ Stranding extends beyond fossil fuels—aviation, heavy manufacturing, and carbon-intensive real estate also face obsolescence as the economy decarbonises. Physical climate risks like sea-level rise, floods, and droughts can also directly strand assets by making them uninhabitable or uneconomical. Buildings failing to meet emerging energy efficiency standards face early economic obsolescence, requiring costly retrofits or suffering reduced marketability.

The financial industry’s exposure to climate change¹⁰ ¹¹
The financial industry is exposed to climate risks on both sides.

In finance, buy side and sell side refer to the two broad categories of financial market participants and their roles in the investment ecosystem. The buy side includes entities whose primary role is to invest capital (money) for themselves or their clients, and their main goal is to generate positive returns from the purchase and management of these assets. Sell side entities provide investment products, research, and execution services to buy-side clients and often facilitate transactions between buyers and sellers.

Buy side entities face climate risk in the form of:
- Asset Value Declines: Physical climate events can damage or destroy underlying assets (like real estate, farmland, or infrastructure), eroding the value of investments.
- Transition Risks: As economies move to lower-carbon models, the value of companies or sectors exposed to fossil fuels, heavy industry, or outdated technologies may collapse, turning previously valuable holdings into “stranded assets”.
- Market Volatility: Unexpected regulatory policy, carbon pricing, or shifts in investor preferences can result in sharp drops in certain securities, particularly where climate risks were previously underpriced, or even unpriced.
- Reputational and Compliance Pressure: Asset managers are increasingly required to disclose their climate risk exposures, scenario analysis, and decarbonisation strategies under frameworks such as TCFD, EU taxonomy, and other local regulations.
And Sell side entities face them in the form of:
- Credit Risk and Loan Defaults: Borrowers struck by climate disasters (flood, drought, hurricane) may default on loans as asset values drop or cash flow dries up. Large-scale disasters can lead to significant concentrations of defaults in a short period.
- Collateral Devaluation: The value of physical collateral backing loans (properties, crops, factories) declines with repeated climate events or chronic risks such as sea-level rise or desertification.
- Underwriting Risk: Insurers see more frequent and severe claims for natural disasters, complicating pricing and threatening profitability.
- Rising Compliance and Capital Costs: Regulators increasingly require sell side firms to conduct climate stress tests, manage exposures, and allocate more capital against climate-vulnerable loans or portfolios (so that if their value suddenly declines, there is enough money to cover for it).

Some of the newer insurance instruments

Traditional vs. Parametric Insurance:¹⁰ Traditional indemnity insurance requires extensive damage assessment and claims verification, causing significant delays when communities need immediate relief. Parametric or index based insurance (called so because payouts are triggered by weather indices that measure heat waves, number of rainy days, wind speeds, etc.) trigger automatic payouts when predefined thresholds are met.

For example, if wind speeds in an area exceed 150 km/h, it may immediately send money to the people who are insured in that area, if rainfall below 200mm happens during growing season in an area, automatic payout will happen in that area, as long as data confirms that the threshold criteria were met. This brings transparency, expedites claims processing, and provides policyholders discretionary use of funds for their most urgent needs. Parametric insurance is also expanding to cover urban businesses, tourism, and logistics.

Catastrophe Bonds (CAT Bonds):²⁸ Catastrophe bonds are alternative risk transfer instruments that connect disaster risk to capital markets. Governments or corporations issue these high-yield debt securities through Special Purpose Vehicles, attracting investors including pension funds, asset managers, and hedge funds. Investors receive attractive returns—typically higher than traditional bonds—as long as specified catastrophes don’t occur. However, if predetermined triggers are met (a cyclone reaching specific intensity, earthquake exceeding certain magnitude, or insured losses surpassing threshold levels), investors forfeit some or all principal, which immediately transfers to the issuer for disaster relief and reconstruction.

The CAT bond market has grown substantially, reaching approximately $40-50 billion by 2025, up from minimal levels in the 1990s when they emerged after Hurricane Andrew devastated the insurance industry. India is exploring CAT bonds as the country faces $9-10 billion in annual disaster losses, with single events like the 2013 Uttarakhand floods causing over $6 billion in damages.

Risk Pooling Mechanisms:²⁹ ²⁶ Regional catastrophe risk pools aggregate disaster risks across multiple countries, exploiting geographic diversification where weather events affecting one nation are unlikely to simultaneously impact others. Research shows optimal regional pooling can increase risk diversification by 35-40% compared to individual country approaches. The three major global pools demonstrate this model’s effectiveness:

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) covers tropical cyclones, earthquakes, and excess rainfall across Caribbean and Central American nations.
The African Risk Capacity (ARC) primarily addresses drought risk across African countries, with some coverage for other perils.
The Pacific Catastrophe Risk Insurance Company (PCRAFI) protects Pacific island nations against tropical cyclones and seismic risks.

These pools signed a Memorandum of Understanding at COP27 to collaborate on product development, advocacy, and capacity building.

Microinsurance for Climate Resilience:²⁹ Microinsurance extends risk coverage to low-income households in developing countries whose livelihoods are vulnerable to climate impacts. More than one billion unbanked adults live in the most climate-vulnerable countries, and they lack the financial resilience to withstand climate shocks.

Climate-linked index microinsurance products use satellite monitoring to trigger automatic payouts when drought, flood, or temperature indices reach predetermined levels, eliminating verification costs and fraud risks while providing rapid relief. Evidence suggests microinsurance helps vulnerable communities adopt risk management rather than harmful coping mechanisms after the events have happened, which then deepen poverty cycles.

Some microinsurance programs are now pairing parametric coverage against climate shocks with access to savings accounts or lines of credit accounts for post-disaster recovery. The idea is that this can strengthen community resilience.³⁰

Nature-Based Solutions and Insurance Innovation:⁵ Insurers increasingly recognise ecosystems2 as protective infrastructure deserving of coverage. Mangrove forests, coastal wetlands, and coral reefs provide natural storm surge barriers, while urban green spaces reduce flood risk and heat stress.

Insurance products now protect these natural assets and enable nature-based solutions, understanding that ecosystem degradation directly increases insured losses, although less than 2%²⁹ of international climate finance currently supports nature-based solutions for adaptation.

Instrument	What It Covers	How It Works	Who Uses It	Strengths	Challenges
Parametric Insurance	Weather extremes (rainfall, wind, drought, heat)	Policies pay out automatically if a set index (like rainfall, temperature) crosses a threshold—no need to prove physical loss	Farmers, governments, businesses in exposed areas, humanitarian agencies	Fast payouts, limited paperwork, works for hard-to-insure risks	May not match actual losses perfectly; needs reliable data
Traditional Insurance	Physical damage from weather/disaster	Payouts come after damage is verified, based on actual bills and assessments	Property owners, businesses, local governments	Familiar, covers wide loss types, can be customised	Slow response, costly verification, may not cover all gaps
Catastrophe Bonds (CAT Bonds)	Large-scale disasters (cyclones, earthquakes, floods)	Governments/businesses issue ‘high-yield’ bonds; investors lose their money only if disaster triggers payout	Countries, insurers, pension funds, asset managers	Brings capital markets into disaster relief, diversifies risk	Complex setup, investors risk losing principal if disaster strikes
Risk Pooling	Weather or disaster risks across regions or countries	Multiple countries/areas join a pool to share risks; one area hit, all pay, but events rarely hit all at once	Small nations, regional groups, insurance agencies	Reduces premiums, helps small countries access coverage	Governance is tricky, payouts depend on group solidarity
Microinsurance	Small losses for low-income, vulnerable groups	Ultra-affordable coverage, often parametric, sometimes bundled with savings, delivered by NGOs/banks/mobile	Farmers, informal workers, small businesses in climate hotspots	Swift and simple, increases resilience, avoids deep poverty	Can be less comprehensive, difficult to scale, requires outreach
Nature-Based/Ecosystem Insurance	Mangroves, reefs, wetlands, green urban assets	Policies protect/capitalise the restoration/maintenance of natural infrastructure	Coastal cities, local governments, conservation groups, insurers	Reduces cost of disasters naturally, preserves biodiversity	Not yet widespread, requires monitoring and valuation of natural assets

Comparable explanations of the different climate-related insurance products

In conclusion

As climate change intensifies, traditional insurance models face unprecedented challenges. Historical weather data, which is the foundation of actuarial science, becomes less reliable when climate patterns shift fundamentally.²⁶ Failure to manage climate risks exposes both buy and sell side firms to financial instability, reputational harm, and even legal action.

Financial institutions are adapting by increasingly adopting active risk management strategies that include scenario analysis, stress testing, enhanced data collection, and real-time monitoring of exposures to physical and transition risks, and by aligning governance structures, investing in climate modeling and reporting platforms, and embedding climate risk in all business decision layers including by setting climate-reduction targets, assessing financed emissions, and developing new risk-adjusted pricing and hedging strategies.

Sources

ESG investing

First, a list of definitions:

Asset: Any resource of economic value owned or controlled by an individual or entity, expected to provide future financial benefit.
Asset Class: Broad categories of assets that behave similarly, e.g., equities (stocks), fixed income (bonds), cash, real estate.
Asset Type: Specific forms within an asset class, e.g., large cap, small cap stocks within equity.
Portfolio: A collection of investments held by an individual or entity.
Portfolio Weight: The percentage each asset contributes to the total value of a portfolio.
Asset Allocation: The strategy for distributing investments among different asset classes for balancing risk and return.
Diversification: Investing in different assets to reduce overall portfolio risk.
Rebalancing: Adjusting asset proportions in a portfolio to maintain target allocation that had been decided at the time of deciding asset allocation.
Liquidity: How easily an asset can be converted to cash without affecting its price.
Risk: The chance an investment might lose money or underperform expectations.
Risk Tolerance: Willingness or ability to withstand investment losses or volatility.
Volatility: The degree and frequency of changes in prices of an asset.
Portfolio Risk: The uncertainty of the entire basket of investments losing value or performing below expectations.
Market Risk/ Systematic Risk: Risk due to economy-wide factors affecting all investments.
Credit Risk: Risk that bond issuers or borrowers may default.
Company-specific Risk/ Unsystematic Risk: Risk tied to individual companies or securities.
Downside Risk: The potential for an investment to lose value due to negative market conditions. This focuses only on the probability and quantity of losses rather than the probability of volatility of prices. ESG investing primarily provides downside protection rather than return enhancement.
Volatility: The degree of price fluctuation in either direction in an asset or portfolio over time.
Benchmark: A standard (often an index) for comparing investment performance (e.g., Nifty 50).
Tracking Error: The difference between a portfolio’s returns and the returns of the benchmark its tracking.
Capital Gain: Profit made from selling an asset for more than it’s cost.
Dividend: Payments made by companies to shareholders, usually from profits.
Compound Interest: Earning interest on initial investment plus prior earned interest—critical for long-term growth.
Net Asset Value (NAV): Value per share of mutual funds or ETFs, calculated as total assets minus liabilities divided by shares.
Bull Market / Bear Market: Extended period of rising (bull) or falling (bear) asset prices.
Yield/ Return: Income return on investments, such as interest or dividends.
Turnover: The rate at which securities are bought/sold in a portfolio; high turnover can mean higher costs.
Sharpe Ratio: Measures risk-adjusted return, penalising for volatility.
Portfolio Optimisation: Selecting the best mix of assets to maximise returns for a given risk.
Passive/Active Management: Passive strategies track a benchmark, active invest based on analysis, not constrained to an index.
Index: A selection of securities representing a market or sector, used for performance tracking and benchmarking.
Index Risk Characteristics: How much an index’s value fluctuates due to its components; calculated via weighted average of the securities’ price changes.
Portfolio Tilting: Adjusting portfolio weights to emphasise preferred features (like ESG leaders) while maintaining diversification.
ESG Ratings/Scores: Independent evaluations of companies’ ESG performance.
Materiality: How significantly issues affect a company’s business or financial outcomes.
Greenwashing: Misleading claims of sustainability or ESG compliance by firms, especially the G part.
Greenhushing: Deliberately under-reporting or not reporting genuine environmental action.
Stakeholder: All groups affected by company actions, such as shareholders, employees, customers, suppliers, communities.

Now onto ESG investing.

What
ESG investing is a way to put money into companies while considering more than just their financial returns. The non financial factors considered are Environmental, Social, and Governance (ESG) aspects of the company.

Here’s a list of ESG laws in India.

A small list of different ESG aspects:

Environmental Factors	Social Factors	Governance Factors
Resource use, pollution, waste creation, waste disposal, sustainable procurement, biodiversity impacts,	Human rights, equality, equity, diversity, inclusion, human capital management, customer safety, customer satisfaction,	Corporate governance, executive compensation, board membership, whistleblower protection, corporate transparency, business ethics, shareholder compensation and rights, stakeholder engagement

Why
ESG investing has evolved from a niche ethical consideration to a fundamental component of modern investment strategy due to the recognition that environmental, social, and governance factors pose material financial risks that can devastate companies when left unmanaged. The core imperative for ESG investing lies not in altruism but in financial reality: companies that fail to manage ESG risks face losses that can destroy shareholder value and damage their competitive position.

Mismanaged environmental risks can result in extensive fines, settlements and other costs, stock price collapse, CEO resignations, criminal investigations, and business model restructuring.

Examples:
The Volkswagen emissions scandal: the company was charged over $30 billion in fines, settlements, and other costs after installing “defeat devices” in 11 million diesel vehicles to cheat on emissions tests.¹ The misconduct triggered an immediate stock price collapse, forced resignations, sparked criminal investigations across multiple continents, and required the company to fundamentally restructure its entire business model toward electric vehicles.

The BP Deepwater Horizon oil spill resulted in $20.8 billion in environmental damage settlements, the largest in U.S. history, plus additional billions in cleanup costs, lost revenues, and operational disruptions.² ³ The environmental damages translated directly into financial losses through fishing industry shutdowns, tourism declines, and permanent ecosystem service losses valued at $17.2 billion.⁴

Here’s an explanation of ecosystem services.

Social risks create equally devastating financial consequences when companies fail to maintain proper governance over workplace culture and employee treatment.

Examples:
The Wells Fargo cross-selling scandal, where employees created 3.5 million fraudulent accounts without customer consent, resulted in $3.7 billion in settlements and fundamentally shattered the bank’s reputation for customer-centric service.⁵ The scandal emerged from toxic sales cultures that imposed impossible quotas on employees, leading to widespread fraud, customer harm, and eventual regulatory intervention.

In 2025, Google agreed to pay $50 million to settle a lawsuit alleging bias against Black employees.⁶ Simultaneously, the company paid an additional $28 million to settle claims that it favored white and Asian employees.⁷ Adding to Google’s social risk exposure, the company faced a separate $118 million gender discrimination settlement involving approximately 15,500 employees.⁸ These combined settlements totaling $196 million (50+28+118) reflect systematic failures in Google’s workplace culture and diversity management that created material financial liabilities.

While risk management drives the primary rationale for ESG investing, additional business benefits strengthen the investment case. Better risk management reduces costly scandals and regulatory penalties, improved stakeholder relationships enhance operational resilience, and ESG practices often drive operational efficiencies that reduce costs.

Investor demand increasingly favors ESG-compliant companies, with over 90% of younger investors showing interest in sustainable investing.⁹ ESG-focused institutional investments are projected to reach $33.9 trillion by 2026,¹⁰ while 89% of investors consider ESG when making investment decisions¹¹. This demand translates into better access to capital and lower financing costs for companies with strong ESG credentials.

Regulatory momentum makes ESG compliance increasingly mandatory rather than voluntary. The European Union’s Corporate Sustainability Reporting Directive, India’s Business Responsibility and Sustainability Report framework, and similar regulations worldwide require comprehensive ESG disclosures and accountability. Companies failing to meet these requirements face market access restrictions, regulatory penalties, and competitive disadvantages.

Research demonstrates that ESG investing provides downside protection, especially during social or economic crises.¹² During the COVID-19 pandemic, companies with robust ESG practices demonstrated greater financial resilience and risk management capabilities compared to conventional peers.¹² This downside protection stems from ESG companies’ superior risk management, stakeholder relationships, and operational flexibility.

Climate-related weather events are expected to cost suppliers $1.3 trillion by 2026.¹³ Companies with strong environmental practices position themselves to avoid these costs through improved resilience, supply chain diversification, and proactive adaptation measures. This represents massive potential savings compared to companies that ignore environmental risks.

How
ESG investment strategies provide multiple pathways for investors to align their portfolios with environmental, social, and governance principles while pursuing financial returns. Understanding these distinct approaches enables investors to select methods that best match their values, risk tolerance, and impact objectives.

Negative Screening (Exclusionary Screening)
Negative screening represents the oldest and most straightforward ESG approach, systematically excluding companies or entire sectors that fail to meet specific ethical or sustainability criteria. This strategy originated in the 1970s with religious investors avoiding industries like tobacco, alcohol, gambling, and weapons manufacturing.¹⁴ ¹⁵

Modern negative screening has expanded significantly beyond traditional “sin stocks” to exclude companies with poor environmental records, human rights violations, or severe governance failures. For example, many European pension funds exclude companies involved in coal mining or controversial weapons, while Norway’s Government Pension Fund Global eliminates companies with severe environmental damage or human rights violations from its portfolio.

The screening criteria can range from broad sector exclusions to specific revenue thresholds, such as excluding companies that derive more than 10% of revenue from fossil fuel extraction. This approach allows investors to avoid supporting business activities that conflict with their values while maintaining diversification across other sectors.

Positive Screening (Best-in-Class Selection)
Positive screening takes the opposite approach by actively seeking companies that demonstrate superior ESG performance within their respective industries. This “best-in-class” methodology allows investors to maintain sector exposure while favoring companies with the strongest sustainability credentials.

Unlike negative screening, positive screening doesn’t automatically exclude controversial sectors like oil and gas or mining. Instead, it identifies companies within these industries that show the best ESG practices, commitment to improvement, and transition strategies. For instance, an oil company might qualify if it demonstrates the lowest carbon intensity, strongest safety record, and most credible renewable energy transition plan in its peer group.

BlackRock, the world’s largest asset manager, exemplifies this approach by selecting companies with the highest ESG ratings in each sector for its ESG-focused funds. The Dow Jones Sustainability Indices follow similar principles, annually selecting the top 10% of companies in each sector based on ESG criteria.¹⁶

ESG Integration
ESG integration systematically incorporates environmental, social, and governance factors into traditional investment analysis alongside financial metrics. Rather than simply screening companies in or out, this strategy uses ESG data to better understand risks, opportunities, and long-term value creation potential.

This approach recognises that ESG factors can significantly impact a company’s financial performance, competitive position, and operational resilience. Investment analysts examine how climate risks might affect a utility company’s infrastructure costs, how labor relations impact a retailer’s operational efficiency, or how board composition influences strategic decision-making quality.

Unilever demonstrates ESG integration through its Sustainable Living Plan, which focuses on environmental impact, social responsibility, and governance to reduce risk, build stakeholder trust, and deliver consistent financial performance.

Thematic Investing
Thematic investing focuses on specific ESG themes or sectors that address major global challenges while offering growth opportunities. This strategy identifies long-term sustainable trends and invests in companies positioned to benefit from these developments.

Common thematic areas include renewable energy, clean technology, water management, sustainable agriculture, healthcare access, and financial inclusion. The iShares Global Clean Energy ETF exemplifies this approach by investing specifically in companies involved in solar, wind, and other renewable energy sources.

Thematic investing differs from broad ESG approaches by concentrating on specific solutions rather than applying general ESG criteria across all sectors. This focused approach can offer higher growth potential but typically involves greater concentration risk.

Impact Investing
Impact investing seeks to generate measurable positive social or environmental outcomes alongside competitive financial returns. This approach targets specific problems and requires evidence of additionality- demonstrating that the investment creates positive change that wouldn’t occur otherwise. The Global Impact Investing Network reports that impact investing assets under management have grown to $1.6 trillion in 2024.¹⁷ ¹⁸

Impact investments often focus on underserved markets or pressing global challenges such as affordable healthcare, clean water access, financial inclusion, sustainable agriculture, and climate solutions. Examples include microfinance institutions serving underbanked populations, funds supporting affordable housing projects, and companies developing clean water solutions for developing regions. To be noted, unlike thematic investing, impact investing requires ongoing measurement and reporting of social and environmental outcomes, not just investment in relevant sectors.

Shareholder Engagement and Stewardship
Shareholder engagement uses ownership rights to influence corporate behavior and improve ESG practices through dialogue, proxy voting, and shareholder resolutions. This strategy recognises that investors can create positive change by actively engaging with companies rather than simply avoiding or divesting from problematic investments.

Engagement activities include regular dialogue with management, filing shareholder proposals, voting on proxy measures, and participating in collaborative initiatives with other investors. BlackRock reported conducting over 2,600 engagements with nearly 1,700 companies during 2019, focusing on issues like board diversity and climate risk disclosure.¹⁹

A cinematic example of ESG shareholder activism occurred in 2021 when Engine No. 1, a small hedge fund with just $40 million invested, successfully elected three directors to ExxonMobil’s board to promote climate-focused strategies.²⁰ This campaign demonstrated how strategic engagement can achieve significant influence even with modest shareholdings.

Norm-Based Screening
Norm-based screening evaluates companies based on compliance with internationally recognised standards and norms covering ESG factors. This approach screens investments according to frameworks established by organisations such as the United Nations Global Compact, OECD Guidelines for Multinational Enterprises, and International Labour Organization conventions.

Unlike values-based exclusions, norm-based screening focuses on minimum acceptable business conduct standards rather than sector preferences. Companies failing to comply with basic human rights, labour standards, environmental protections, or anti-corruption measures may be excluded regardless of their industry.

EUROFIMA exemplifies this approach by monitoring investee compliance with the Ten Principles of the UN Global Compact, derived from international human rights, labour, environmental, and anti-corruption standards. Non-compliant positions must be liquidated and business relationships terminated.²¹

Portfolio Tilting and Overweighting
Portfolio tilting adjusts portfolio weights to favour companies with higher ESG ratings while maintaining similar sector and risk characteristics to a benchmark index. This approach provides ESG exposure without dramatically altering portfolio diversification or risk profiles.

Rather than completely excluding companies or sectors, portfolio tilting reduces exposure to ESG laggards while increasing allocations to ESG leaders. A fund might replicate the Russell 3000 index structure but tilt toward companies with superior ESG scores, maintaining broad market exposure while expressing ESG preferences.

This strategy appeals to investors seeking ESG alignment without accepting significant tracking error relative to market benchmarks. The approach balances ESG considerations with traditional portfolio management objectives like diversification and risk control.

Double Materiality
Double materiality is the cornerstone of the European Union’s Corporate Sustainability Reporting Directive (CSRD). Double materiality looks at the company’s impact on the environment, which is seen in impact materiality and sustainability issues influence a company’s development, performance, and financial position, which is evaluated through financial materiality.

Choosing the Right Strategy
The selection of appropriate ESG strategies depends on individual investor priorities, risk tolerance, and desired level of impact. Many investors combine multiple approaches—using negative screening to exclude unacceptable investments while applying positive screening or ESG integration to select among remaining options.

Beginners often start with ESG mutual funds or ETFs that employ professional management and established methodologies. More sophisticated investors might combine thematic investments with shareholder engagement activities to maximise both financial returns and positive impact.

Who
Pension funds have emerged as significant drivers of ESG investment due to their long-term investment horizons and exposure to ESG-related downside risks.²² According to recent research, 71% of sovereign wealth fund respondents have adopted an ESG approach,²³ examples include Norway’s Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund at $1.3 trillion, which has become a stand-out example of responsible investing through negative screening and divestment from companies causing severe environmental damage.²⁴ Insurance companies are the third influencial group interested in the ESG investing, with 85% of global insurers believing ESG will impact all functions of their business. They identify investments as the single largest area of ESG impact, with 91% recognising significant implications.²⁵ Finally, asset management giants are the remaining very large investor: BlackRock now oversees roughly $320 billion of dedicated ESG funds,²⁶ Vanguard offers both exclusionary ESG funds that filter out certain sectors and actively managed products that allocate capital to companies with leading or improving ESG practices,²⁷ and State Street Global Advisors manages over $516 billion in ESG assets under management, comprising roughly 12.5% of the firm’s total assets under management as of 2021.²⁸

Current ESG Related Monetary Flows
The ESG fund flow landscape has experienced significant volatility in recent years. Global sustainable funds recorded the highest inflows of 2024 in the fourth quarter, reaching $16.0 billion. However, the first quarter of 2025 saw record outflows of $8.6 billion, marking the worst quarter on record.²⁹ ³⁰ The market showed signs of recovery in the second quarter of 2025 with net inflows of $4.9 billion, driven primarily by European investors who contributed $8.6 billion after redeeming $7.3 billion in the prior quarter.³¹

Global sustainable funds attracted $31 billion in net inflows during 2024, though this represented slower growth compared to previous years. The combined assets of mutual funds and ETFs investing according to ESG criteria increased by $8.43 billion to $605.23 billion in the United States alone.³² ³³

Meanwhile, Germany leads global ESG enforcement with the largest single penalty imposed on DWS (Deutsche Bank’s asset management arm), which paid €25 million ($27 million USD) in 2025 for greenwashing violations;³⁴ Australia has also demonstrated a comprehensive enforcement program with three major greenwashing penalties totaling $23.3 million USD in the last year;³⁵ ³⁶ ³⁷ United Kingdom reports £7.3 million ($7.3 million USD) in individual penalties during 2024/25, representing a 225% increase from the previous year;³⁸ and even the United States has fined $19 million across multiple actions.³⁹ ⁴⁰

Challenges and Market Evolution

The ESG landscape faces significant challenges from regulatory uncertainty and political backlash, particularly in the United States where ESG principles have become politically controversial.⁴¹
The absence of unified global ESG standards represents one of the most persistent challenges facing the sector. 25% of global investors identify inconsistency in ESG scores from different rating providers as their primary challenge, while 37% of executives highlight the lack of consistent reporting standards as a major operational obstacle.⁴² This fragmentation creates significant compliance burdens for multinational corporations. Companies operating across multiple jurisdictions must navigate the CSRD, TCFD, GRI, SASB, and ISSB standards, each with different disclosure requirements.
Columbia University and London School of Economics research comparing 147 ESG fund portfolios with 2,428 non-ESG portfolios found that companies in ESG portfolios had worse compliance records for both labor and environmental rules. These findings contribute to growing skepticism, with 53% of UK investors considering ESG factors in 2023, down from 65% in 2021.⁴³ ⁴⁴
46% of investors highlight the lack of comprehensive ESG data as a significant challenge , particularly for Scope 3 emissions and supply chain risk assessments.⁴⁵ ⁴⁶
Supply chain due diligence presents major compliance challenges, as most ESG risks occur outside an organisation’s direct operations. Companies must ensure their entire supply chain complies with ESG standards, which can be resource-intensive, particularly when dealing with suppliers in emerging markets that may lack resources or expertise to meet compliance standards.⁴⁷
There is a growing role of artificial intelligence and machine learning in ESG data collection and analysis. Technology solutions address the 46% of investors who identify lack of comprehensive ESG data as a significant challenge, representing a practical solution to implementation barriers.

In conclusion, understanding these diverse ESG investment strategies enables investors to construct portfolios that reflect their values while pursuing competitive financial returns and contributing to positive environmental, social, and/ or corporate governance changes, if they wish to do so.

ESG factors represent material business risks that directly impact financial performance, not ancillary social concerns: NYU Stern meta-analysis showing 58% positive relationships and 90% non-negative correlations between ESG performance and financial returns.⁴⁸ This positions ESG as fundamental risk management rather than values-based investing overlay. Therefore, companies that excel at managing these risks demonstrate superior long-term value creation, while those that ignore ESG factors face potentially catastrophic financial losses that can destroy decades of shareholder value.

Sources

Financing Climate Solutions – III: Weather or Climate Derivatives

A derivative is an asset whose value is based on a different underlying asset. They are called derivatives because they derive their value based on the value of something else. That something else is called the “underlying asset” and can be any asset, such as a stock/ share in a company, land, bags of grain, plant and machinery, inventory, or any other asset, group of assets, or even a benchmark¹, or a variable, such as the weather, or an event (outcome of an election). If something has an associated measurement that can be reliably quantified, it can be the “underlying asset”. The underlying asset is also called the “Primary Instrument”.¹

If there is any uncertainty about what the value of the underlying will be in the future, whether it is the price of a house, the earnings of a film, or how much rainfall there will be in the month of July next year, there can be a derivative about it. This is because derivatives are based on risk- some parties wish to protect themselves from a particular risk they foresee, and others believe that risk is worth taking. A derivative is a transaction between such risk averse/ risk protective and risk friendly parties.

Why do some people wish to take on more risk while others avoid it? Because humans have different opinions about what will happen in the future, generally believe they are correct about their assessments, and have varying risk appetites. Those with higher risk appetites may think of derivatives either as a wager, or a bet, and those with lower risk appetites may look at them as insurance or hedging against risk.

When thinking of derivatives as wagers or bets, we can liken them to sports betting, and just like organisations that run bets on sports matches have books of odds of what they think the result is likely to be, weather derivatives have an “index” of what is the normal or average or expected weather for a particular geography at a particular time of the year, and how likely it is to be that kind of weather. This is also called speculation- we are speculating on what the associated value measurement of the primary instrument will be at some point in the future, or, we are making a bet or a wager that it will be a particular value, but their value in climate finance lies in the security they provide against weather abnormalities. For example, both less and more rainfall than expected can be negative outcomes for farmers as both can ruin their crop. This sounds like an insurance, except that insurances pay out only when all their conditions are met- derivatives pay out when there is any deviation of the value of the underlying asset from what it was supposed, or expected, to be (the average value).

This is how derivatives can be used instead of insurance, and also why they are often considered better than insurance for those who know how to use them- insurance firms pay out only if there is evidence of a loss, and the loss must be proven to their standards, and even so your entire amount may not be covered due to contractual issues or because they don’t cover certain common types of losses, or even because the insurance company does not consider the evidence you provide to be sufficient. A derivative will pay out immediately as long as there is a difference between what was supposed to happen according to the contract, and what actually happened.

There are two general types of derivatives- firm commitments, and contingent claims. If parties participate in a firm commitment, that is, they promise, they must then fulfill the promise and complete the contract. For contingent claims, you have the option to follow through or not at the time the contract becomes due.

Because the value or price of the primary asset on which the derivative is based can move upwards or downwards, derivatives can also be thought of as being based on the direction of this movement. This is why some contracts are called “long” and some are called “short”:

Long contracts- you will benefit if the value of the underlying asset increases in the future. In case of sports for a match between Teams A and B for Team A to win, you are long (bullish) or you are long on Team A’s chances to win (winning being considered positive, generally).

Short contracts- You will benefit if the value of the underlying asset decreases in the future. In the case of the sports teams, since you are expecting Team A’s victory to take place, you will be short on Team B, because you expect their loss to take place or their value to decrease after the given match.

Example: Let’s say you come to know that Company X will purchase Company Y in the future, you are likely to purchase more shares of Company Y, because usually the purchasee is overvalued by the purchasing company, therefore the price of the shares of Y will increase since X is likely (via historical evidence) to have paid more for Y than Y is actually worth. Simultaneously X’s value is likely to reduce in the future because they have paid more than they should have. You are therefore long on Y and short on X.

Types of derivatives:

Futures

A Futures contract is an agreement to buy or sell an underlying asset at a future date and price that are both set down in the contract.

Futures contracts are standardised, and the counterparty is always the exchange it is traded on- this means, the entities buying or selling the contract do not have contact with the party selling or buying (respectively) the contract. Each party only interacts with the exchange on which the trade is taking place. Because they are exchange traded, the contracts are standardised rather than personalised.

These contracts are also settled daily by the exchange with the involved parties, so if the buying price of the contract increases, the exchange will ask the purchasing party to top up the difference, further discouraging rogue traders. Further, since these contracts are standardised and exchange traded, they are liquid and transparent.

Example: A natural dye trader worried that her crop of marigolds has not yielded enough flowers in time to make the dye for her next shipment due. She decides to purchase a futures contract for a few additional caseloads of fresh marigold petals, thinking that it’s okay if she ends up with more golden dye rather than less of it.

The contract states that two weeks from the date of purchase, the purchaser of the contract will pay the USD 150 for two kilos of fresh marigold petals. Now the farmer is certain that weather her farm produces enough marigold or not, she will have ready to use fresh petals for making her dye.

Let’s assume that on the date of delivery the price of two kilos of fresh marigold petals is USD 140 in the market, then the farmer still has to pay USD 150 for her delivery. And vice versa.

Forward

A Forward contract is similar to a Futures Contract, with the sole difference that these are customised private contracts between two parties rather than exchange traded.

Therefore these are not centrally settled, they are not liquid, and there is a possibility that the counterparty, which is the other trader and not a central exchange, may renounce the contract at any point, leaving the other party hanging.

Example: Morgan and Akanksha enter into a contract with each other to buy and sell 10 crayons of the now discontinued Crayola Daffodil Yellow. These are not available in the market any longer, and Akanksha is the only seller available, so she can decide any terms. This is also a very small quantity of product and an unusual product for the commodity markets. Morgan and Akanksha therefore enter into a Forward contract to accomodate all the unstandardised elements of their exchange.

If either party were to decide to dishonour the contract at any time before the exchange is completed, there would be no penalties exacted upon them, and the contract would fall through.

Options

Options, give people the possibility of doing something in the future. There are two kinds of options: A Put option, and a Call option.

A Put option is the right, but not the obligation (that is, the option), to sell an underlying asset in the future at a certain price which will be decided at the time of the contract.

A call is the right, but not the obligation, to purchase an underlying asset in the future at a certain price which will be decided at the time of the contract.

Example: A restaurant does not know how many tourists the city will host next year. Depending on whether more than expected tourists come, the owners of the restaurant wish to secure their supply of onions for their famous French onion soup. If there are more tourists, there will be more demand for onions, and then their prices will increase- and yet, the restaurant cannot always increase the price of the soup to reflect the increased price of the onions.

To secure their future supply, and to save themselves price uncertainty, they buy the option to buy more onions during tourist season at current prices. Now they are assured that if prices increase, or supply is tight, they will still have access to the produce. In case at the specified time the option can be exercised, the price of onions drops, they can always just buy from the market, and their only loss is a small fee paid to purchase the option, which for the restaurant is a call option.

If the market price of onions is higher than the price they agreed to pay as part of the Call Option they have bought (that is, they bought the option to buy onions), the restaurant can buy at the Call price and save money in comparison to what they would have paid for buying onions off the open market.

If the market price is less than the call price, they can just buy from the market and the only money they lose is the small amount they paid to buy the Call Option.

Example: For a Put Option, think of a scuba diving instructor, whose business is weather dependent, buys the Option to sell his lessons to a cruise shipping company. This is a Put Option, because it is the option to sell. If during the given week, the weather is good, the scuba diving instructor can sell his lessons at a higher price to other tourists and make more money. However if the weather is poor and tourists do not wish to go scuba diving, he can still sell to the cruise ship company.

Swaps

Swaps allow us to exchange cashflows.

Certain types of financial contract result in a stream of cashflows. For example, a debt contract results in a stream of interest income. Parties can agree to swap the interest they will receive (or pay) in the future with each other.

Example: In terms of climate financing, think of a weather dependent business, for example a movie shooting outdoors. The film production house can get into a Swap contract with a financing company. Let’s say the film company requires 20 continuous days of sunshine and warm weather at their location. They can get into a Swap Contract that says they require an average of 10 hours of sunshine daily, and another Swap that says they want an average of 25°C temperature daily for the twenty days of their shoot.

If the weather is different over the time period for which the film producing company bought the derivatives, they will automatically be paid (just by comparing the actual weather to the base index) and can use the money to cover additional costs that were incurred due to the different weather (like it was rainy instead of sunny).

So, a film production company (Party A) and a financial institution (Party B) enter into a weather swap that says that if there is more than 0 cm of rain between June 20 and July 10 at their location, Party B will pay $10,000 per day where there is more than 0 cm of rain to Party A.

Weather Swaps are generally two way contracts, so depending on the contract, perhaps if there are no rain disruptions, the Production Company may pay the financial institution $10,000 x 20 days = $200,000 instead. This depends on the contract they have entered into.

Sources

Understanding Derivatives: A Comprehensive Guide to Their Uses and Benefits

Financing climate solutions – II: adaptation finance

Climate change adaptation finance is the gangplank between addressing constantly escalating climate threats, and our current level of climate adversity preparedness- that is, it is used to help adjust to the adverse effects of climate change, such as floods, fires, or other extreme weather events.

The UNEP’s Emissions Gap Report 2024 states that while it remains technically possible to get on a 1.5°C pathway, a failure to deliver superior results would put the world on course for a temperature increase of 2.6-3.1°C over the course of this century.¹ To achieve the pathway to limiting temperature rise to 1.5°C, the current estimates are that the annual adaptation finance gap is US$187-359 billion per year², and developed countries, that did most of the climate damage must double adaptation finance to at least $40 billion a year by 2025³.

In 2022, the total financial flows to adaptation efforts were assessed to be $32.4 billion⁴, while another approximation puts this value at $63 billion⁵, which is nearly twice the first estimate- and yet, to put our requirements into further perspective, the all nations at COP29 agreed that the all sources of finances should generate $1.3 trillion annually by 2035, less than 10 years from now⁶.

Various financial mechanisms and instruments have been devised to address the gap. Here is a brief run down of some interesting ones:

1. Results based finance/ Outcome-Based Instruments- Money is paid out only once the previously agreed results are achieved. Debt-for-climate swaps/ Debt-for-Nature Swaps- “In a debt-for-adaptation swap, countries who borrowed money from other nations or multilateral development banks (e.g., the IMF and World Bank) could have that debt forgiven, if the money that was to be spent on repayment was instead diverted to climate adaptation and resilience projects.”⁷ These are a type of Results Based Financing.

2. Blended finance- The use of cataclytic finance to increase private sector participation in climate financing.⁸ Catalytic capital—debt, equity, guarantees, and other investments that accept disproportionate risk or concessionary returns compared to a conventional investment in order to generate positive impact.⁹ For example, guarantees are an assurance by a party that they will bear all losses for a project in case any occur, so that other investors come in to finance the project. Pooled investments are another example of blended finance, where capital from different entities is combined to finance projects.⁸

3. Payment for Ecosystem Services (PES)- The beneficiaries of ecosystem services remunerate those who tend to the ecosystem in question. A hypothetical example is paying the tribespeople who live in and tend to the Amazonian forests for providing a green lung to the rest of the world.

4. Liquidity facilities- Providing loans at the time of a crisis, often at concessional rates, or deferring repayments of old debts after an extreme weather event so that the nation(s) suffering from it have adequate liquidity to help their citizens.

5. Bonds- A bond is a debt instrument which offers an interest rate in exchange for lending money to the issuer of the bond. When the issuer is a sovereign, the interest rates are usually low since it is believed that they can cover at least the nominal value of the interest and the basic capital borrowed, whereas riskier debts such as corporations must offer more attractive rates of interest.

Catastrophe bonds are bonds issued to investors by insurers or pension funds which are offered at attractive rates and cover the risk of a climate catastrophe. In case such an event occurs, these funds are called in, however in case no such disaster happens, the investors benefit from the high interest rates.

There are also a variety of sustainable bonds, such as green bonds, sustainability-linked bonds, blue bonds, etc. and are used to fund different types of climate projects.

6. Green securitisation- Securitisation is the practice of clumping various financial instruments with similar characteristics together to form a completely new instrument which can then be sold to those willing to accept the risks and rewards associated with that new instrument, and the underlying securities. If the underlying securities were originally issued for climate friendly projects, they are called “Green Securitisation”.¹⁰

These and other mechanisms are all geared towards luring private funds into covering the gaping mouth of climate change adaptation requirements. Its clear that the need is dire, however these and other climate related mechanisms still form a tine part of the global capital markets.

Sources

Financing climate solutions – I

Climate oriented finance is often a nebulous, not-quite-defined cloud of international funds, bilateral and multilateral agreements, public and private initiatives. It’s an ever changing landscape, and several trillions of United States Dollars are required as of date to truly combat the ever escalating events ^{1, 2, 3} so there is no one way to pinpoint its exact components, but here is a first primer on climate finance.

Money used to help adjust to the effects of climate change (adaptation finance), reduce the future burden attributable to climate change (mitigation finance), and/ or help change our current ways of working that contribute to the perpetuation of climate change towards a low (or lower) carbon intensive economy (transition finance) is classified roughly as climate finance. Additionally, money used for capacity building or educating people about climate change and how we can adjust to or tackle the situation in the shorter and longer terms is also part of the money bag.

There are various mechanisms used to activate financing for climate change related projects, such as:

i. Multilateral Funding – money provided by a group of countries for a project.

ii. Bilateral Investments – Funds invested by one country into projects in another country.

iii. Global or Regional Climate Funds – These funds may operate at any geographical level. Some global examples are the Global Environment Facility (GEF), and the Adaptation Fund.

iv. Blended Finance – using more than one source of funds in a way that different funding agencies take up different different risks depending on their own risk appetite, as well as different rates of returns. For example, a government agency may not require any rate of return on a project, but a private entity is likely to have a base requirement. These bodies will also have different capacity for risk. using a combination of such sources will allow for projects that may otherwise be difficult to fund. These sources of funds may be sovereign funds, private grants, loans, scholarships, crowd sourced, etc.

These funding sources use a variety of instruments to distribute money among various deserving projects. Financial instruments are a monetary contract that promise to transfer value from the giver to the receiver. A bank note is an example of a financial instrument. These instruments may be:

i. Debt, such as climate bonds or loans.

ii. Equity, such as investing in companies that work directly on climate solutions (for example, a company that researched how to produce electricity from non fossil fuel sources).

iii. Climate projects may also be financed through what I think of as ‘Indirect Financing’ or ‘Risk Financing’, such as providing guarantees for the funding of higher risk projects, in which case the guarantor is not providing the money to run the project directly, but instead assuring the financier that if they do not meet the required return, the guarantor will meet the deficit.

iv. Climate Derivatives are a type of instrument in which a party takes on the weather related risk associated with a particular event or project, and depending on the outcome, they may keep the premium paid to them to cover the risk, or they will have to pay for the weather damages.

As mentioned previously, climate related finance is a complex subject, and while this is a pithy overview of the basics, in the next articles in this series I’ll take up these topics in greater detail.

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