The intersection of climate change and finance is now a crucial focus area for policymakers, economists, and environmentalists alike. Novel prize winner Svante Arrhennius was the first who estimated the effects atmospheric CO2 levels had on temperatures in the late 19th century. The long term change in temperature and weather pattern which can occur due to natural reasons is climate change; which has been prominent since the industrial revolution of the 19th century.
Climate Crisis
The greenhouse gases (GHG) emissions are the most significant threat to humanity. In 2021 a comprehensive assessment conducted by the Intergovernmental Panel on Climate Change (IPCC) found that the GHG emissions have reached an unprecedented level in human history with the global average temperature rising by approximately 1.1 degree Celsius compared to the global pre-industrial period (1850-1900). As per the UN SDG portal it is estimated that by 2030 about 700 million people worldwide will be at risk of displacement by drought alone. In a nutshell global warming is a reality, so is climate change. Climate change is a major environmental issue worldwide which is imparting the natural ecosystem, social structures and economic activities. Climate change affects the financial stability following three channels. First, extreme weather conditions due to climate change which directly affects key sectors like agriculture (reduction in production), infrastructure (disruptions in supply chain), and energy (asset devaluation). Second, compensation for the affected economic entities which leads to raises in financial pressures. Lastly, change in policy due to climate change can be the reason for the crash in asset prices. These three channels together leads to a climate crisis.
Sustainable Finance
Understanding climate finance meaning is key—it refers to local, national, or transnational financing drawn from public, private, and alternative sources of financing to support climate change mitigation and adaptation actions. After the Paris Agreement many firms have adopted a sustainable business model so as to reduce the carbon emissions and comply with the environmental regulations. Sustainable finance covers the financial activities that take environment, social and governance (ESG) into consideration. The report of Global Sustainable Alliance shows that the sustainable investment assets reached a total of $35.3 trillion globally in the year 2020 (15% increase than the year 2018). In the last few years a substantial increase in the investment of clean energy, green indices and environmental initiatives have been seen. The array of sustainable finance covers green bonds, ESG criteria incorporation into investment decision making, climate risk disclosure and impact investing.
Regulatory and Policy Developments in India
Emerging economies like India are witnessing a surge in green financing activities. In India the Reserve Bank of India issued its first circular in 2007 on banking and sustainable development, in 2008 the S&P ESG India Index launched. In 2012 the SEBI mandated the business responsibility report as a part of the annual reports by launching the S&P BSE CARBONEX while in 2013 the MSCI ESG India index was launched. Followed by in 2014 the companies act 2013 mandated the 2% of profit to be invested towards CSR. SEBI proposed norms regarding issue and listing of green bonds in 2016.
What’s Holding Back Sustainable Finance?
Despite the increasing momentum in sustainable finance, substantial problems persist. Greenwashing, in which corporations overstate or misrepresent their sustainability initiatives, diminishes investor trust and emphasizes the importance of clear, verifiable ESG indicators. Data limitations, particularly in poor nations, impede accurate climate risk assessment and prevent informed decision-making. Short-termism in financial markets is also a hindrance, as rapid rewards are frequently emphasized above long-term sustainability unless accompanied by strong legislative incentives. Furthermore, the lack of clear worldwide ESG standards and disclosure frameworks causes uncertainty, lowers comparability, and undermines the efficacy of sustainable financing activities across countries and industries. Addressing these difficulties is important to true development.
Developing a Capital Market Strategy Linked to Sustainability
Green bonds have emerged as a way to promote sustainable development linked infrastructure. Establishment of a national exchange risk liquidity facility with a special focus on infrastructure including green infrastructure, this can create a facility to support green bonds. Also providing financial support to market-led initiatives which are targeting to develop standards for the green bond in the Indian context will aid in archiving the sustainable goal.
Priority on Increasing Access to Sustainable Finance
Sustainable finance can be accessed fully by investment in projects on supply driven subsidies for sanitation infrastructure rather than promotion and marketing. Result based financing adoption for waste to energy projects are recommended.
The Future of Finance is Sustainable Financing
Climate change is no longer only an environmental issue; it has become one of the most pressing financial challenges. As global risks evolve, sustainable finance is reshaping how the financial sector defines and manages risk, return, and long-term value. This transition is not a passing trend but a fundamental shift in the financial landscape. In this era, money is important in facilitating the transition to a low-carbon, inclusive economy. Including sustainability in fundamental initiatives it is required for long-term profitability and contributing to a resilient and fair future for both the economy and planet. As we look ahead, concepts like esg climate change and climate finance upsc are becoming essential knowledge for both professionals and future leaders who aim to build a sustainable and financially secure world.
