Recent Papers

In recent years, many governments, international organisations and private institutions have endeavoured to analyse climate transition-related risks and opportunities with respect to the transition to low-carbon economies, including implications for the global financial system. Financial markets will play a catalytic role in financing the adaptation and mitigation to climate change. The urgency for action on climate change has captured the attention of international institutions, policymakers, regulators, and now the corporate world. Company directors, management, shareholders, and investors alike are calling for firms to do their part to shift to a carbon-neutral world economyfrequently under so-called environmental, social, and governance frameworks. Climate adaptation requires large capital investments that could be provided not only by traditional sources like governments and banks, but also by derivatives markets. Such markets would allow two parties with different tolerances and expectations about climate risks to transact for their mutual benefit and, in so doing, finance climate adaptation. Catastrophe and green bonds in the private sector have become the most prominent innovations in the field of sustainable finance in the last fifteen years. Yet, the issuances at the sovereign level have been relatively recent and not well documented in the literature. This Note discusses the benefits of issuing these instruments as well as practical implementation challenges impairing the scaling-up of these markets. The issuance of these instruments could provide an additional source of stable financing with more favorable market access conditions, mitigate the stress of climate risks on public finances and facilitate the transition to greener low-carbon economies. Emerging market and developing economies stand to benefit the most from these financial innovations.

Copyright © 2023 Ikshita Bhatia. This is an open access article distributed under the Creative Commons Attribution License.