OCTOBER2025

Putting

DevelopmentFirst

ClimateChangeandthe

InternationalFinancialArchitecture

PhotobyMichu??ngQuangviaUnplash.

TableofContents

AbouttheTaskForce4

TaskForceMembers5

ExecutiveSummary7

Introduction9

ProgresstoDate17

PersistentGaps21

WhyADevelopmentCenteredApproachisImportant26

Conclusion:TheNeedforaSystemicApproach31

References33

CoverPhoto:CapeTown,SouthAfrica.PhotobyPietervanNoordenviaUnsplash.3

AbouttheTaskForce

TheTaskForceonClimate,DevelopmentandtheInternationalFinancialArchitectureisaconsortiumofexpertsfromaroundtheworldutilizingrigorous,empiricalresearchtoadvanceadevelopment-centeredapproachtoclimatechangeacrosstheinternationalfinancialarchi-tecture(IFA).TheTaskForcebelievesitisimperativethattheglobalcommunitysupportclimateresilienceandtransitionstoalow-carboneconomyinajustmanner.ThemissionoftheTaskForceistoadvanceadevelopment-orientedclimatepolicyintheinternationalfinancialarchitecturethroughrigorousempiricalresearch,policyengagementandstrategiccommunications.

MEMBERORGANIZATIONS

?IntergovernmentalGroupofTwenty-Four(G24)

?VulnerableGroupofTwenty(V20)MinistersofFinance

?AfricanCenterforEconomicTransformation

?AfricanEconomicResearchConsortium

?BostonUniversityGlobalDevelopmentPolicyCenter

?CentreforPolicyDialogue

?CentreforSocialandEconomicProgress

?FinancialFuturesCenter

?Macro&GreenFinanceLab,NationalSchoolofDevelopment,PekingUniversity

?Wirtschaftsuniversit?tWien

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5

TaskForceMembers

JOHNASAFU-ADJAYEisaSeniorFellowattheAfricanCenterforEconomicTransformation(ACET).

SARAJANEAHMEDservesasaFinanceAdvisortotheVulnerableGroupofTwenty(V20)MinistersofFinanceoftheClimateVulnerableForum(CVF).

RISHIKESHRAMBHANDARYisAssistantDirectoroftheGlobalEconomicGovernanceInitiativeattheBostonUniversityGlobalDevelopmentPolicyCenter.

AMARBHATTACHARYAisaSeniorFellowintheCenterforSustainableDevelop-mentattheBrookingsInstitutionandaVisitingProfessorinPracticeattheGranthamResearchInstituteattheLondonSchoolofEconomics.

KEVINP.GALLAGHERisaProfessorofGlobalDevelopmentPolicyatBostonUniversityIsPardeeSchoolofGlobalStudiesandDirectoroftheBostonUniversityGlobalDevelopmentPolicyCenter.

XIAOBEIHEisDeputyDirectoroftheMacroandGreenFinanceLabattheNationalSchoolofDevelopment,PekingUniversity.

MAJUNisDirectoroftheMacroandGreenFinanceLabattheNationalSchoolof

Development,PekingUniversity,andtheFounderandPresidentofInstituteofFinanceandSustainabilityinBeijing.HeisthePresidentofInstituteofFinanceandSustainabilityandCo-ChairoftheG20SustainableFinanceWorkingGroup,andheservedasthe

ChiefEconomistatthePeopleIsBankofChinaIsResearchBureau.

ABBIM.KEDIRistheDirectorofResearchattheAfricanEconomicResearchConsortium(AERC).

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FAHMIDAKHATUNistheExecutiveDirectoroftheCentreforPolicyDialogue(CPD),aleadingthinktankinBangladeshandSouthAsia.

IYABOMASHAisDirectoroftheIntergovernmentalGroupofTwenty-FouronInternationalMonetaryAffairsandDevelopment.

RAKESHMOHANisPresidentEmeritusandDistinguishedFellowatCentreforSocialandEconomicProgress.HeservedasExecutiveDirectorontheBoardoftheInternationalMonetaryFund.HewasDeputyGovernoroftheReserveBankofIndiabetween2002-2009.

IRENEMONASTEROLOisaProfessorofClimateFinanceattheUtrechtUniversitySchoolofEconomics,VisitingProfessoratWirtschaftuniversitaetWienandNon-res-identFellowwiththeGlobalEconomicGovernanceInitiativeattheBostonUniversityGlobalDevelopmentPolicyCenter.

JANAKRAJisaSeniorFellowattheCentreforSocialandEconomicProgress.

JWALARAMBARRANisaDistinguishedFellowattheClimateWorksFoundation.HeistheformerGovernoroftheCentralBankofTrinidadandTobago.

DANIELTITELMANisaNon-residentSeniorFellowfortheGlobalEconomic

GovernanceInitiativeattheBostonUniversityGlobalDevelopmentPolicyCenterandpreviouslyservedastheDirectoroftheEconomicDevelopmentDivisionattheUnitedNationsEconomicCommissionforLatinAmericaandtheCaribbean.

MARILOUUYisaNon-residentSeniorFellowfortheGlobalEconomicGovernanceInitiativeattheBostonUniversityGlobalDevelopmentPolicyCenter.ShewasformerlytheDirectoroftheIntergovernmentalGroupofTwenty-FouronInternationalMonetaryAffairsandDevelopment.

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ExecutiveSummary

Thereisavanishingwindowtolimitglobalwarmingto1.5degreesCelsius.Meetingthisurgentchallengewillrequireatremendousmobilizationofresourcesforamajorinvestmentpushtowardneweconomicgrowthpathsthatarelow-carbon,sociallyinclusiveandcli-mate-resilient.Thischallengeisallthemoreurgentgiventhatintersectingcrisesoftheearly2020ssetbackmanyofdevelopmentgainsinpovertyreductionandeducation.Meanwhile,climate-relatedhazardscontinuetointensifyandestimatesoftheeconomiccostofinactiononclimatechangeareincreasinglystaggering.However,astepwiseincreaseininvestmenttowardgreenstructuraltransformationpresentsasignificantopportunityfornewgrowthpathsintheGlobalSouth.

Overthelastfiveyears,significantprogresshasbeenmadeinaligningtheinternationalfinan-cialarchitecturewithdevelopmentandclimatechangegoals.Forexample,theInternationalMonetaryFundadoptedaninstitutionalstrategyonclimatechangein2021andestablishedtheResilienceandSustainabilityTrust(RST),adedicatedlendinginstrumentforclimateandhealthemergencies(IMF2022a).Multilateraldevelopmentbankshavecontinuedtoraisetheirclimateambitionandhaveundertakenreformmeasurestoincreasetheirlendingby$357billionoveradecade.TheWorldBankhasevolveditsvision,mission,financingandopera-tions,significantlyadvancingdevelopmentandclimatechangeanalytics.However,thescaleoffundingavailableisstillnotsufficienttohelpcountriesachievedevelopmentandclimatechangegoals.Privatecapitalmobilizationremainsfarbelowexpectations,anddomesticresourcemobilizationintheGlobalSouthissignificantlyconstrainedgiventhehighcostofborrowing,highdebtburdensandsluggisheconomicgrowthrates.TheGlobalFinancialSafetyNet(GFSN)remainsunevenandisinadequatetoaddresseconomicandfinancialshocks,andisalsoyettorecognizeandaddressthefullscopeandscaleofclimaterisks.

Overthepastfouryears,theTaskForceonClimate,DevelopmentandtheInternationalMon-etaryFund,aSouthern-ledconsortiumofthinktanksacrosstheglobeinformedbytechnicalpapersandpolicyanalyses,hasadvocatedforaninvestment-ledapproachtosupportcountriesinachievingtheirdevelopmentandclimatechangegoals.Countriesneedaffordable,long-termfinancetopursuenationally-ledgreenstructuraltransformationsandbuildresiliencetoclimaterisks.Theselong-rungrowthpathsneedtobecalibratedtomaximizeshort-runfiscalandfinancialsustainability.SuchanalignmentwillrequiretheGFSNandthebroaderecosys-temofdevelopmentfinanceinstitutionstoworktogetherthroughcoherentgovernance.

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AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

Giventheneedforthissystemicperspectiveandthepersistentgapsintheexistingsystem,ratherthanretreatingfromcallingforclimatereformtheTaskForcehasdoubleddownandexpandeditsmandatetoincludeboththeGFSNanddevelopmentfinanceinstitutionscom-bined,andmovingforwardwillbecalledtheTaskForceonClimate,DevelopmentandtheInternationalFinancialArchitecture.

Aninvestment-led,development-centeredapproachtoclimatechangewillrequireinterna-tionalanddomesticfinancialinstitutionsto:

?Embraceandplayacentralroleinmobilizingpublicandprivatefinance;

?Aligninvestmentswithgreenstructuraltransformationgrowthpaths;and

?Ensureclimatefinanceandclimatepolicyarefiscallysoundandfinanciallystable.

Itisofparamountimportancethattheinternationalfinancialarchitecturebereformedtoenablethegreenstructuraltransformationnecessarytolimitclimatechangeto1.5°Candtoadvanceadaptationandresilience,therebystrengtheningthegrowthanddevelopmentpros-pectsoftheGlobalSouthandtheworldeconomyasawhole.Tothisend,thereinvigoratedmissionoftheTaskForcewillbetoadvanceanagendaofdevelopment-orientedclimatepolicyintheinternationalfinancialarchitecturethroughrigorousempiricalresearch,policyengage-mentandstrategiccommunications.

Introduction

Greenstructuraltransformation(GST)cancreatenewgrowthanddevelopmentopportunitiesandminimizetheimpactsofclimatechangeaswellastheshort-termcostsoftheenergytransition.GSTwillhavetobesupportedbyastepwisemobilizationofresourcesasitscentralpillar.However,emergingmarketanddevelopingeconomies(EMDEs)faceasignificantgapinthefinancingrequiredtoachievedevelopmentandclimatechangegoals.Addressingthisshortfallrequiresurgentactionasthewindowtolimitglobalwarmingto1.5degreesCelsiusisrapidlyclosing.Theimpactsofclimate-relatedhazards(e.g.floods,hurricanes,droughts)arealreadyintensifying,furtherincreasingthedemandforclimate-resilientinvestments.Further-more,theintersectingcrisesoftheearly2020shaverolledbackdevelopmentgainsachievedthroughthepursuitofSustainableDevelopmentGoals(GrayMolinaandJensen2023).Cor-rectingthecoursewillrequireconcerted,collaborativeandmultilateralaction.

Expertestimatessuggestthatslightlyundertwo-thirdsofthe$2.4trillionofEMDEfinanceneedswillhavetobemobilizeddomestically(IHLEG2024).Anotherrecentstudyhasesti-matedtheclimatefinancerequirementsforthenineG20EMDEsacrossthefourmajorcarbonemittingsectors(power,roadtransport,steelandcement)at$2.2trillionupto2030($255billionor0.6percentofGDPannually).However,excludingChina,climatefinancerequire-mentsaremuchlowerat$854billion($100billionor0.5percentofGDPannuallyupto2030)(RajandMohan2025).Atthe2024UnitedNationsClimateChangeConferenceinBaku,Azerbaijan,partiestotheParisAgreementagreedonthe“BakutoBelémRoadmap,”whichsetsouttheambitiontomobilize$1.3trillioninclimatefinanceby2035(UNFCCC2024a).Thecentralityofdomesticresourcemobilizationandthecontinuedneedforcloseinternationalcollaborationtosupportit,throughtaxreformandinstitutionalstrengthening,amongotherstrategies,washighlightedintheSevillaCommitmentof2025,whichrepresentsthemostrecentglobalconsensusonfinancingfordevelopment(UN2025).Whiledomesticresourcemobilizationwillbeattheheartofnationalstrategiesforgreenstructuraltrans-formation,itmustoccurwithinthecontextoftightfinancialandfiscalconstraints.EMDEshavebeenexperiencingpro-cyclicalprivatecapitalflows,elevatedandgrowingdebtservicingcosts,highcostsofcapitalandahighlyuncertaingeopoliticalenvironmentthatisdampeningeconomicgrowthandcomplicatingmacroeconomicmanagement.

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Iftheseheadwindsarenotaddressed,theywillslowdownthepaceofactionrequiredtoachievedevelopmentandclimatechangegoals.Forexample,theInternationalMonetaryFund(IMF)warnedthatareversalofglobaleconomicintegrationcouldundermineclimatemitigationeffortsintheshorttomediumterm,potentiallymissingthe2030targetofreducing

AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

10

carbonemissionsbynearly50percent,whichwouldjeopardizethechanceoflimitingwarm-ingto1.5°C(Blacketal.2024;Aiyaretal.2023).Morebroadly,climateinactionintheformofpersistentunderinvestmentinfavorofservicingexternaldebtwillleadtomissedopportu-nitiesandcouldleadtocountries“defaultingondevelopment”(Zucker-Marquesetal.2024).

In2021,theTaskForceonClimate,DevelopmentandtheIMFwaslaunchedasaGlobalSouth-ledcollaborativeefforttoadvancerigorousresearchandpolicyengagementtowardsadevelopment-centeredapproachtoclimatepolicyattheIMF.Sinceitsinception,theTaskForcehaspublishedtechnicalpapersonthemacroeconomicdimensionsofclimatechange,apreliminaryassessmentoftheIMF’sclimatechangestrategyandamedium-termIMFreformagendaforanacceleratedpushtoachievedevelopmentandclimatechangegoals.ThecentralmessagefromtheTaskForce’sworkhasbeentheneedforaninvestmentpushthroughastepwisemobilizationofresourcesinamannerthatisfiscallysoundandfinanciallystable.Giventheimportanceofaffordablelong-termfinanceinsupportingtheseefforts,theTaskForcehasexpandeditsscopetoincludedevelopmentfinanceinstitutions.Furthermore,whiletheIMFhastakenencouragingstepstowardsintegratingclimatechangeintoitswork,theGFSNasawholeneedstointegrateclimaterisksandensurealignmentwithdevelopmentandclimatechangegoals.Totheseends,theTaskForcewillcontinuetoadvancetheneedforadevelopment-centeredapproachtoclimatepolicyintheinternationalfinancialarchitectureandwillbeknownastheTaskForceonClimate,DevelopmentandtheInternationalFinancialArchitecture.

NEEDFORSTEPWISEMOBILIZATIONOFRESOURCES

TheIndependentHigh-LevelExpertGrouponClimateFinance(IHLEG)estimatesEMDEsotherthanChinawillneed$2.3-2.5trillionperyearby2030and$3.1-3.5trillionby2035tofundcleanenergy,adaptationandresilienceandlossanddamage(IHLEG2023).Thesefinancingrequirementsdemandamajorstepchangeinthemobilizationofresources.Accord-ingtothe2025GlobalLandscapeofClimateFinance,in2023,internationalclimatefinanceamountedto$196billion,reflectingathree-foldincreasecomparedto2018butstillfarshortoftheclimatefinancegapidentified(ClimatePolicyInitiative2025).Furthermore,estimatessuggestthatEMDEsreceivedonly17percentoftotalglobalclimatefinancewhiletheleastdevelopedcountries(LDCs)receivedonlyatotalof3percent(IHLEG2023).

Againstthisbackdrop,EMDEsnotonlyfacealimitedrangeofoptionsforfinancingbutalsoahighcostofborrowing.Multilateraldevelopmentbanks(MDBs)areuniquelycapableofsupplyingaffordable,long-runfinance,andareuniquelycapableofplayingacatalyticroleinmobilizingbothprivateandotherformsofpublicfinancing.Whiletheirprogrammingandoperationsneedtobereformedtoenablegreenstructuraltransformations,theirabilitytomobilizevastamountsoffinancingonthebackofsmallquantitiesofshareholdercapital(fromgovernments)makesthemwell-suitedtothechallengeofplayingacentralroleinmobilizingthesignificantfinancingrequiredtosupportdevelopmentandclimatechangegoals(Hum-phrey2022).

AlthoughMDBshavealreadybeenamajorsourceofclimatefinance,thereisstrongpoliticalandexpertconsensusontheirneedandabilitytodomore.TheSevillaCommitmentcallsonMDBstotripletheirlending(UN2025).TheG20IndependentExpertGroupledbytheIndianpresidencyestimatedthatMDBlendingshouldincreasebyanadditional$260billionby2030(G20IEG2023).TheBakutoBelémRoadmapto$1.3trillionrecognizesthecentralrolethat

Source:IMF2022b.11

MDBsplayinfinancingclimateaction(UNFCCC2024b).AG20-commissionedreportonbiggerMDBsestimatedthatambitiousimplementationofthecapitaladequacyframeworkreformsandscaled-uphybridinstrumentscouldbringdownnewcapitalneedsto$60billion;however,thecapitalneedsunderthecurrentambitionlevelaremuchlargerandwouldrangefrom$255-572billion(Gallagheretal.2024).

However,asFigure1ashows,borrowingfromMDBsasafractionofGDPhassteadilydeclinedovertime.Furthermore,financingfromMDBshasalsobecomemoreexpensiveandshorterinmaturityinrecenttimesandprivatecapitalmobilizationhasbeenquitelimited.

1970

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FIGURE1AMDBFinanceasaFractionofGDPforLICsandMICs

lDisbursementof

GrossNationalIncome

0.8%

0.6%

0.4%

0.2%

0%

OthersCAFAIIBEIB

ADBAfDBIDBWBG

Source:Gallagheretal.2024.

MDBshavealsobeenviewedasthekeyenginesthatcanhelpdriveprivatecapitalmobilization(WorldBank2015;UN2015;2025).However,existinghistoricalestimatesofprivatecapitalmobilizationassociatedwithMDBlendingarefarbelowexpectations.MDBsmobilizeonly1.2dollarsinprivatefinanceforeachMDBdollar.Thisratiodropsto0.6fortheWorldBank.

FIGURE1BMDB-DrivenPrivateCapitalMobilization

AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

12

AsFigure2shows,theinterestchargedbyofficialcreditorsspikedovertheperiod2020-2023,reachingarateof4percent.Maturityhasroughlyaveraged20yearsforofficialcreditorswhilematurityonloansobtainedfromprivatecreditorsisslightlybelow15years.

FIGURE2EMDECreditTerms

Source:WorldBank2024a.

Thehighupfrontcostsofrenewableenergyinvestmentsmakethemparticularlysensitivetothecostofcapital(Schnabel2023).Furthermore,developingeconomiesfaceariskpremiumrelatedtothecostofcapital,illustratedinFigure3.Figure3showsadisaggregationoftherisksthatEMDEsfacewhichcontributetoanadditionalriskpremium.

FIGURE3RiskPremiuminPowerGenerationforEMDEs

Source:InternationalEnergyAgency2025.

TheClimatePolicyInitiativeestimatesthatadaptationfinancereachedonly$65billionin2023,notingthatthree-fourthsofthegrowthcomparedto2022camefromtheissuanceofgreenbonds.Yet,theUNEnvironmentProgrammeAdaptationGapReportestimatesafinancegapof$187-359billionperyearfordevelopingeconomies.Thereisalsoapersistentconcernthatadaptationfinancehasprimarilyfocusedonno-regretsoptionsandincremental,technical

solutionsratherthananticipatoryandtransformationalonesthataremorechallengingtofinance(UNEP2024).

GREENSTRUCTURALTRANSFORMATIONPATHWAYS

Thereisnoone-size-fits-allapproachtoachievingdevelopmentandclimatechangegoals.Greenstructuraltransformationswillhavetobecloselytailoredtonationalcontexts.Table1providesatypologyofgreenstructuraltransformationpathways.Thesetypesvarybasedoncountries’existingendowments,includingtheircarbonintensity,capitalstockandclimatevulnerability.Eachnationalcontextwillhaveitsowndistinctsetofpoliticaleconomyfactors,bureaucraticstructuresandgovernancemodelsthatwillalsoplayamajorroleinshapingthesepathways(Dubash2021).

TABLE1GreenStructuralTransformationPathways

Leapfroggers

Thesearecountriesthatneedtomobilizecapitalinordertoinvestinnew

capitalstockwherelittleexistsinthefirstplaceandcanthusleapfrogthe

experienceoflargeemitters.Forinstance,muchofSub-SaharanAfricalacksthemanufacturingcapabilitiesandappropriategridconnectivityneededtoharnesstheabundanceofcleanenergysourcesandtheconsumerdemandofarapidlygrowingcontinent.

Newwinners

Thesearecountriesblessedwiththevital“transitionminerals”andindustriesthatformthebasisofaneweconomy,whichcanworktoharnessthose

resources,increasevalueadditionandstrengtheneconomy-widelinkagesinamannerthatensuresmacroeconomicstability,sharedprosperityandenviron-mentalsustainabilitynotonlygloballybutwherethesematerialsaregenerated.

Largeemittersandfuturelargeemitters

Thesecountriesneedtomakemassiveinvestmentstoreplacetheexistingcapitalstockthroughstructuralchangeawayfromfossilfuelproductionandconsumptionpatternstowardcleanenergy,energyefficiencyandbeyond.

Fossilfuelexporters

Thesecountriesarenothighcarbonemittersthemselvesbuttheireconomiesaredependentonexportingfossilfuels.Theyneedtodiversifytheireconomicbaseandchangethestructureoftheireconomiestowardsnewsourcesof

foreignexchangeandexports,whilebuttressingthemselvesfrom“transitionspillovers”thatarisefromtheglobalshiftawayfromfossilfuels.

Climate-vulnerableeconomies

Thesecountriesneedtomobilizecapitalinordertoreinforcetheirexistingcapitalstocktoadapttoclimatechange,buildanewclimate-resilientcapitalstockandbecomemoreresilienttolossanddamagefromclimateshocks.

Source:AdaptationofGallagheretal.2024.

Abiginvestmentpushalongthesepathwayscanhelprestoregrowth.AsFigures4a-bshow,aninvestmentpushwouldhelpraisethegrowthratetoaround6percent.Batinietal.(2022)estimateacleanenergymultiplierof1.1-1.7,whichissubstantiallyhigherthanthe0.4-0.7rangeforfossilfuels.InanIMFStaffClimateNote,Caietal.demonstratethat$25billioninclimatefinanceforSub-SaharanAfricacouldboostelectricityproductionbyupto24percentandincreaseGDPgrowthby0.8percentonaverageoveratenyearperiod(Caietal.2024).Simi-larly,studiesshowthatinvestinginresilienceyieldsbenefitsfaroutweighingthecosts.AWorldResourcesInstitutestudyestimates$10inbenefitsforevery$1invested,whichincludenotonlyavoidedlossesbutalsoinducedeconomicbenefitsandwidersocialandenvironmentalbenefits(Brandonetal.2025).However,recentresearchhasfoundthatclimatevulnerableeconomies

AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

13

AbouttheTaskForce

TaskForceMembers

ExecutiveSummary

Introduction

ProgresstoDate

PersistentGaps

WhyADevelopment

CenteredApproachis

Important

Conclusion:TheNeed

foraSystemicApproach

References

14

faceahigherriskpremiumthanthosethatarelessvulnerable(CevikandJalles2022;Chamonetal.2022)Underinvestmentinclimateresiliencewouldleavethesecountriesfurtherexposedtoclimate-relatedhazards.Itisalsoclearthatacoordinatedinvestmentpushisrequiredtoaddressthemultiplemarketfailuresthathindergrowthanddevelopment.Forexample,issueslikeundersupplyofinfrastructure,informationasymmetriesandunder-investmentinresearchanddevelopment,amongothers,canholdbackgrowth(SternandStiglitz2023).

FIGURES4AAND4BGlobalSouthGreenGrowthPathandRebalancingDevelopingCountryAccounts

Source:Capaldo2025.

Greenstructuraltransformationisanopportunitytoaddressandmitigatetherisksposedbyclimatechangeinthefuture.However,nation-stateswillhavetosubsequentlypreventandmitigatethecostsofclimatechangeandofuncoordinatedclimatechangepolicies.AsFigure5displays,countriesfacethreemajortypesofclimaterisksthataremacro-critical:physicalrisks,transitionrisksandspillovertransitionrisks.

FIGURE5ClimateRisksandTransmissionChannels

Source:Ramosetal.2022.

Physicalrisksarisefrombothimmediateandslow-onsetevents,aswellaslong-termcli-mateimpacts.Theformerarecharacterizedbyincreasingseverity,volatilityandfrequency;thelatterbyslow-onseteventsthathavemajorcumulativeimpactovertimeanddisrupt

ecosystems.Physicalrisksarefinancialrisksbecausetheyimpactthevalueoffinancialassets,suchasproperty,infrastructureandbeyond.Banks,inturn,facehighercreditandunderwritingrisks.Physicalrisksmayalsodisruptsupplychainsandbusinessoperations,therebyincreas-ingfinancialrisk.Transboundaryphysicalrisksmayalsoposefinancialrisksbecauseclimateimpactsacrossbordersmayaffectpricesandaltertermsoftrade(Battenetal.2016;Monas-terolo2020;Gourdeletal.2025).

Transitionrisksarisefromthe“processofadjustmenttowardsalow-carboneconomy”andcanhavemajoreconomicimplicationsforallsectorsoftheeconomy(NGFS2019).McGladeandEkins(2015)estimatethatbykeepingglobaltemperatureswithintheParisAgreementtargetrange,approximatelyone-thirdoft