Can private investment contribute to global climate justice?

The glob­al response to cli­mate change has entered a phase in which the cred­ib­il­ity and fair­ness of cli­mate action increas­ingly depend on how polit­ic­al com­mit­ments are trans­lated into fin­an­cial sys­tems and mon­et­ary flows. Since the adop­tion of the Par­is Agree­ment, and par­tic­u­larly through the out­comes of COP27, COP28, and COP29, cli­mate fin­ance has been reframed not merely as a ques­tion of scale but as a ques­tion of justice. The estab­lish­ment of the Loss and Dam­age Fund and ongo­ing nego­ti­ations on a New Col­lect­ive Quan­ti­fied Goal on Cli­mate Fin­ance have brought long-stand­ing equity con­cerns to the centre of glob­al cli­mate gov­ernance¹. These devel­op­ments reflect a grow­ing recog­ni­tion that cli­mate justice requires atten­tion to how fin­an­cial resources are mobil­ised, alloc­ated, and gov­erned, not only what emis­sions tar­gets are set.

With­in this con­text, ESG invest­ing has rap­idly expan­ded as a mech­an­ism inten­ded to align private cap­it­al with envir­on­ment­al and social object­ives². Yet des­pite this expan­sion, ser­i­ous doubts per­sist regard­ing wheth­er ESG frame­works can deliv­er tan­gible bene­fits for cli­mate-vul­ner­able regions. In prac­tice, ESG cap­it­al alloc­a­tion remains heav­ily con­cen­trated in low-risk mit­ig­a­tion pro­jects in high­er-income coun­tries, while adapt­a­tion and resi­li­ence needs in the Glob­al South remain chron­ic­ally under­fun­ded. This paper argues that ESG fin­ance can either sup­port or under­mine cli­mate justice depend­ing on how pub­lic insti­tu­tions trans­late UNFCCC prin­ciples into con­crete fin­an­cial governance.

The rela­tion­ship between ESG invest­ing and cli­mate justice is not one of simple com­pat­ib­il­ity or con­tra­dic­tion; it is struc­tur­ally con­di­tion­al. The first step toward under­stand­ing this is examin­ing where ESG cap­it­al actu­ally flows and what fin­an­cial logic drives those decisions.

Empir­ic­al evid­ence on glob­al cli­mate fin­ance con­sist­ently reveals a sig­ni­fic­ant geo­graph­ic and sec­tor­al mis­match with justice-ori­ented pri­or­it­ies. Cli­mate Policy Ini­ti­at­ive data show that glob­al cli­mate fin­ance reached approx­im­ately $1.3 tril­lion annu­ally in 2021–2022, with private fin­ance account­ing for over half of total flows. The rap­id growth of green and sus­tain­ab­il­ity-linked bonds, sur­pass­ing $1 tril­lion in annu­al issu­ance in 2023, fur­ther reflects strong private sec­tor engage­ment, yet this expan­sion has largely fol­lowed exist­ing mar­ket logics rather than cor­rect­ing struc­tur­al imbal­ances. This cap­it­al was largely con­cen­trated in renew­able energy and energy effi­ciency pro­jects in high-income mar­kets³, with least developed coun­tries and small island devel­op­ing states, those bear­ing the highest cli­mate vul­ner­ab­il­ity, receiv­ing less than three per­cent of tracked sus­tain­able fin­ance flows. Moreover, sus­tain­able fin­ance has over­whelm­ingly favoured mit­ig­a­tion pro­jects that gen­er­ate pre­dict­able rev­en­ue streams, while adapt­a­tion fin­ance, crit­ic­al for address­ing floods, droughts, and food insec­ur­ity, accoun­ted for less than ten per­cent of total cli­mate fin­ance⁴. Fund­ing adapt­a­tion is, how­ever, pre­cisely where cli­mate justice demands are most acute.

Empir­ic­al evid­ence con­sist­ently reveals a sig­ni­fic­ant geo­graph­ic and sec­tor­al mis­match with justice-ori­ented priorities

This geo­graph­ic pat­tern is not incid­ent­al; it fol­lows dir­ectly from the fin­an­cial logic embed­ded in ESG frame­works. ESG invest­ing is primar­ily jus­ti­fied through fin­an­cial mater­i­al­ity, the premise that integ­rat­ing envir­on­ment­al, social, and gov­ernance risks improves long-term port­fo­lio per­form­ance, rather than through redis­tributive or equity-driv­en object­ives⁵. In oth­er words, ESG remains organ­ised around risk-return logics that rarely match the dis­tributive prin­ciples artic­u­lated in the UNFCCC and Loss and Dam­age debates. As a res­ult, ESG strategies favour pro­jects with pre­dict­able rev­en­ue streams and man­age­able polit­ic­al risk, typ­ic­ally in stable, high-income jur­is­dic­tions. Adapt­a­tion and resi­li­ence pro­jects, which gen­er­ate dif­fuse or non-mon­et­ised bene­fits and involve elev­ated polit­ic­al and cur­rency risks, fall out­side this selec­tion logic entirely.

Where cli­mate-labelled fin­ance does reach vul­ner­able coun­tries, it fre­quently takes the form of for­eign cur­rency-denom­in­ated debt that must be ser­viced regard­less of cli­mate shocks. This con­fig­ur­a­tion cre­ates the risk of cli­mate fin­ance becom­ing yet anoth­er chan­nel of depend­ency and exploit­a­tion if con­di­tions aimed at pre­serving fisc­al space and pri­or­it­ising loc­al devel­op­ment needs are not clearly defined. The Loss and Dam­age agenda makes this struc­tur­al lim­it espe­cially clear: loss and dam­age con­cerns harms that are irre­vers­ible, non-rev­en­ue-gen­er­at­ing, and impossible to secur­it­ise, pre­cisely the domain where private fin­ance is struc­tur­ally ill-suited and where pub­lic and grant-based mech­an­isms remain indispensable.

The second dimen­sion of the prob­lem is not fin­an­cial but insti­tu­tion­al. The imple­ment­a­tion gap between polit­ic­al com­mit­ments and actu­al fin­an­cial flows is not primar­ily a fund­ing short­fall; it is a gov­ernance fail­ure. Cli­mate object­ives artic­u­lated in inter­na­tion­al for­ums are filtered through mar­ket logics that pri­or­it­ise risk-adjus­ted returns, shap­ing which pro­jects receive fin­an­cing and which are sys­tem­at­ic­ally excluded. COP decisions and UNFCCC prin­ciples do not, by them­selves, impose bind­ing con­straints on private cap­it­al⁶, which means that form­al align­ment between ESG port­fo­li­os and cli­mate goals can coex­ist with deeply unequal real-world outcomes.

Sev­er­al struc­tur­al fea­tures explain why this gap per­sists. Reli­ance on vol­un­tary stand­ards and port­fo­lio-level tar­gets allows ESG-labelled invest­ments to coex­ist with con­tin­ued expos­ure to high-emis­sion activ­it­ies, weak­en­ing the cred­ib­il­ity of align­ment claims without neces­sar­ily alter­ing under­ly­ing invest­ment beha­viour. ESG dis­clos­ure frame­works man­date trans­par­ency on risks and per­form­ance met­rics, but dis­clos­ure alone does not ensure pos­it­ive real-world out­comes: report­ing can high­light sus­tain­ab­il­ity chal­lenges without gen­er­at­ing incent­ives for change, par­tic­u­larly when fin­an­cial per­form­ance remains decoupled from social or envir­on­ment­al res­ults⁷.

At the same time, risk-shar­ing arrange­ments designed to attract private cap­it­al in devel­op­ing coun­tries may shift fin­an­cial bur­dens rather than reduce them. While pub­lic bal­ance sheets absorb polit­ic­al and cur­rency risks, private investors often retain mar­ket-rate returns, rais­ing con­cerns about debt sus­tain­ab­il­ity and loc­al own­er­ship. Without strong pub­lic steer­ing, private fin­ance tends to repro­duce exist­ing mar­ket logics rather than trans­form them in line with equity-ori­ented cli­mate objectives.

Two con­trast­ing cases illus­trate con­cretely how instru­ment design and pub­lic gov­ernance determ­ine wheth­er ESG fin­ance serves or con­tra­dicts cli­mate justice goals. In Bangladesh, the World Bank’s $900 mil­lion Green and Cli­mate Resi­li­ent Devel­op­ment Cred­it com­bined con­ces­sion­al mul­ti­lat­er­al fin­an­cing with guar­an­tees that made adapt­a­tion pro­jects bank­able for private co-investors^8,9. Pub­lic co-fin­an­cing absorbed flood and polit­ic­al risks; gender-respons­ive design ensured that infra­struc­ture, includ­ing pub­lic toi­lets, com­munity centres, and urb­an trans­port, reached vul­ner­able pop­u­la­tions; and con­crete out­comes were embed­ded with­in Bangladesh’s long-term Delta Plan 2100. This case does not illus­trate autonom­ous ESG suc­cess but demon­strates that ESG fin­ance can serve justice object­ives when oper­at­ing under strong pub­lic lead­er­ship and delib­er­ate instru­ment design.

ESG can sup­port justice-ori­ented object­ives only con­di­tion­ally, not automatically

Zam­bi­a’s exper­i­ence with green-labelled Euro­bonds offers a sharply con­trast­ing example. Between 2012 and 2020, Zam­bia issued over $1 bil­lion in high-yield sov­er­eign bonds mar­keted with green nar­rat­ives around hydro­power and affor­est­a­tion. These attrac­ted yield-seek­ing private investors but pro­ceeded without veri­fied green tax­onomy stand­ards or adequate pub­lic risk-shar­ing mech­an­isms. When drought reduced hydro­power rev­en­ues and the kwacha col­lapsed, Zam­bia defaul­ted in Novem­ber 2020, trig­ger­ing a sov­er­eign debt crisis. Pro­ceeds had largely served to refin­ance exist­ing debt rather than fin­ance new cli­mate-resi­li­ent infra­struc­ture, and post-default restruc­tur­ing costs exceeded $400 mil­lion^10,11. The case illus­trates that absent robust gov­ernance, includ­ing cred­ible tax­onomy veri­fic­a­tion, trans­par­ent alloc­a­tion, and pro­tec­tion of sov­er­eign fisc­al space, cli­mate-labelled instru­ments can extract value from the Glob­al South while deliv­er­ing neg­li­gible adapt­a­tion bene­fits. This is not a fail­ure of ESG in prin­ciple, but a gov­ernance fail­ure with con­crete dis­tri­bu­tion­al consequences.

Taken togeth­er, these cases illus­trate that ESG frame­works have cre­ated mean­ing­ful tools for main­stream­ing cli­mate risk with­in fin­an­cial sys­tems, as dis­clos­ure require­ments, sus­tain­ab­il­ity tax­onom­ies, and net-zero tar­get-set­ting have made it harder for large investors to ignore envir­on­ment­al expos­ures. Yet these con­tri­bu­tions remain lim­ited as long as stand­ards are vol­un­tary, gre­en­wash­ing goes unpen­al­ised, and justice cri­ter­ia are absent from the frame­works that gov­ern cap­it­al alloc­a­tion. ESG can sup­port justice-ori­ented object­ives only con­di­tion­ally, not auto­mat­ic­ally, and the con­di­tions required are insti­tu­tion­al and polit­ic­al rather than purely tech­nic­al¹².

ESG invest­ing occu­pies an ambi­val­ent pos­i­tion with­in glob­al cli­mate gov­ernance: it has insti­tu­tion­al­ised cli­mate con­sid­er­a­tions with­in main­stream fin­an­cial prac­tice, but in its cur­rent form, tends to repro­duce rather than cor­rect the unequal dis­tri­bu­tion of cli­mate bur­dens between the Glob­al North and the Glob­al South^13,14. The geo­graphy, con­di­tions, and risk struc­tures of ESG-labelled fin­ance reflect under­ly­ing mar­ket incent­ives that are not auto­mat­ic­ally respons­ive to the dis­tributive prin­ciples artic­u­lated in the UNFCCC pro­cess and Loss and Dam­age nego­ti­ations. The cent­ral ques­tion this raises is: under what con­di­tions does ESG invest­ing con­trib­ute to cli­mate justice rather than repro­duce or deep­en exist­ing inequalities?

Private fin­ance can con­trib­ute to cli­mate justice, but only under insti­tu­tion­al con­di­tions that are not yet sys­tem­at­ic­ally in place. These include the con­tin­ued pro­vi­sion of pub­lic and grant-based fin­ance for adapt­a­tion and Loss and Dam­age, which profit-seek­ing cap­it­al can­not replace without com­prom­ising justice goals; robust reg­u­la­tion of sus­tain­able fin­ance to lim­it gre­en­wash­ing and intro­duce expli­cit equity cri­ter­ia into tax­onom­ies and dis­clos­ure rules, and mech­an­isms for fair risk-shar­ing in sov­er­eign and infra­struc­ture fin­ance, so that cli­mate-vul­ner­able coun­tries do not absorb adjust­ment costs while investors secure mar­ket-rate returns.

The ques­tion, there­fore, is not wheth­er private fin­ance should be part of the cli­mate solu­tion, since giv­en the scale of invest­ment required, it must be, but how far states and inter­na­tion­al insti­tu­tions are will­ing to reshape the rules gov­ern­ing it. ESG fin­ance is best under­stood not as a neut­ral tech­nic­al instru­ment but as a site of polit­ic­al con­test­a­tion, where the terms of align­ment between cap­it­al and cli­mate justice remain act­ively nego­ti­ated. Achiev­ing its poten­tial requires treat­ing pub­lic reg­u­la­tion, gov­ernance design, and inter­na­tion­al nego­ti­ation out­comes as con­stitutive of what ESG fin­ance can and can­not deliv­er, not as extern­al con­straints on an oth­er­wise self-cor­rect­ing market.