As we look ahead to New York Climate Week next month and COP30 in November, the usual declarations will ring out. We will hear about net zero targets, innovative solutions and the urgency of the moment.
But beneath the speeches and strategy documents, an inconvenient truth sits in the shadows: we are sabotaging our efforts with rules that were originally designed to protect us.
Consider this: emerging and developing economies – home to most of the world’s people and a quarter of global gross domestic product (GDP) – receive just 14 per cent of international climate finance. Yet to stay on a net zero path, they need an additional US$450-US$550 billion a year.
That’s not a gap; that is a chasm.
It’s tempting to reach for familiar explanations like political instability, a lack of bankable projects or weak institutions. These are real issues, but they obscure something more insidious: a global regulatory framework that treats a clean energy project in Ghana as riskier than a speculative real estate venture in Geneva.
The framework I’m referring to is Basel III: a set of global banking rules created after the 2008 financial crash to ensure that banks hold enough capital against the loans they issue. Sensible? Of course. But like many systems built in crisis, its logic has been frozen in time. And today it is throttling climate finance in the very places that need it most.
Imagine an international bank weighing up a £50-million (US$68-million) project in a solar plant in sub-Saharan Africa. The project is backed by a multilateral development bank. It has political risk insurance. There is a long-term off-take agreement in place.
And yet, under Basel rules, the loan is treated as if it were a high-risk gamble, with the bank required to hold a punitive amount of capital as collateral. Faced with regulatory penalties of this scale, it is hardly surprising that many such deals simply never get off the ground.
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Sometimes the most powerful change comes not from the podium but from the footnote.
The core problem is this: Basel effectively turns a blind eye to widely used instruments that substantially reduce real-world credit risk. Development bank guarantees carry little regulatory weight. And political risk insurance – a linchpin of emerging market investment – is excluded unless it meets rigid, highly technical conditions.
In short, the Basel framework has become an inadvertent roadblock. It made banking safer. But in its current form, it is making climate progress harder.
This is not a call to throw caution to the wind when it comes to financial stability. It’s about carefully calibrating regulation to reality. There is now ample data to show that climate-related project finance in emerging economies performs as well as – or better than – corporate loans in mature markets.
Defaults are lower than you might think. And when things do go wrong, recovery rates are relatively strong. Yet the rules haven’t caught up.
To tackle this challenge, we need to see smart political leadership from those advanced economies that have repeatedly pledged in United Nations forums to mobilise higher levels of climate finance for developing nations.
Leaders from Canada, the European Union, Japan and Britain should refrain from the temptation to use New York Climate Week to make more high-level pledges to accelerate climate action.
Instead, it is time to get granular in dealing with the impact of financial stability rules on essential private finance flows.
That means championing targeted clarifications to the application of Basel III: clearer recognition of guarantees, weighing risk proportionally for partially-insured loans, better treatment of blended finance and broader recognition of new development banks.
These are not radical ideas – they are common sense ones. And they could unlock billions in urgently needed capital, without compromising the safety of the financial system.
In a world awash with net zero roadmaps and climate declarations, this may not sound glamorous. But sometimes the most powerful change comes not from the podium but from the footnotes.
We don’t need to rewrite the entire financial rulebook. We just need to correct and clarify the parts that no longer serve us or our planet. Because if we want capital to flow to the right places, we have to stop blocking the river upstream.
Philippe Varin is chair of the International Chamber of Commerce.
This op-ed was published with permission from Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, climate change, resilience, women’s rights, trafficking and property rights. Visit https://www.context.news/.
