Climate Finance: Banking on a Green Future

Source: United Nations Development Programme - Overcoming Global Distrust On Climate Financing

Climate finance, which involves channelling monetary resources to address and adapt to climate change, has experienced notable progress lately. These developments include international funding pledges, changes in investment approaches, and regulatory actions designed to evaluate and handle climate-related risks in the financial industry.

During the 29th United Nations Climate Change Conference (COP29) in Azerbaijan, countries reached an agreement on a New Collective Quantified Goal (NCQG) for climate financing. This ambitious objective aims to generate a minimum of $300 billion each year by 2035, with a larger goal of directing $1.3 trillion annually to developing nations to tackle climate change. This pact highlights the growing acknowledgment of the financial investments necessary for effectively addressing climate-related issues.

Simultaneously, multilateral development banks (MDBs) have announced unprecedented investments in climate finance. In total, MDBs allocated $125 billion in 2023 for global climate initiatives, indicating a substantial rise compared to earlier years. Significantly, $74.7 billion of this financing was aimed at low-income and middle-income countries, showcasing a dedicated effort to assist areas that are most at risk from climate change.

Hong Kong Monetary Authority's Climate Risk Stress Test

In the regulatory landscape, the Hong Kong Monetary Authority (HKMA) has taken significant steps to evaluate how resilient its banking sector is against climate-related risks. In February 2025, the HKMA wrapped up its second Climate Risk Stress Test (CRST), which included 46 banks. The outcomes showed that, under different stress scenarios, the total capital ratio for the banking sector is anticipated to decline by 1.4 to 3.1 percentage points. Nevertheless, the sector remains strongly capitalized, with capital ratios surpassing 20%, illustrating a solid ability to endure climate-related disruptions.

The HKMA's CRST also cited advancements in banks' ability to assess climate risks. Participating institutions improved their data collection systems, assessment methodologies, and model governance. Some banks have incorporated sophisticated technology, such as artificial intelligence, into their assessment processes, resulting in more comprehensive reviews. These improvements demonstrate the industry's realisation of the value of strong climate risk management systems.

Source: HKMA - 2023-2024 BANKING SECTOR CLIMATE RISK STRESS TEST

The HKMA is developing a cloud-based physical risk assessment technology to help the financial sector manage climate risks even more effectively. This tool will allow banks to assess the risks associated with their property assets under various climate scenarios over a range of time horizons, from the next five years to fifty years. These projects demonstrate regulatory attempts to provide financial institutions with the tools they need to negotiate the intricacies of climate risk assessment. 

Conclusion

The climate finance landscape is rapidly evolving, with higher financing pledges, adaptive investment techniques, and aggressive regulatory initiatives. The combined efforts of governments, financial institutions, and regulatory organisations are critical in mobilising resources and building strong frameworks to meet the numerous challenges faced by climate change. As these measures move forward, ongoing collaboration and innovation will be required to ensure a sustainable and resilient global financial system.