The Evolving Role of Capital Markets in a World of Climate Change, Conflict, and Inequality

By Arunma Oteh

Capital markets are increasingly vital for addressing existential and indeed interconnected global crises such as climate change, conflict, and inequality. Despite rapid growth in sustainable finance of up to $6.2 trillion, in cumulative value, a significant $4 trillion annual SDG investment gap persists in developing nations. Overcoming challenges such as greenwashing, regulatory fragmentation, and ensuring real impact requires enhanced transparency, robust global partnerships, and targeted capital flows that foster a truly sustainable, equitable, and prosperous future.

Nations are currently navigating a complex landscape of interconnected and often mutually reinforcing crises ranging from escalating geopolitical tensions, widening social and economic inequalities, and the increasing impact of climate change. They in turn profoundly challenge global stability and prosperity. For instance, environmental degradation exacerbates resource scarcity, potentially fueling conflict, while inequalities undermine social cohesion and impede the collective action needed to address global threats. Within this intricate web, capital markets are increasingly becoming indispensable components of the solution. This is in addition to their traditional roles in wealth creation, risk management, and the promotion of sound governance. They are being progressively harnessed to channel significant resources for climate mitigation and adaptation, as well as social disparities and sustainable development.

This shift is being driven by a fundamental necessity to mobilise resources to close the huge funding gap. Public sector resources alone, including official development assistance, are inadequate to close the significant financing gaps necessary to actualize global objectives such as the Sustainable Development Goals (SDGs). Naturally, the efficient mobilization of private capital via world class capital markets is urgent. The scale of the financial challenge necessary to achieve global sustainability goals is staggering, especially for developing countries. The United Nations Conference on Trade and Development (UNCTAD, 2024) estimates that the annual investment deficit for attaining the SDGs in developing nations has reached an alarming $4 trillion, up from $2.5 trillion in 2015, underscoring a troubling trend intensified by recent global disruptions such as the COVID-19 pandemic, escalating geopolitical tensions, and the cost-of-living crisis in many countries.

This widening gap signifies more than just missed targets. It points to a potential reversal of hard-won development progress and a growing divergence in wealth and opportunity between high-income and low-income countries. The disparity is particularly acute in critical areas such as clean energy. Also, while developing nations require substantial annual investments in renewable energy (estimated needs around $1.7 trillion), they attract significantly less, with the majority of available funds flowing to developed economies. Furthermore, while investments have grown in renewable energy and infrastructure, they have lagged or even decreased in other vital SDG sectors such as water, sanitation, and health (WASH), and agrifood systems.

In response to these mounting global challenges and shifting investor preferences, markets are leaning into sustainable finance. Consequently, this segment, broadly defined as incorporating Environmental, Social, and Governance (ESG) considerations into investment decisions, has moved from a niche area to a significant force within global capital markets. The global sustainable finance market was valued at approximately $6.2 trillion in 2024 and is projected to grow at a compound annual growth rate (CAGR) of 19.8% between 2025 and 2034, showcasing strong continued momentum despite global economic uncertainties. A key driver of this growth has been the expansion of labeled sustainable bonds – instruments specifically earmarked for financing projects with positive environmental or social outcomes. According to the World Bank, annual issuance of these instruments surpassed $1.1 trillion in 2024, up 5% compared to 2023. 

Source: World Bank

Across the globe, we see diverse and innovative approaches showcasing how financial tools and institutional frameworks can be adapted to specific development needs and contexts. In the UK and India, the British Asian Trust, founded by King Charles III, provides a compelling example of outcome-based finance. Its Quality Education India Development Impact Bond (DIB) raised $3 million, structuring payments to investors contingent on achieving predefined educational outcomes. This public-private partnership model enhances accountability and effectiveness, offering a template that, if scaled with further capital market innovation, could significantly impact social development across emerging countries.

Furthermore, India’s National Investment and Infrastructure Fund (NIIF), in partnership with the UK government, launched the Green Growth Equity Fund (GGEF), focusing on renewable energy, clean transportation, and water management. Achieving a final close of $741 million by early 2022. GGEF is one of the largest single-country climate-focused funds in emerging markets, highlighting the potential of nationally anchored funds supported by international collaboration.

Stock exchanges around the world continue to increase their focus on sustainable finance. In addition, the United Nations Sustainable Stock Exchange (UNSSE) Initiative provides a global platform for exploring how exchanges, in collaboration with investors, issuers, regulators, policymakers and relevant international organizations, can enhance performance on ESG (environmental, social and governance) issues and encourage sustainable investment.

In Africa, African Development Bank (AfDB), FSD Africa, and the International Finance Corporation (IFC) are engaged in crucial market development initiatives in partnership with local regulators and stakeholders. These initiatives include improving capital market efficiency, and creating enabling environments for the mobilisation of private capital. They also support issuers with accessing capital markets for housing, infrastructure, small business and other vital sectors. They often use “Blended Finance”, a mechanism where concessional funding from development partners is strategically used to mitigate specific risks (such as political or currency risk) and improve the risk-return profile of investments in challenging markets. Such innovative structures help attract private capital. The AfDB, IFC, and other development finance institutions (DFIs) also contribute by issuing local currency denominated sustainable bonds. They additionally deploy tools such as guarantees and risk-sharing facilities, particularly in Fragile and Conflict-Affected States (FCS) where commercial appetite is limited.

Some countries such as Luxembourg, have proactively positioned themselves as leading sustainable finance hubs. As at mid-2024, ESG assets held through Collective investment funds (UCITS) in Luxembourg totalled €3.2 trillion. The Luxembourg Green Exchange (LGX) is the world’s leading platform for green, social and sustainable securities. As of December 31, 2024, LGX held over €1 trillion worth of outstanding green, social, sustainability, and sustainability-linked (GSSS) bonds and served over 310 issuers from 60 countries.

Despite the growth and innovation in sustainable finance, significant obstacles hinder its full potential to address global challenges. A primary concern is greenwashing – the practice where entities misrepresent and overstate their environmental credentials or the sustainability impact of their activities or financial products. This can erode investor trust and undermine the credibility of the entire sustainable finance market. Addressing greenwashing entails developing robust verification, transparency, and accountability mechanisms.

Closely related is the challenge of standardisation in ESG reporting. For years, a fragmented landscape of voluntary frameworks and competing standards made it difficult for investors to compare corporate performance, and for companies to report efficiently. In this regard I note the significant efforts that are underway to address this, including the inaugural standards of the International Sustainability Standards Board (ISSB) released in 2023, and the Corporate Sustainability Reporting Directive (CSRD) of the European Union (EU) as well as the EU Taxonomy, among others.

Beyond disclosure, a deeper challenge lies in ensuring that sustainable finance translates into measurable real world impact. While disclosure frameworks focus on information provision, the field of impact measurement and management seeks to intentionally track, manage, and report on the actual social and environmental outcomes of investments. It is however still evolving and lacks universal standardisation. Simply labeling a bond “green” or complying with disclosure rules does not guarantee positive impact. Robust methodologies are needed throughout the investment lifecycle to ensure accountability and effectiveness. Finally, the persistent short-term focus of many market participants remains a barrier, hindering investments into long-term sustainability initiatives whose benefits may not be immediately apparent from quarterly financial statements. 

Overcoming these obstacles requires deliberate and coordinated action from all stakeholders. Strengthening regulatory frameworks, fostering robust partnerships, and ensuring capital flows reach the areas of greatest need are critical priorities. We need all hands on deck to facilitate capital flows from developed economies, and to create receptive enabling environments that build local capacity within developing countries. This involves domestic reforms aimed at building world class capital markets while strengthening legal and regulatory frameworks for investment, enhancing the capabilities of local financial institutions, and building the necessary infrastructure to absorb and effectively deploy incoming capital for sustainable development.

About the Author

Arunma Oteh is a highly accomplished leader and expert in global capital markets with 40 years experience in finance, governance, and international development. Her book All Hands on Deck is a must-read for those looking to unleash the potential of capital markets to generate true global economic and social transformation.