As Luxembourg hosts the International Climate Finance Days from 3 to 5 June, the debate around sustainable finance is moving beyond green bonds, ESG funds and climate-labelled products. For the Chief of Staff and Director of Strategy, Sustainable Finance and Global Initiatives at the Global Green Growth Institute (GGGI), Ferruccio Santetti, the next step is more demanding: climate and nature risks must affect the way financial markets price debt.
GGGI works with developing countries on policies, projects and finance. Its role is not to act as a bank, but to help governments turn climate strategies into investment plans, structure projects and mobilise capital. Luxembourg, which became a member of GGGI in the last year, offers a dense sustainable finance ecosystem that Santetti sees as difficult to replicate elsewhere.
Finance that finances climate change mitigation or adaptation.
Climate finance, Santetti says, does not need an elaborate definition. “Climate finance is finance that finances climate change mitigation or adaptation.” In other words, it covers investment flows that help reduce the causes of climate change or strengthen societies against its effects.
GGGI’s work focuses on developing countries. The organisation, established in 2012, now has 55 member countries. Its mission is to support a model of growth that Santetti describes as “low carbon, inclusive and resilient”. To do so, it links national climate policies with project pipelines and financial instruments. “We work at the level of policies, projects and finance,” he says. “And we try to link the three together.”
Luxembourg’s appeal goes beyond investment funds
For GGGI, Luxembourg was a natural partner because much of the organisation’s work deals with sustainable finance. The attraction was not only the fund industry.
“In Luxembourg, you find an ecosystem of actors that it’s very hard to find elsewhere,” Santetti says. “In such a relatively small city, you have so many extremely competent, world-leading sustainable finance players.”
He mentions the Luxembourg Stock Exchange, the Luxembourg Green Exchange, microfinance institutions and sustainable finance initiatives. The difference, he adds, comes from the combination of private-sector expertise and public-sector commitment. “In other countries you might find one of the two. Here you have both.”
GGGI wants to help the government execute Luxembourg’s International Climate Finance Strategy, which sets out how the country contributes to low-carbon and inclusive development in developing countries through international climate finance.
The harder side of climate finance
Much climate finance still goes towards mitigation, such as renewable energy projects. That market is easier for investors to understand. A solar plant sells electricity. A wind farm creates revenue. The business model is visible.
Adaptation finance works differently. It often aims to reduce future losses rather than generate direct income. A flood defence, a resilient road or a water system may protect people and infrastructure, but it does not always create strong cash flows.
The world currently is facing a climate crisis, a biodiversity crisis, but really a debt sustainability crisis.
“When you think about mitigation finance, you are talking about revenue-generating projects,” Santetti says. “Whereas when you talk about adaptation, many of these projects don’t generate strong cash flows, don’t generate strong revenue, they’re not profitable and therefore it’s much harder to attract the private sector.”
That leaves many adaptation projects dependent on public budgets. For developing countries, this creates another problem: more public spending can mean more debt. “The world currently is facing a climate crisis, a biodiversity crisis, but really a debt sustainability crisis,” he says.
Not every adaptation project carries the label
One of the ideas behind GGGI’s report is that adaptation may often go unnoticed. A road, airport or harbour can become more resilient to floods or other climate-related events, but public budgets do not always describe them that way. A ministry may see a highway, not a resilient highway.
Santetti says this matters because governments often lack detailed information when they issue bonds or raise capital. Identifying which projects count as green, social or resilient can require a line-by-line review of thousands of budget entries.
This is where Ecuador comes in. GGGI examined a social housing programme and found that recent building codes had improved the climate resilience of new housing. The programme was not originally only a climate project. It was a social housing programme. But it also helped households with climate vulnerabilities.
“We are trying to do both,” Santetti says, referring to new adaptation finance and the recognition of resilience benefits in existing programmes. “There are other cases, like the example of Ecuador, where we looked into social programmes and realised that their project also contributed substantially to adaptation and resilience.”
In that case, the aim was not simply to rename an existing programme. By adding resilience metrics, the government could give priority to households that faced both social and climate vulnerabilities.
Beyond “rainbow finance”
The theme of the Luxembourg International Climate Finance Days points towards a broader question: should finance keep creating new green labels, or should climate and nature risks become part of the financial system itself?
Santetti favours the second option. He warns that focusing only on labelled finance can distort the picture. A rise in nature finance means little if larger flows still support activities that damage nature.
“What the financial sector excels at is to identify, quantify and price risks,” he says. “The riskier the debtor, the higher the cost of debt.”
There is rainbow finance, orange finance, silver finance. It’s becoming almost a marketing scheme.
For him, this should also apply to climate and nature risks. A company or country with lower exposure to climate risks should be able to borrow at a lower cost than one more exposed to them.
“We don’t want to keep seeing new labels of finance, green, social, sustainable,” he says. “There is rainbow finance, orange finance, silver finance. It’s becoming almost a marketing scheme.”
The scale problem
Santetti says global climate finance reached around $1.9 tn in 2024, while annual needs stand near $8.6 tn. But the problem is not only the gap between those two figures. It is also where the money flows.
Most climate finance still goes to China, North America and Europe, he says. The countries with the greatest needs still receive a small share. More than 60% of climate finance also comes through debt instruments, while many developing countries face rising debt pressure.
“Things are picking up pace,” he says. “There is no question about it. The mobilisation of climate finance is growing.” Yet the distribution remains uneven. Climate finance may grow globally, but that does not mean it reaches the places where vulnerability is highest.
Europe’s role
Europe, Santetti says, remains a leader in sustainable finance. “The great majority of ESG funds globally are here in Europe,” he says. The EU also plays a large role in supporting developing countries through official development aid.
Debt finance, he adds, is not automatically a problem. In project finance, debt often represents a large share of the structure. The tension comes from the demands of developing countries, which call for more grants and concessional finance in international climate negotiations.
“What developing countries are asking for is increased flow of official development aid as non-reimbursable funding,” he says. “They want grants or highly concessional funding, which is obviously very hard to mobilise.”
What success would look like
For Santetti, climate finance will succeed when climate and nature risks influence creditworthiness.
A country or a company that is less exposed to climate change should be able to raise capital at lower rates than a country or a company that is more exposed to climate change.
Credit rating agencies shape the borrowing costs of countries, companies and cities. If climate risks affect a debtor’s ability to repay, those risks should appear in ratings and in the cost of capital.
“A country or a company that is less exposed to climate change should be able to raise capital at lower rates than a country or a company that is more exposed to climate change,” he says.
That is the point at which climate finance stops sitting on top of the financial system and starts changing how the system works.
