Climate finance: emerging markets
4.6/5 - (5 votes)

 

CLIMATE FINANCE: LIMITATIONS OF CURRENT INDICATORS AND IMPLICATIONS FOR EMERGING MARKETS

 

EXTERNAL ARTICLE

Estimated reading time: 3 min.

 

Do portfolio strategies of climate finance contribute to the decarbonization of the economy?

This study examines climate investment strategies, focusing on Carbon Intensity (CI) and Implied Temperature Rise (ITR) indicators, as well as Best-in-Universe (BiU) and Best-in-Class (BiC) strategies. 

The findings reveal that while these strategies are effective according the two mentioned climate metrics, they exhibit significant sectoral and geographical biases. Notably, they reduce investments in emerging markets and essential sectors like electricity, potentially hindering the global energy transition. 

The study also highlights the limitations of current criteria used to assess the climate performance of portfolios, which can be insufficient or even misleading. Pure exclusion strategies, such as BiU and BiC, risk delaying the transition if not accompanied by targeted investments in renewable energy and green bonds.

 

KEY INSIGHTS FROM THIS ARTICLE

    CLIMATE PERFORMANCE vs REAL-WORLD TRANSITION

    BiU and BiC strategies show strong Carbon Intensity (CI) and Implied Temperature Rise (ITR) scores, but this performance is misleading: they avoid high-emitting sectors rather than financing their decarbonization.

    SECTOR AND GEOGRAPHIC BIASES

    Electric utilities: sharp underweighting (BiU: 0.6% vs. 3.1% benchmark).

    Emerging markets: significant reduction (BiU: 15.7% vs. 19.6% benchmark).

    CARBON PERFORMANCE ATTRIBUTION

    For BiU, the reduction in Carbon Intensity (CI) is driven primarily by the allocation effect (–47 tCO₂/M$), whereas BiC relies more heavily on within-sector security selection.

    LIMITATIONS OF CURRENT INDICATORS

    CI and ITR tend to reward short-term exclusion strategies. Adjusted metrics (CI*, ITR*) show that BiU is penalized (CI* = 49 vs. BiC = 24), highlighting the need to incorporate sector neutrality.

 

 

Download the full article (PDF)

 

 

This article is written by Jérôme Andre: jerome.andre@dauphine.psl.eu.

Laboratoire d'Economie de Dauphine, DIAL-IRD

January 14th, 2026, preliminary version. 

EXPLORE MORE ARTICLES

COMMON QUESTIONS ABOUT THIS TOPIC

One of the primary barriers to the mobilization of and access to finance for climate mitigation and adaptation in the region is the lack of clear policies and regulatory and legal frameworks or, where policies do exist, a lack of policy enforcement.

Climate Finance Challenges for India

Private Gap: Adaptation finance suffers due to weak returns and low investor interest. Project Risk: Long gestation periods deter banks from financing green infrastructure projects. Debt Barrier: Rising debt levels reduce India's access to concessional global climate finance

 

The major ones that could be mentioned in this regard relate to the following: 1) The adequacy of international liquidity and the distribution of it; 2) Economic adjustment and conditionality; 3) Exchange arrangement; 4) External Debt problem; 5) Private market development and internationalization of finance; 6)Problems of poorer countries; 7) Trade liberalization and free trade in services; 8) Currency and financial crises of recent years, especially the 1990s; 9) Proposals relating to governance of Bretton Wood Twins and 'New International Financial architecture' (NIFA); 10) Implementation of transparency practices and international standards and codes; and 11) Institutional mechanisms for promoting international cooperation for improvement of international prosperity and financial stability. These issues are not wholly mutually exclusive.

While positive shocks generate short-term instability, negative climate shocks have more severe and lasting consequences, particularly regarding credit market disruptions and long-term financial distress. Climate risks also significantly affect bank liquidity and financial intermediation.