Climate Debt Painted Green: How loan-Heavy Finance is Trapping the World’s Most Vulnerable Countries

The global financial system has grown highly adept at articulating the discourse of climate responsibility. Banks are making net-zero pledges, regulators are designing green taxonomies, governments are implementing disclosure policies, and investors are branding bonds, loans, and funds as sustainable.

However, fossil fuel financing outperforms low carbon financing, countries suffering from disaster situations which they bear no responsibility for are taking on debt, and the funding required for adaptation is always under-funded (UNEP, 2025). Climate finance is being judged more on accuracy of labelling and less on its effectiveness in protecting humanity, nature, and sovereign fiscal independence.

This discrepancy is apparent when the OECD’s Review on Aligning Finance with Climate Goals 2026 is juxtaposed with Change Initiative’s Climate Debt Risk Index 2025 (Khan et al., 2025). This juxtaposition demonstrates that our current financial systems are growing much faster in terms of terminology and risk assessment than fairness, affordability, or implementation.

More rules, but not necessarily more action

Between 2000 and 2025, policy makers in 111 jurisdictions and the European Union implemented over 860 policies pertaining to climate change in the financial sector. The number grew by over 25 per cent between 2023 and 2025.

But 78 per cent of these policies addressed transparency, 20 per cent were prudential policies, and only 2 per cent involved monetary policy tools. There is very little evidence these policies have helped cut emissions or increased resilience to climate risks, according to the OECD review (OECD, 2026).

Transparency is essential, but transparency alone is not transformation. A taxonomy does not close a coal-fired power plant. A disclosure requirement will not restore a wetland. A climate risk assessment will not upgrade a power grid, house a displaced family, or bring drought-resilient irrigation to farmers.

The OECD further found that funding for fossil fuels is still outstripping funding for low-carbon energy within most financial asset categories. Green corporate bonds represented about 4 per cent of outstanding corporate bonds, while fossil-fuel company bonds stood at 5 per cent in 2025. Green syndicated lending stood at roughly 5 per cent of total new lending, whereas fossil fuel companies' syndicated lending was close to 6 per cent. Fossil fuels still receive almost twice as much syndicated lending as low-carbon investments (OECD, 2026).

The conclusion is uncomfortable but unavoidable, the global financial system is greening its vocabulary faster than it is changing its allocation of capital.

The global climate-debt reality

The central weakness of the OECD framework is not what it analyses, but what it leaves underdeveloped: the terms on which climate finance reaches vulnerable countries.

Change Initiative’s Climate Debt Risk Index 2025¹ estimates that global climate-related debt has reached approximately USD 372 billion, trapping vulnerable economies in a systemic financial deficit. Instead of receiving compensation and grant-based support, many climate-exposed countries are borrowing for adaptation, reconstruction and energy transition.

Annual adaptation finance stands at only around USD 27.5 billion, against an estimated requirement of approximately USD 387 billion. The world is therefore meeting barely seven per cent of developing-country adaptation needs.

Even more concerning, approximately 62 per cent of adaptation finance is loan-based, with an increasing share provided on non-concessional or insufficiently concessional terms. Countries facing floods, cyclones, droughts and sea-level rise are being required to repay the cost of responding to damage caused largely by the historical emissions of richer economies.

Multilateral development banks reported around USD 125 billion in climate finance (EIB, 2024), but only approximately USD 5 billion was delivered as grants to vulnerable countries. The remainder was dominated by loans, guarantees and other financial instruments that can increase sovereign liabilities.

This is the central injustice of the current climate-finance architecture: those least responsible for the crisis are being offered debt rather than restitution.

A climate project financed through a high-interest foreign-currency loan may be technically green while remaining economically destructive. It may reduce emissions but weaken foreign-exchange reserves, increase public debt and force governments to reduce spending on health, education, food security and disaster preparedness.

Climate alignment that undermines fiscal sovereignty cannot automatically be called climate progress.

Bangladesh illustrates the trap

Bangladesh’s experience demonstrates how climate vulnerability can be converted into financial dependency. The country received a Climate Debt Risk Index score of 65.37, placing it in the high-risk category (Khan et al., 2025). Change Initiative projects the score to rise to 65.63 by 2031 unless the structure of climate finance changes. Bangladesh’s climate-related debt burden is estimated at approximately USD 80 per person.

Its overall debt-to-grant ratio stands at 2.70, meaning Bangladesh receives USD 2.70 in climate-related loans for every dollar it receives in grants.

The imbalance is also visible in multilateral development bank financing. Bangladesh’s MDB debt-to-grant ratio is 0.94, nearly five times the LDC average of 0.19. While the ratio remains below one, it is exceptionally high relative to comparable vulnerable economies and indicates a much heavier reliance on repayable finance.

Delivery is another major problem. Bangladesh’s overall climate-finance disbursement-to-commitment ratio is approximately 0.63. For MDB climate finance, it falls to only 0.32, compared with an LDC average of around 0.50.

This means that even when climate finance is officially committed, much of it does not reach implementation on time. Slow disbursement raises project costs, delays resilience measures and leaves vulnerable communities exposed while debt-related obligations may continue to accumulate.

The quality of classification is equally concerning. Change Initiative found that around 18.84 per cent, approximately USD 0.88 billion, of reported climate finance was associated with fossil-fuel projects, including Matarbari and Bheramara.

Classifying fossil infrastructure as climate finance does more than distort statistics. It inflates the apparent volume of climate support, increases climate-labelled debt and locks countries into imported fuels, foreign-exchange exposure and long-term pollution.

Money cannot credibly be counted as climate finance when it expands the infrastructure responsible for climate breakdown.

Climate finance follows bankability, not vulnerability

Climate financing continues to concentrate on activities that offer commercial gains, including energy, transport, and major infrastructure projects. Public health, community water supplies, disaster response programs, ecological restoration, and climate change resilient agriculture receive much less funding than is needed.

This is because of structure. Renewable energy plants, transport networks, and carbon stocks are able to earn a regular income stream. Mangrove rehabilitation, cyclone shelters, heat-health programs, and resilience-building activities provide great public value, although not necessarily financial gain.

Thus, a market-oriented climate finance approach funnels capital into those things which it can monetize rather than those which poor communities desperately require.

This is the reason adaptation is still not being given adequate attention even though it is crucial for survival. While the world continues to pour significant effort into creating metrics for adaptation, not enough funding is made available for it (ADB, 2024; UNEP, 2025).

Article 2.1(c) cannot replace Article 9

The OECD review is structured around Article 2.1(c) of the Paris Agreement, which calls for financial flows to become consistent with low-emission and climate-resilient development (OECD, 2026; UNFCCC, 2015).

That objective is important. But developing countries must reject any interpretation under which Article 2.1(c) weakens Article 9, which requires developed countries to provide financial resources to assist developing countries with mitigation and adaptation (UNFCCC, 2015).

Aligning all global financial flows cannot replace the obligation to provide predictable, additional and accessible public climate finance. Otherwise, historical responsibility is quietly replaced with borrower responsibility. Developed countries can claim that the financial system is becoming greener, while vulnerable countries are instructed to improve credit ratings, prepare bankable projects, attract private investors and borrow for their own survival.

That is not burden-sharing. It is burden-shifting.

Climate-risk disclosure must not become climate-risk punishment

The growth of climate-risk disclosure also creates a dangerous paradox.

When investors identify a country as highly exposed to floods, cyclones, droughts or sea-level rise, they may demand higher interest rates or withdraw capital. Climate vulnerability then becomes a financial penalty. The cycle is self-reinforcing, higher climate exposure increases borrowing costs; higher borrowing costs reduce fiscal space; reduced fiscal space limits adaptation; and inadequate adaptation increases future risk (UNCTAD, 2023).

Climate-risk identification should therefore activate concessional finance, grants, guarantees, insurance support and debt relief. It should not merely provide a technical justification for increasing risk premiums. Countries should not be forced to pay more because they are suffering more from a crisis they did not create.

Green labels do not prove green impact

The OECD review rightly warns that the additionality of green taxonomies, bonds and labelled financial instruments remains difficult to demonstrate. Some investments may simply be relabeled rather than newly created (OECD, 2026).

More than 85 per cent of real-economy investment is still not systematically tracked for climate alignment. This means damaging investments can remain outside scrutiny, while countries with weaker reporting systems may appear less investable even when their projects produce strong ecological and social benefits.

A green bond should not be considered successful merely because investors purchased it. It must demonstrate additional investment, transparent use of proceeds, measurable climate outcomes, protection of ecosystems and tangible benefits for affected communities.

Nor should low-carbon status provide automatic legitimacy. A solar park that dispossesses farmers, a hydropower project that destroys a river ecosystem or a biofuel investment that undermines food security cannot receive an uncomplicated green classification.

Under Natural Rights Led Governance, climate alignment must protect life, livelihoods, ecosystem integrity, community rights and intergenerational justice. Carbon accounting without natural-rights safeguards can legitimize ecological destruction in the name of climate action.

Bangladesh has domestic financing alternatives

Bangladesh cannot solve a global climate-finance injustice alone. Developed countries must fulfil their obligations. Nevertheless, the country can reduce dependency by redirecting environmentally harmful expenditure and mobilizing domestic resources more strategically (World Bank, 2025).

Bangladesh spends an estimated USD 1.2-1.5 billion annually on LNG subsidies. Redirecting only 30 per cent could create approximately USD 360-450 million per year for renewable energy, grid modernization, storage and community energy systems (Khan et al., 2026).

More broadly, reallocating around 20 per cent of national fossil-fuel expenditure could release approximately USD 1 billion annually for climate adaptation. Such reform must be carefully targeted so that subsidy withdrawal does not disproportionately burden low-income households, farmers or small enterprises (Khan et al., 2026).

Bangladesh also possesses significant potential for faith-based and solidarity finance. The country’s estimated annual zakat potential is approximately USD 17 billion. Channeling 20 per cent through transparent, professionally governed climate and social-resilience mechanisms could mobilize around USD 3.4 billion annually in grant-equivalent finance (Khan et al., 2026).

This funding could support climate-displaced families, resilient housing, safe water, public health, livelihood restoration and community-owned renewable energy. Zakat-based finance must, however, retain its social-protection purpose and be governed with public transparency rather than becoming another mechanism for private financial intermediation.

A well-designed carbon tax could potentially generate around USD 1 billion annually, while a plastic pollution levy could raise approximately USD 300 million. Such taxes should follow the polluter-pays principle and direct revenues towards affected communities, pollution control, ecosystem restoration and just-transition support.

These estimates should not all be added mechanically because some expenditure categories may overlap. Nevertheless, they demonstrate that Bangladesh has several multibillion-dollar domestic financing opportunities that remain underused.

Debt relief and alternative instruments

Bangladesh and other vulnerable countries also require international debt restructuring.

Debt relief should be linked to climate vulnerability, adaptation requirements and historical responsibility. Debt-for-nature and debt-for-climate swaps can reduce or restructure external liabilities while directing agreed fiscal savings towards ecosystem restoration, coastal resilience and community protection.

Such swaps must be transparent, independently monitored and designed to protect national sovereignty. They should not transfer control of forests, rivers, coastlines or biodiversity to foreign creditors or private conservation intermediaries.

Bangladesh could also consider diaspora bonds dedicated to renewable energy and resilient infrastructure. Properly structured, these could mobilize up to USD 1 billion annually, channeling diaspora savings into national assets and reducing reliance on more expensive commercial foreign debt.

However, diaspora bonds are not debt-free. They remain as repayable obligations. Despite the debt obligation, their value lies in potentially offering longer maturities, lower financing costs, stronger national participation and less exposure to conditional lending, not in replacing grants or climate reparations.

A justice-based alignment framework

Developing countries should demand a new climate-alignment standard grounded in justice rather than financial terminology.

Article 2.1(c) must be implemented as complementary to Article 9, the principle of common but differentiated responsibilities and developed-country finance obligations.

Every climate-finance assessment should disclose the grant equivalent, interest rate, currency denomination, maturity, grace period, sovereign guarantees, expected debt-service cost and implications for fiscal space.

Grants should become the default instrument for adaptation, loss and damage, ecosystem restoration and community resilience in LDCs, SIDS and highly vulnerable countries.

Climate-risk disclosure should automatically trigger mechanisms that lower the cost of capital, including guarantees, concessional windows and debt relief.

International financial institutions should create direct-access facilities for municipalities, cooperatives, SMEs, local institutions and community organizations, using reporting requirements proportionate to institutional capacity.

Climate finance must also pass a “do no natural-rights harm” test, covering biodiversity, land, water, public health, displacement, community consent and intergenerational justice.

Finally, international reporting must distinguish clearly between grants, concessional loans, market-rate loans, guarantees and private finance. One dollar of repayable debt cannot be presented as equivalent to one dollar of grant support.

From green accounting to climate justice

The OECD review performs an important service by showing that fossil finance remains deeply embedded, data gaps remain enormous and disclosure alone is insufficient (OECD, 2026).

The Climate Debt Risk Index provides the missing justice dimension. It shows that vulnerable countries are increasingly being required to finance their own protection through debt, while creditors, ratings agencies and international financial institutions retain the power to determine the terms of survival.

The world does not merely need more climate-aligned finance. It needs finance aligned with justice.

Finance is not climate-aligned merely because it is labelled, disclosed or stress-tested. It is aligned only when it is additional, affordable and debt-safe; when it protects people and ecosystems; and when it expands rather than destroys the fiscal sovereignty of vulnerable nations.

Anything less, is not climate finance.

It is climate debt painted green.

*M. Zakir Hossain Khan, Proponent of Transformative Natural Rights Led Governance Framework; Co-Founder and Managing Director, Change Initiative, a global think tank; and Editor in Chief, Nature Insights. Email: zhkhan@changei.earth

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Author: M. Zakir Hossain Khan

Originally published in: Change Initiative

This article is republished for archival and informational purposes. All rights remain with the original publisher.