Your essential guide to climate finance

The global ecosystem of climate finance is complex, constantly changing and sometimes hard to understand. But understanding it is critical^[1] to demanding a green transition that’s just and fair. That’s why The Conversation has collaborated with climate finance experts to create this user-friendly guide, in partnership with Vogue Business^[2]. With definitions and short videos, we’ll add to this glossary as new terms emerge.

Blue bonds

Blue bonds are debt instruments designed to finance ocean-related conservation, like protecting coral reefs or sustainable fishing. They’re modelled after green bonds but focus specifically on the health of marine ecosystems – this is a key pillar of climate stability.

By investing in blue bonds, governments and private investors can fund marine projects that deliver both environmental benefits and long-term financial returns. Seychelles issued^[3] the first blue bond in 2018. Now, more are emerging as ocean conservation becomes a greater priority for global sustainability efforts.

By Narmin Nahidi, assistant professor in finance at the University of Exeter

Carbon border adjustment mechanism

Did you know that imported steel could soon face a carbon tax at the EU border? That’s because the carbon border adjustment mechanism is about to shake up the way we trade, produce and price carbon.

The carbon border adjustment mechanism is a proposed EU policy to put a carbon price on imports like iron, cement, fertiliser, aluminium and electricity. If a product is made in a country with weaker climate policies, the importer must pay the difference between that country’s carbon price and the EU’s. The goal is to avoid “carbon leakage” – when companies relocate to avoid emissions rules and to ensure fair competition on climate action.

But this mechanism is more than just a tariff tool. It’s a bold attempt to reshape global trade. Countries exporting to the EU may be pushed to adopt greener manufacturing or face higher tariffs.

The carbon border adjustment mechanism is controversial: some call it climate protectionism, others argue it could incentivise low-carbon innovation worldwide and be vital for achieving climate justice. Many developing nations worry it could penalise them unfairly unless there’s climate finance to support greener transitions.

Carbon border adjustment mechanism is still evolving, but it’s already forcing companies, investors and governments to rethink emissions accounting, supply chains and competitiveness. It’s a carbon price with global consequences.

By Narmin Nahidi, assistant professor in finance at the University of Exeter

Carbon budget

The Paris agreement aims to limit global warming to 1.5°C above pre-industrial levels by 2030. The carbon budget is the maximum amount of CO₂ emissions allowed, if we want a 67% chance^[4] of staying within this limit. The Intergovernmental Panel on Climate Change (IPCC) estimates that^[5] the remaining carbon budgets amount to 400 billion tonnes of CO₂ from 2020 onwards.

Think of the carbon budget as a climate allowance. Once it has been spent, the risk of extreme weather or sea level rise increases sharply. If emissions continue unchecked, the budget will be exhausted within years, risking severe climate consequences. The IPCC sets the global carbon budget based on climate science, and governments use this framework to set national emission targets, climate policies and pathways to net zero emissions.

By Dongna Zhang, assistant professor in economics and finance, Northumbria University

Carbon credits

Carbon credits are like a permit that allow companies to release a certain amount of carbon into the air. One credit usually equals one tonne of CO₂^[6]. These credits are issued by the local government or another authorised body and can be bought and sold. Think of it like a budget allowance for pollution. It encourages cuts in carbon emissions each year to stay within those global climate targets.

The aim is to put a price on carbon to encourage cuts in emissions. If a company reduces its emissions and has leftover credits, it can sell them to another company that is going over its limit. But there are issues. Some argue^[7] that carbon credit schemes allow polluters to pay their way out of real change, and not all credits are from trustworthy projects. Although carbon credits can play a role in addressing the climate crisis, they are not a solution on their own.

By Sankar Sivarajah, professor of circular economy, Kingston University London

Carbon offsetting

Carbon offsetting is a way for people or organisations to make up for the carbon emissions they are responsible for. For example, if you contribute to emissions by flying, driving or making goods, you can help balance that out by supporting projects that reduce emissions elsewhere. This might include planting trees (which absorb carbon dioxide) or building wind farms to produce renewable energy.

The idea is that your support helps cancel out the damage you are doing. For example, if your flight creates one tonne of carbon dioxide, you pay to support a project that removes the same amount.

While this sounds like a win-win, carbon offsetting is not perfect. Some argue^[8] that it lets people feel better without really changing their behaviour, a phenomenon sometimes referred to as greenwashing.

Not all projects are effective or well managed. For instance, some tree planting initiatives might have taken place anyway, even without the offset funding, deeming your contribution inconsequential. Others might plant the non-native trees in areas where they are unlikely to reach their potential in terms of absorbing carbon emissions.

So, offsetting can help, but it is no magic fix. It works best alongside real efforts to reduce greenhouse gas emissions and encourage low-carbon lifestyles or supply chains.

By Sankar Sivarajah, professor of circular economy, Kingston University London

Carbon tax

A carbon tax is designed to reduce greenhouse gas emissions by placing a direct price on CO₂ and other greenhouse gases.

A carbon tax is grounded in the concept of the social cost of carbon. This is an estimate of the economic damage caused by emitting one tonne of CO₂, including climate-related health, infrastructure and ecosystem impacts.

A carbon tax is typically levied per tonne of CO₂ emitted. The tax can be applied either upstream (on fossil fuel producers) or downstream (on consumers or power generators). This makes carbon-intensive activities more expensive, it incentivises nations, businesses and people to reduce their emissions, while untaxed renewable energy becomes more competitively priced and appealing.

Carbon tax was first introduced by Finland in 1990. Since then, more than 39 jurisdictions have implemented similar schemes. According to the World Bank^[9], carbon pricing mechanisms (that’s both carbon taxes and emissions trading systems) now cover about 24% of global emissions^[10]. The remaining 76% are not priced, mainly due to limited coverage in both sectors and geographical areas, plus persistent fossil fuel subsidies. Expanding coverage would require extending carbon pricing to sectors like agriculture and transport, phasing out fossil fuel subsidies and strengthening international governance.

Sweden has one of the world’s highest carbon tax rates and has cut emissions by 33% since 1990 while maintaining economic growth^[11]. The policy worked because Sweden started early, applied the tax across many industries and maintained clear, consistent communication that kept the public on board.

Canada introduced a national carbon tax in 2019. In Canada, most of the revenue from carbon taxes is returned directly to households through annual rebates, making the scheme revenue-neutral for most families. However, despite its economic logic, inflation and rising fuel prices led to public discontent – especially as many citizens were unaware they were receiving rebates^[12].

Carbon taxes face challenges including political resistance, fairness concerns and low public awareness. Their success depends on clear communication and visible reinvestment of revenues into climate or social goals. A 2025 study^[13] that surveyed 40,000 people in 20 countries found that support for carbon taxes increases significantly when revenues are used for environmental infrastructure, rather than returned through tax rebates.

By Meilan Yan, associate professor and senior lecturer in financial economics, Loughborough University

Climate resilience

Floods, wildfires, heatwaves and rising seas are pushing our cities, towns and neighbourhoods to their limits. But there’s a powerful idea that’s helping cities fight back: climate resilience.

Resilience refers to the ability of a system, such as a city, a community or even an ecosystem – to anticipate, prepare for, respond to and recover from climate-related shocks and stresses.

Sometimes people say resilience is about bouncing back. But it’s not just about surviving the next storm. It’s about adapting, evolving and thriving in a changing world.

Resilience means building smarter and better. It means designing homes that stay cool during heatwaves. Roads that don’t wash away in floods. Power grids that don’t fail when the weather turns extreme.

It’s also about people. A truly resilient city protects its most vulnerable. It ensures that everyone – regardless of income, age or background – can weather the storm.

And resilience isn’t just reactive. It’s about using science, local knowledge and innovation to reduce a risk before disaster strikes. From restoring wetlands to cool cities and absorb floods, to creating early warning systems for heatwaves, climate resilience is about weaving strength into the very fabric of our cities.

By Paul O'Hare, senior lecturer in geography and development, Manchester Metropolitan University

Climate risk disclosure

Climate risk disclosure refers to how companies report the risks they face from climate change, such as flood damage, supply chain disruptions or regulatory costs. It includes both physical risks (like storms) and transition risks (like changing laws or consumer preferences).

Mandatory disclosures^[14], such as those proposed by the UK and EU, aim to make climate-related risks transparent to investors. Done well, these reports can shape capital flows toward more sustainable business models. Done poorly, they become greenwashing tools.

By Narmin Nahidi, assistant professor in finance at the University of Exeter

Emissions trading scheme

An emissions trading scheme is the primary market-based approach for regulating greenhouse gas emissions in many countries, including Australia, Canada, China and Mexico.

Part of a government’s job is to decide how much of the economy’s carbon emissions it wants to avoid in order to fight climate change. It must put a cap on carbon emissions that economic production is not allowed to surpass. Preferably, the polluters (that’s the manufacturers, fossil fuel companies) should be the ones paying for the cost of climate mitigation.

Regulators could simply tell all the firms how much they are allowed to emit over the next ten years or so. But giving every firm the same allowance across the board is not cost efficient, because avoiding carbon emissions is much harder for some firms (such as steel producers) than others (such as tax consultants). Since governments cannot know each firm’s specific cost profile either, it can’t customise the allowances. Also, monitoring whether polluters actually abide by their assigned limits is extremely costly.

An emissions trading scheme cleverly solves this dilemma using the cap-and-trade mechanism. Instead of assigning each polluter a fixed quota and risking inefficiencies, the government issues a large number of tradable permits – each worth, say, a tonne of CO₂-equivalent (CO₂e) – that sum up to the cap. Firms that can cut greenhouse gas emissions relatively cheaply can then trade their surplus permits to those who find it harder – at a price that makes both better off.

By Mathias Weidinger, environmental economist, University of Oxford

Environmental, social and governance (ESG) investing

ESG investing stands for environmental, social and governance investing. In simple terms, these are a set of standards that investors use to screen a company’s potential investments.

ESG means choosing to invest in companies that are not only profitable but also responsible. Investors use ESG metrics to assess risks (such as climate liability, labour practices) and align portfolios with sustainability goals by looking at how a company affects our planet and treats its people and communities. While there isn’t one single global body governing ESG, various organisations, ratings agencies and governments all contribute to setting and evolving these metrics.

For example, investing in a company committed to renewable energy and fair labour practices might be considered “ESG aligned”. Supporters believe ESG helps identify risks and create long-term value. Critics argue it can be vague or used for greenwashing, where companies appear sustainable without real action. ESG works best when paired with transparency and clear data. A barrier is that standards vary, and it’s not always clear what counts as ESG.

Why do financial companies and institutions care? Issues like climate change and nature loss pose significant risks, affecting company values and the global economy.

Investing with ESG in mind can help manage these risks and unlock opportunities, with ESG assets projected to reach over US$40 trillion (£30 trillion) by 2030^[15].

However, gathering reliable ESG information can be difficult. Companies often self-report, and the data isn’t always standardised or up to date. Researchers – including my team at the University of Oxford – are using geospatial data, like satellite imagery and artificial intelligence, to develop global databases for high-impact industries, across all major sectors and geographies, and independently assess environmental and social risks and impacts.

For instance, we can analyse satellite images of a facility over time to monitor its emissions effect on nature and biodiversity, or assess deforestation linked to a company’s supply chain. This allows us to map supply chains, identify high-impact assets, and detect hidden risks and opportunities in key industries, providing an objective, real-time look at their environmental footprint.

The goal is for this to improve ESG ratings and provide clearer, more consistent insights for investors. This approach could help us overcome current data limitations to build a more sustainable financial future.

By Amani Maalouf, senior researcher in spatial finance, University of Oxford

Financed emissions

Financed emissions are the greenhouse gas emissions linked to a bank’s or investor’s lending and investment portfolio, rather than their own operations. For example, a bank that funds a coal mine or invests in fossil fuels is indirectly responsible for the carbon those activities produce.

Measuring financed emissions helps reveal the real climate impact of financial institutions not just their office energy use. It’s a cornerstone of climate accountability in finance and is becoming essential under net zero pledges.

By Narmin Nahidi, assistant professor in finance at the University of Exeter

Green bonds

Green bonds are loans issued to fund environmentally beneficial projects, such as energy-efficient buildings or clean transportation. Investors choose them to support climate solutions while earning returns.

Green bonds are a major tool to finance the shift to a low-carbon economy by directing finance toward climate solutions. As climate costs rise, green bonds could help close the funding gap while ensuring transparency and accountability.

Green bonds are required to ensure funds are spent as promised. For instance, imagine a city wants to upgrade its public transportation by adding electric buses to reduce pollution. Instead of raising taxes or slashing other budgets, the city can issue green bonds to raise the necessary capital. Investors buy the bonds, the city gets the funding, and the environment benefits from cleaner air and fewer emissions.

The growing participation of government issuers has improved the transparency and reliability of these investments. The green bond market has grown rapidly in recent years. According to the Bank for International Settlements^[16], the green bond market reached US$2.9 trillion (£2.1 trillion) in 2024 – nearly six times larger than in 2018. At the same time, annual issuance (the total value of green bonds issued in a year) hit US$700 billion, highlighting the increasing role of green finance in tackling climate change.

By Dongna Zhang, assistant professor in economics and finance, Northumbria University

Just transition

Just transition is the process of moving to a low-carbon society that is environmentally sustainable and socially inclusive. In a broad sense, a just transition means focusing on creating a more fair and equal society.

Just transition has existed as a concept since the 1970s. It was originally applied to the green energy transition, protecting workers in the fossil fuel industry as we move towards more sustainable alternatives.

These days, it has so many overlapping issues of justice hidden within it, so the concept is hard to define. Even at the level of UN climate negotiations, global leaders struggle to agree on what a just transition means.

The big battle is between developed countries, who want a very restrictive definition around jobs and skills, and developing countries, who are looking for a much more holistic approach that considers wider system change and includes considerations around human rights, Indigenous people and creating an overall fairer global society.

A just transition is essentially about imagining a future where we have moved beyond fossil fuels and society works better for everyone – but that can look very different in a European city compared to a rural setting in south-east Asia.

For example, in a British city it might mean fewer cars and better public transport. In a rural setting, it might mean new ways of growing crops that are more sustainable, and building homes that are heatwave resistant.

By Alix Dietzel, climate justice and climate policy expert, University of Bristol

Loss and damage

A global loss and damage^[17] fund was agreed by nations at the UN climate summit (Cop27) in 2022. This means that the rich countries of the world put money into a fund that the least developed countries can then call upon when they have a climate emergency.

The World Bank has agreed to run^[18] the loss and damage fund but they are charging significant fees for doing so.

At the moment, the loss and damage fund is made up of relatively small pots of money. Much more will be needed to provide relief to those who need it most now and in the future.

By Mark Maslin, professor of earth system science, UCL

Mitigation v adaptation

Mitigation means cutting greenhouse gas emissions to slow climate change. Adaptation means adjusting to its effects, like building sea walls or growing heat-resistant crops. Both are essential: mitigation tackles the cause, while adaptation tackles the symptoms.

Globally, most funding goes to mitigation, but vulnerable communities often need adaptation support most. Balancing the two is a major challenge in climate policy, especially for developing countries facing immediate climate threats.

By Narmin Nahidi, assistant professor in finance at the University of Exeter

Nationally determined contributions

Nationally determined contributions (NDCs) are at the heart of the Paris agreement, the global effort to collectively combat climate change. NDCs are individual climate action plans created by each country. These targets and strategies outline how a country will reduce its greenhouse gas emissions and adapt to climate change.

Each nation sets its own goals based on its own circumstances and capabilities – there’s no standard NDC. These plans should be updated every five years and countries are encouraged to gradually increase their climate ambitions over time.

The aim is for NDCs to drive real action by guiding policies, attracting investment and inspiring innovation in clean technologies. But current NDCs fall short of the Paris agreement goals and many countries struggle to turn their plans into a reality. NDCs also vary widely in scope and detail so it’s hard to compare efforts across the board. Stronger international collaboration and greater accountability will be crucial.

By Doug Specht, reader in cultural geography and communication, University of Westminster

Natural capital

Fashion depends on water, soil and biodiversity – all natural capital. And forward-thinking designers are now asking: how do we create rather than deplete, how do we restore rather than extract?

Natural capital is the value assigned to the stock of forests, soils, oceans and even minerals such as lithium. It sustains every part of our economy. It’s the bees that pollinate our crops. It’s the wetlands that filter our water and it’s the trees that store carbon and cool our cities.

If we fail to value nature properly, we risk losing it. But if we succeed, we unlock a future that is not only sustainable but also truly regenerative.

My team at the University of Oxford is developing tools to integrate nature into national balance sheets, advising governments on biodiversity, and we’re helping industries from fashion to finance embed nature into their decision making.

By Mette Morsing, professor of business sustainability and director of the Smith School of Enterprise and the Environment, University of Oxford

Net zero

Reaching net zero means reducing the amount of additional greenhouse gas emissions that accumulate in the atmosphere to zero. This concept was popularised by the Paris agreement^[19], a landmark deal that was agreed at the UN climate summit (Cop21) in 2015 to limit the impact of greenhouse gas emissions.

There are some emissions, from farming and aviation for example, that will be very difficult, if not impossible, to reach absolute zero. Hence, the “net”. This allows people, businesses and countries to find ways to suck greenhouse gas emissions out of the atmosphere, effectively cancelling out emissions while trying to reduce them. This can include reforestation, rewilding, direct air capture and carbon capture and storage. The goal is to reach net zero: the point at which no extra greenhouse gases accumulate in Earth’s atmosphere.

By Mark Maslin, professor of earth system science, UCL

For more expert explainer videos, visit The Conversation’s quick climate dictionary playlist here on YouTube^[20].

References

1. ^{^} is critical (theconversation.com)
2. ^{^} Vogue Business (www.voguebusiness.com)
3. ^{^} Seychelles issued (www.worldbank.org)
4. ^{^} 67% chance (www.ipcc.ch)
5. ^{^} estimates that (www.ipcc.ch)
6. ^{^} one tonne of CO₂ (climate.ec.europa.eu)
7. ^{^} argue (climatepromise.undp.org)
8. ^{^} argue (www.unglobalcompact.org.uk)
9. ^{^} According to the World Bank (hdl.handle.net)
10. ^{^} about 24% of global emissions (www.worldbank.org)
11. ^{^} maintaining economic growth (www.government.se)
12. ^{^} receiving rebates (www.ft.com)
13. ^{^} A 2025 study (www.aeaweb.org)
14. ^{^} Mandatory disclosures (finance.ec.europa.eu)
15. ^{^} over US$40 trillion (£30 trillion) by 2030 (www.bloomberg.com)
16. ^{^} Bank for International Settlements (www.bis.org)
17. ^{^} loss and damage (theconversation.com)
18. ^{^} World Bank has agreed to run (www.worldbank.org)
19. ^{^} Paris agreement (www.un.org)
20. ^{^} here on YouTube (www.youtube.com)