Why the financial system is failing the planet
· 9 min read
This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.
The world we live in today is financed into existence.
From the infrastructure we build to the food on our plates, the flow of capital dictates what societies value and prioritise. Yet our traditional financial system is stuck in the past. Built to chase short-term profits, it is no longer fit for purpose amid escalating climate and environmental crises. It dangerously overlooks the long-term challenges that we now face.
In the pursuit of returns, financial actors routinely externalise environmental and social costs, shifting the burden to local communities, fragile ecosystems, and future generations worldwide. The devastating consequences of this system are dismissed as someone else’s problem or, even worse, disregarded as no one’s problem at all. This traditional short-sighted approach is morally questionable and economically unsustainable.
The reality? The world we hope to live in tomorrow could be financed into extinction.
Simultaneously, our current financial system is increasingly vulnerable to systemic shocks. Energy price volatility, global food insecurity, the COVID-19 pandemic and extreme weather conditions are not isolated disruptions. They are symptoms of our current system operating beyond its ecological and social limits. Ultimately, stability is falsely assumed when risk is underestimated, and resilience is underinvested in.
Take the fossil fuel industry as an example. Despite the complex web of international environmental agreements and treaties, including the Paris Agreement [1], as well as business alliances geared towards net-zero, the fossil fuel industry continues to attract 4.3 million USD in investment [2]. The profits realised by these companies come at a devastating environmental and social cost [3].
On a local scale, the impact of oil and gas production, for example, in the Niger Delta, are devastating. Decades of the fossil fuel industry have left a toxic legacy: oil spills contaminating land, water and air, plummeting crop yields, worsening health conditions, lowering life expectancy, and livelihoods being lost [4]. Globally, the industry has continued to emit greenhouse gases for decades, driving the climate crisis further.
For investors, these fossil fuel investments risk becoming ‘stranded assets’, where they are unable to deliver future returns and threaten to wipe out portfolios based on traditional assumptions. These are all environmental and social risks, including physical risks from extreme weather events damaging infrastructure, transition risks from shifting policies, market and consumer preferences away from fossil fuels and/or liability risks from legal action against companies for climate-related disasters.
We need a shift.
Business and finance must go beyond profit - they must serve the people and planet too. Sustainable finance encapsulates this shift: a model that resurfaces hidden costs, celebrates long-term stability and resilience, and ensures that the future of finance is not only profitable, but above all, possible.
Climate science is unequivocal.
We are currently living through the warmest decade on record, with global mean temperatures now 1.24 to 1.28°C above pre-industrial levels [5]. The year 2024 was officially the world’s warmest year ever recorded [6]. Arctic Sea ice continues to shrink at an alarming rate of 12.2% per decade [7]. In 2023, the global average sea level reached a record high, standing 101.4 mm above 1993 levels [8]. Meanwhile, extreme weather events are becoming more frequent and intense, with a staggering 605 extreme weather events recorded in 2024 alone [9]. According to paleoclimate data, the rate and scale of such changes are unprecedented.
Climate models project that without rapid decarbonisation, we are on course for 2.7°C of warming by the end of this century [10].
This trajectory far exceeds the thresholds deemed safe by climate scientists and dramatically increases the likelihood of crossing irreversible tipping points – some of which are already being observed [11]. Political shifts and the rise of climate denialism in certain regions could accelerate this trajectory, though the full implications are yet to be discovered in data.
However, our current financial system undermines this risk. Investment decisions assume a future that resembles a past. But according to the data, past performance can no longer be used to predict future returns. The climate crisis means that our contexts are drastically different. The financial system must catch up.
The push for sustainable finance is embedded in international agreements and global policy frameworks that are reshaping expectations for financial institutions.
The United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement have an overarching goal of holding the increase in global average temperatures to well below 2°C above pre-industrial levels, and to pursue efforts to limit it to 1.5°C [12]. Under this agreement, countries must submit their Nationally Determined Contributions (NDCs) outlining their climate action plans, with each successive NDC becoming more ambitious.
Article 2.1(c) of the Paris Agreement explicitly calls for aligning financial flows with pathways towards low emissions and climate-resilient development [13]. Similarly, the Intergovernmental Panel on Climate Change (IPCC) report echoes that limiting warming requires systemic transformation in the financial sector [14].
Meanwhile, other conventions are also bringing finance to the sustainability conversation. Conventions such as the UN Convention on Biological Diversity (UNCBD) and the UN Convention to Combat Desertification (UNCCD) recognise that finance must account for nature, land, and the rights of marginalised communities.
These conventions reiterate the need for finance to account for externalities in investment decisions.
In July 2025, the International Court of Justice (ICJ) released its advisory opinion on the Obligations of States in respect of climate change [15], stating the binding obligations that nations have under the UN conventions and other treaties to ensure the stability of the climate systems and the integrity of our environment. Together, these frameworks set clear expectations for how states and financial systems must respond. While some climate action has already been undertaken by governments, regulators, and financial institutions – such as through disclosure frameworks and green taxonomies, progress remains slow and fragmented.
In some cases, progress is even reversing [16].
This disconnect between global commitments and actual delivery was made especially visible at the November 2025 COP30’s supposed “implementation COP”, where finance once again emerged as the fault line shaping global climate ambition. Despite expectations that negotiators would move from what needs to be done to how to deliver it, deep divisions over finance, trade measures and mitigation pathways stalled progress.
The outcome of the COP disappointed many. Particularly the coalition of more than 80 countries that pushed for a clear fossil-fuel transition roadmap.
In addition, the Mutirão decision spotlighted climate finance, including a call to triple adaptation finance by 2035. However, while these discussions signalled intent, it delayed the urgent support developing countries are demanding by 2030. Overall, COP30 reinforced that the global agenda is now not only constrained by a lack of ambition, but further by a persistent failure to unlock, mobilise, and deliver finance at the scale the crisis demands [17].
A fundamental shift in the core structure of businesses is required: from maximising return to maximising environmental benefits and social value.
If the traditional financial system continues business as usual and ignores planetary boundaries, it will be blindsided by incoming shocks, such as physical climate or social and geopolitical shocks. But if finance is redirected to incorporate value foundationally, it holds immense potential to spur transformative change. Capital could be allocated to regenerate and maintain fragile ecosystems, empower communities and maintain long-term resilience, alongside generating profit.
Sustainable finance does not mean sacrificing returns. Today, it is about survival through redefining risk and value. It drives the shift towards a just transition, where environmental, social and governance factors act as a core function of due diligence and fiduciary responsibility. It is not an afterthought, nor should it be reduced to a tick-box exercise.
For our financial system to flourish, there must be a sustainable future. A reprioritisation of the social and climate impact potential of investments is a must. Our future depends on how we choose to invest today.
In short, recognising climate risk as financial risk is the first step towards understanding why the current system is no longer fit to operate on outdated assumptions. Traditional finance is not designed to account for long-term value, or the cascading risks that are now reshaping markets.
As this section unfolds, the next articles unpack how the sustainable finance landscape actually works by clarifying the terms, tools, and approaches that are often used interchangeably and showing how sustainable finance is rapidly moving into the mainstream. This section sets the foundation for understanding not only why change is necessary, but also how the financial system can, and has, evolved to stay resilient, responsible and relevant in a warming world.
The views expressed are for informational purposes only and do not constitute financial, legal, or investment advice.
Start your journey with the Sustainable Finance Guide and explore the series reshaping how we think about money, markets and our planet. View the full guide content here.
Looking for more information on sustainable finance and what it means for your business or school? Check Globalfields' new pages here.
Curious how major companies measure up on climate? On illuminem’s Data Hub™, explore verified emissions data, net‑zero targets, and sustainability performance of thousands of firms — from industry leaders to emerging innovators.
References
Filip Koprčina
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illuminem briefings
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Green Central Banking
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ESG Today
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Inside Climate News
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