CLIMATE FINANCE AND GREEN TRADE TRANSITIONS: EU CARBON BORDER ADJUSTMENT MECHANISM, GREEN BOND MARKETS, AND CLIMATE RISK IN BANK LENDING PORTFOLIOS

ABSTRACT

Climate finance and green trade transitions are fundamentally reshaping the architecture of the global economy. As climate commitments intensify — with enhanced pledges by 113 countries projected to cut global emissions by approximately 12% by 2035 — the financial mechanisms and trade policy instruments designed to support these transitions warrant rigorous academic scrutiny (UNFCCC, 2023; Hein et al., 2024). This paper examines three interconnected dimensions of this transformation: (1) the European Union's Carbon Border Adjustment Mechanism (CBAM) and its implications for Indian and other developing country exports; (2) the development and trajectory of global green bond markets; and (3) the incorporation of climate risk in bank lending portfolios. Drawing on secondary data, policy documents, financial market data, and an extensive review of peer-reviewed literature, this study employs a mixed conceptual and empirical framework to analyze these dimensions. The findings reveal that CBAM imposes asymmetric compliance burdens on developing economies, particularly in carbon-intensive export sectors such as steel, cement, and aluminium, threatening export competitiveness and trade flows with the EU (Mehling et al., 2019; Cosbey et al., 2019). Simultaneously, green bond markets have scaled dramatically, surpassing USD 4 trillion in cumulative issuance by 2023, yet structural challenges around greenwashing, standardization, and market access for developing nations persist (Climate Bonds Initiative, 2023; Fatica et al., 2021). In bank lending, climate-related financial risks — both physical and transition risks — remain incompletely priced, with significant implications for financial stability (TCFD, 2021; Battiston et al., 2017). The paper contributes theoretically to sustainable finance and green HRM-adjacent institutional frameworks and offers policy recommendations targeted at multilateral climate finance architecture, CBAM transition support mechanisms, green bond regulatory harmonization, and bank supervisory guidelines. The study underscores the urgent need for calibrated, equity-sensitive climate finance policies that balance ecological ambition with developmental imperatives.