Investing in Climate and Development: The Evolving Role of the International Financial and Tax Architectures

Addressing the intertwined challenges of climate change and growth in emerging and developing economies requires an urgent and unprecedented increase in climate-aligned investment. Increasing investment is essential to addressing the negative effects of climate shocks on growth and productivity. This comes at a time when the world, and developing countries in particular, are experiencing slowing growth prospects, declining productivity and subdued levels of investment.

What frameworks are necessary to set the strategic direction for financing? What policy and institutional underpinnings would help facilitate the energy transition, build resilience and restore natural capital?

A new policy brief by Daniel Titelman, Marilou Uy and Amar Bhattacharya from the Task Force on Climate, Development and the International Monetary Fund lays out the macro-critical dimensions of mobilizing financing to achieve climate and development goals urgently in developing countries. It emphasizes the importance of a scaled-up long-term domestic and external financing framework that aligns climate goals with inclusive development.

To complement domestic resource mobilization efforts, it proposes a 5-pillar strategy that includes reforms of the international financial and global tax architectures:

• First, countries must improve domestic resource mobilization, promote progressive tax reforms—including personal income and wealth taxes—and enhance the effectiveness of public spending. Public spending, and the management of debt sustainability, should account for the long-term growth-enhancing impacts of climate investments.
• Second, at the international level, reforming the global tax architecture is vital for equity and resource mobilization. This includes global minimum taxation, carbon levies, digital taxes, measures to reduce base erosion and profit shifting by corporations and the introduction of international mechanisms to tax extreme wealth of individuals.
• Third, access to external financing must be broadened and made more affordable. This requires recapitalizing multilateral development banks (MDBs), scaling concessional financing, deploying innovative instruments (e.g., thematic bonds, climate-linked debt) and leveraging private capital through de-risking strategies.
• Fourth, the global financial safety net must be reinforced and expanded. The International Monetary Fund (IMF)’s evolving climate agenda, including the Resilience and Sustainability Facility (RSF), should be complemented by deeper cooperation with regional reserve arrangements and expanded Special Drawing Right rechanneling. IMF surveillance and policy advice should take into account the impact of climate risks and the benefits of investments in climate actions.
• Fifth, equity and institutional reform must be at the core of international financial and tax architecture. A just transition requires substantial investment in social protection, education, and labor markets, particularly for vulnerable communities. Equally, stronger voice and representation for developing countries in the governance of international financial institutions and global tax governance is critical to ensuring their legitimacy and realigning international rules with sustainable development goals.

In sum, transforming the global financial and tax architecture to support climate and development outcomes is not only economically necessary but ethically imperative. A multidimensional, cooperative and inclusive approach—anchored in both national reforms and global action—is essential to ensure that no country is left behind in the pursuit of a just and resilient future.