E3G: Geopolitics and Climate Cooperation for a World in Flux — Why the Old Multilateral Framework Is Breaking Down and What Comes Next

Credit: BBC News

E3G's analysis of how the collision between geopolitical fragmentation and climate necessity is reshaping global climate cooperation, with direct implications for sustainable finance practitioners.

Context:

E3G, the independent climate change think tank, has published a major analytical report examining how geopolitical fragmentation is reshaping the landscape for international climate cooperation in 2026 and beyond. The report, 'Geopolitics and Climate Cooperation for a World in Flux', is set against a backdrop of multiple simultaneous crises: the US-Israel-Iran conflict and its energy market consequences, ongoing Russia-Ukraine dynamics, US-China trade and technology tensions, and the election of governments in multiple major economies with at best ambivalent and at worst hostile postures toward multilateral climate commitments.

E3G's central argument is that the world has moved from an era of imperfect but broadly collaborative climate governance to one of competitive multipolarity, where major powers increasingly frame climate policy through the lens of industrial strategy, energy security, and geopolitical competition rather than shared global responsibility. The Iran conflict is a vivid case study: the energy price shock it has created has simultaneously strengthened the economic case for clean energy independence and provided ammunition for fossil fuel interests arguing that energy security requires expanded extraction.

The report is relevant to the financial sector because the transition to clean energy is fundamentally a capital allocation question and capital flows are sensitive to the political and institutional environment in which they are deployed. If multilateral climate frameworks become less credible and national climate commitments become more volatile, transition risk assessments built on policy scenario frameworks need to be updated to reflect a more fragmented, less predictable policy environment.

Rules and Guidelines:

E3G's analytical framework identifies three competing dynamics shaping climate cooperation in this period. First, accelerating national industrial competition in clean energy: the US Inflation Reduction Act, the EU's Net-Zero Industry Act, China's clean energy manufacturing dominance, and the UK's Contracts for Difference programme represent a shift from multilateral standards-setting toward competitive domestic industrial policy. This creates both acceleration risks (faster deployment) and alignment risks (fragmented standards, trade conflicts).

Second, the erosion of trust between developed and developing economies: the failure of wealthy countries to meet their $100bn per year climate finance commitment, combined with the energy crisis triggered by the Iran conflict falling hardest on commodity-importing developing nations, has deepened fractures between the Global North and South. African and Asian nations are increasingly questioning whether they should forgo their own fossil fuel development when wealthy nations expand drilling in response to geopolitical shocks.

Third, the emergence of new coalitions around clean energy security: despite multilateral fragmentation, E3G identifies growing bilateral and regional cooperation on specific clean energy supply chains, critical minerals, green hydrogen, offshore wind manufacturing, and grid infrastructure. These coalitions are interest-based rather than values-based, making them potentially more durable in a fragmented geopolitical environment but also more transactional and harder to scale.

Businesses Affected:

• Asset managers, pension funds, and insurance companies with global climate transition investment strategies, who need to update their policy scenario models to reflect the more fragmented political environment E3G describes.

• Banks are providing transition finance in emerging markets, where the deterioration of North-South climate finance relationships has created acute funding gaps.

• ESG data providers and ratings agencies whose transition risk frameworks are built on assumptions about policy trajectories that may need to be revised.

• UK and EU financial institutions whose regulators (FCA, PRA, ECB/SSM) require climate scenario analysis under ISSB S2, PRA SS5/25, and ECB guidelines and who need to understand what 'plausible policy scenarios' look like in 2026.

Next Steps:

• Review transition risk scenario frameworks for the 'fragmented' or 'delayed transition' scenario. E3G's analysis suggests this is no longer a tail risk but a central case in many regions. Update scenario assumptions accordingly.

• Review emerging market transition finance exposures against the deteriorating North-South climate cooperation environment. Where transition finance depends on policy commitments in countries facing fiscal stress, scenario-test project economics against slower policy delivery.

• Use E3G's analytical framework for client briefings and investment committee papers on sustainable finance strategy. The framing of clean energy as a geopolitical security asset, not merely an ESG preference, is a more resilient basis for sustainable finance strategy in the current environment.

Source | E3G | Climate Diplomacy