Climate finance

Climate finance is "finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts", as defined by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance. The terminology of sustainable finance has evolved over time alongside policy frameworks and market practices. A review study in 2026 demonstrated that early research primarily used fragmented concepts such as ethical finance, socially responsible investment, and environmental finance, before the gradual consolidation of the field around ESG-based sustainable finance. Their periodization clarifies the differences and similarities between the rival terms (carbon finance, climate finance, environmental finance, green finance and sustainable finance). The authors distinguish three main periods: At the 16th Conference of the Parties in 2010 (Cancun 2010) developed countries committed to the goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries. The decision by the 21st Conference of the Parties (Paris 2015) also included the commitment to continue their existing collective mobilization goal through 2025. In 2025, a new goal is expected to be adopted. However, the amount of finance actually provided was estimated to be well below what had been targeted. According to OECD figures, climate finance provided and mobilized reached $83.3bn in 2020 and $89.6bn in 2021. The Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law employ long-term predictable incentives, loan guarantees, and public co-investment to lower the risk and cost of capital for investments in climate finance projects. Empirical studies indicate that public policy and concessional finance can mobilize significant private capital flows into clean energy. == Global estimates of financing needs ==

Global climate finance was estimated to have reached around $1.3 trillion per year in 2021/2022. However, much more is needed to keep global temperature rises within 1.5°C and avoid the worst impacts of climate change. A 2024 report estimated that climate finance flows must increase by at least sixfold on 2021/2022 levels, reaching $8.5 trillion per year by 2030. == Subcategories ==

Mitigation finance is investment that aims to reduce global carbon emissions. Adaptation finance aims to respond to the consequences of climate change. These two subcategories of climate finance are normally considered separately. However, the two areas are known to have many trade-offs, co-benefits and overlapping policy considerations. The Paris Agreement is an important international agreement between governments, which has also helped to engage financial institutions in the climate agenda. The third aim of the Agreement (article 2.1 c) is to make finance flows consistent with the mitigation and adaptation goals of the agreement. Global climate finance is heavily focused on mitigation. Key sectors for investment have been renewable energy, energy efficiency and transport. The International Energy Agency's 2011 World Energy Outlook (WEO) estimates that in order to meet the growing demand for energy through 2035, $16.9 trillion in new investment for new power generation is projected, with renewable energy (RE) comprising 60% of the total. The capital required to meet projected energy demand through 2030 amounts to $1.1 trillion per year on average, distributed (almost evenly) between the large emerging economies (China, India, Brazil, etc.) and the remaining developing countries. It is believed that over the next 15 years, the world will require about $90 trillion in new infrastructure – most of it in developing and middle-income countries. The IEA estimates that limiting the rise in global temperature to below 2 Celsius by the end of the century will require an average of $3.5 trillion a year in energy sector investments until 2050. Finance for adaptation Finance is an important enabler for climate adaptation, for both developed and developing countries. It can come from a variety of sources. Public finance is provided directly by governments or via intermediaries such as development finance institutions (e.g. MDBs or other development agencies). It can also be channeled through multilateral climate funds. Some multilateral climate funds have a specific focus on adaptation within their mandate. These include the Green Climate Fund, the CIFs and the Adaptation Fund. Private finance can come from commercial banks, institutional investors, other private equity or other companies or from household or community funding. The vast majority of tracked finance (around 98%) has originated from public sources. This is partly because of the lack of a well-defined income stream or business case with an attractive return on investment on projects. Finance can be delivered through a range of instruments including grants or subsidies, concessional and non-concessional (i.e. market) loans as well as other debt instruments, equity issuances (listed or unlisted shares) or can be delivered through own funds, such as savings. Adaptation benefits can be estimated in terms of reduced damages from the effects of climate change. In economic terms, the cost to benefit ratio of adaptation shows that each dollar can deliver large benefits. For example, it is estimated that every US$1 billion invested in adaptation against coastal flooding leads to a US$14 billion reduction in economic damages. In other words, a small percentage increase in investment costs can mitigate the potentially very large disruption to infrastructure costs. A 2023 study found the overall adaptation costs for all developing countries to be around US$215 billion per year for the period up to 2030. The highest adaptation expenses are for river flood protection, infrastructure and coastal protection. They also found that in most cases, adaptation costs will be significantly higher by 2050. == Types of finance ==

Multilateral climate finance Multilateral climate funds The multilateral climate funds (i.e. governed by multiple national governments) are important for paying out money in climate finance. As of 2022, there are five multilateral climate funds coordinated by the UNFCCC. These are the Green Climate Fund (GCF), the Adaptation Fund (AF), the Least Developed Countries Fund (LDCF), the Special Climate Change Fund (SCCF), the Global Environment Facility (GEF), and the Just Energy Transition Partnerships. The largest of these, the GCF, was formed in 2010. The other main multilateral fund, Climate Investment Funds (CIFs), is coordinated by the World Bank. The Climate Investment Funds has been important in climate finance since 2008. It comprises two funds, the Clean Technology Fund and the Strategic Climate Fund. The latter sponsors innovative approaches to existing climate change challenges, whereas the former invests in clean technology projects in developing countries. Also in 2022, nations agreed on a proposal to establish a multilateral loss and damage fund to support communities in averting, minimizing, and addressing damages and risks where adaptation is not enough or comes too late. Some multilateral climate change funds work through grant-only programmes. Other multilateral climate funds use a wider range of financing instruments, including grants, concessional loans, equity (shares in an entity) and risk mitigation options. They complement the programmes of (national government) members' bilateral development agencies, allowing them to work in more countries and at a larger scale. The Paris Agreement also provided momentum for the MDBs to align their investments and strategies with climate goals, and in 2018 the MDBs collectively announced a joint framework for financial flows. Internationally, U.S.-supported multilateral initiatives also deploy blended finance to encourage private investment in developing-country mitigation and adaptation projects. Bilateral climate finance . For many developing countries, the plans submitted include targets attached to international financial and technical support (i.e. conditional targets). National-level coordination of climate funding is important for meeting these domestic targets, and in the case of developing countries, also for accessing international funding. Other funding can come from financial institutions such as banks, pension funds, insurance companies and asset managers. Sometimes, public and private sources of funding can be blended into a single solution, for example in insurance, where public funds provide part of the capital. and may also carry higher financial risks because the technologies are not proven or the projects have high upfront costs. If countries are going to access the scale of funding required, it is critical to consider the full spectrum of funding sources and their requirements, as well as the different mechanisms available from them, and how they can be combined. There is therefore growing recognition that private finance will be needed to cover the financing shortfall. Private investors could be drawn to sustainable urban infrastructure projects where a sufficient return on investment is forecast based on project income flows or low-risk government debt repayments. Bankability and creditworthiness are therefore prerequisites to attracting private finance. Potential sources of climate finance include commercial banks, pension funds, insurance companies, asset managers, sovereign wealth funds, venture capital (such as fixed income and listed equity products), infrastructure funds and bank lending (including loans from credit unions). They also include companies from other sectors such as renewable energy or water companies, and individual households and communities. For example, there are credit unions specialized in climate finance, such as the US-based Clean Energy Credit Union which finances a range of clean energy projects including solar PV systems, electric vehicles and electric bicycles. Ceres released a report which stated that credit unions have an essential role to play in mobilizing stakeholders to address climate change, and outlines seven steps credit unions should take to address climate risk. During the COVID-19 pandemic, climate change was addressed by 43% of EU enterprises. Despite the pandemic's effect on businesses, the percentage of firms planning climate-related investment rose to 47%. This was a rise from 2020, when the percentage of climate related investment was at 41%. Climate investment in Europe has been growing in the 2020s. However, the need for the EU's "Fit for 55" climate package remains 356 billion euros a year. Since 2020, US firms' desire to innovate has increased, whereas European firms' has decreased. As of 2022, spending in climate for European enterprises has climbed by 10%, reaching 53% on average. This has been especially noticeable in Central and Eastern Europe at 25% and in small and medium-sized firms (SMEs) with a 22% increase in climate financing.'''''' Carbon offsetting through voluntary carbon markets is a way for private sector enterprises to invest in projects that avoid or reduce emissions elsewhere. The original carbon offsetting and credit mechanisms were "flexibility mechanisms" defined in the Kyoto Protocol. They comprise the compliance carbon market, focusing on trading/crediting (obligatory) emission reductions between countries. In voluntary carbon markets, companies or individuals use carbon offsets to meet the goals they set themselves for reducing emissions. Voluntary carbon markets are growing significantly. Mechanisms such as REDD+ include private sector contributions via voluntary carbon markets. According to a 2024 report by J.P. Morgan, battery and grid technology, clean mobility, food & agriculture technology are the highest-funded sectors, which reflects the demand for electric vehicle infrastructure, energy efficiency, and more sustainable food production. == Financial instruments ==

Several different financial models or instruments have been used for financing climate actions. The overall business model may include several of these financing mechanisms combined to create the climate solution. Financial models can belong to different categories e.g. public budgets, debt, equity, land value capture or revenue generating models etc. Debt-for-climate swaps Debt-for-climate swaps happen where debt accumulated by a country is repaid upon fresh discounted terms agreed between the debtor and creditor, where repayment funds in local currency are redirected to domestic projects that boost climate mitigation and adaptation activities. Climate mitigation activities that can benefit from debt-for-climate swaps includes projects that enhance carbon sequestration, renewable energy and conservation of biodiversity as well as oceans. For instance, Argentina succeeded in carrying out such a swap which was implemented by the Environment Minister at the time, Romina Picolotti. The value of debt addressed was $38,100,000 and the environmental swap was $3,100,000 which was redirected to conservation of biodiversity, forests and other climate mitigation activities. Seychelles in collaboration with the Nature Conservancy also undertook a similar debt-for-nature swap where $27 million of debt was redirected to establish marine parks, ocean conservation and ecotourism activities. Green bonds Empirical evidence suggests that green bond issuance is associated with lower carbon emissions from issuing jurisdictions and may offer modest financing advantages, such as lower yields or broader investor bases. Commercial Lending and Sustainability-Linked Loans Sustainability-linked loans (SLLs), in which interest rates adjust based on achievement of emissions reduction or efficiency targets, have expanded rapidly among U.S. corporations. Offsetting (credit trading) Venture capital and early-stage financing Although smaller in volume relative to project finance and corporate investment, venture capital (VC) funds a significant share of early-stage climate technology innovation in areas such as batteries, hydrogen, carbon capture, and grid software. U.S. climate-tech VC investment grew markedly between 2015 and 2023, reflecting increased investor interest and expanding federal incentives. Academic analyses note that VC plays a crucial role in developing frontier technologies but faces structural challenges due to long commercialization timelines and high capital intensity. Other financial instruments The following financial instruments can also be used for climate finance but were not developed specifically for climate finance: • Revenue-generating models (subscription business model, fee-for-service); Revenue generation through for example water-user fees or tariffs can incentivise investment in climate projects. • Revolving Loan Fund • Public–private partnership • Blended finance • Land Value Capture == Finance committed and dispersed ==

In 2019, CPI estimated that annual climate finance reached more than US$600 billion. Data for 2021/2022 showed it to be almost USD 1.3 trillion, with most of the increase coming from acceleration in mitigation finance (renewable energy and transport sectors). These figures take into account all countries and both private and public finance. The bulk of this finance is raised and spent domestically (84% in 2021/2022). International public climate finance from developed to developing countries was found to be well below US$70 billion per year for the period 2017-2021. There are differences in estimates due to different definitions and methods used. As of November 2020, development banks and private finance had not reached the US$100 billion per year investment stipulated in the UN climate negotiations for 2020. Climate financing by the world's six largest multilateral development banks (MDBs) rose to a seven-year high of $35.2 billion in 2017. According to OECD figures, climate finance provided and mobilized reached $83.3bn in 2020. Another study reported that the money given for climate change was only worth about a third of what was said ($21–24.5bn). In 2009, developed countries had committed to jointly mobilize $100 billion annually in climate finance by 2020 to support developing countries in reducing emissions and adapting to climate change. European Investment Bank Since 2012, the European Investment Bank (EIB) has provided €170 billion in climate funding, which has funded over €600 billion in programs to mitigate emissions and help people respond to climate change and biodiversity depletion across Europe and the world. In 2022, the Bank's funding for climate change and environmental sustainability projects totaled €36.5 billion. This includes €35 billion for initiatives supporting climate action and €15.9 billion for programs supporting environmental sustainability goals. Projects with combined climate action and environmental sustainability advantages received €14.3 billion in funding. Over 2021-2030, the Bank wants to assist €1 trillion in green investment. Currently, only 5.4% of the Bank's loans for climate action are dedicated to climate adaptation, but funding did increase significantly in 2022, reaching €1.9 billion. The European Investment Bank plans to support €1 trillion of climate investment by 2030 as part of the European Green Deal. In 2019 the EIB Board of Directors approved new targets for climate action and environmental sustainability to phase out fossil fuel financing. The bank will increase the share of its financing for to climate action and environmental sustainability to 50% by 2025 The European Investment Bank Group announced it will align all financing with the Paris Agreement by the end of 2020. The bank aims "to play a leading role in mobilising the finance needed to achieve the worldwide commitment to keep global warming well below 2˚C, aiming for 1.5˚C." EIB loans to the sustainable blue economy totalled €6.7 billion between 2018 and 2022, generating €23.8 billion in investments, and €2.8 billion in maritime renewable energy. In the same timeframe, the Bank granted around €881 million to assist in the management of wastewater, stormwater, and solid waste to decrease pollution entering the ocean. In 2023, EIB energy loans climbed to €21.3 billion, up from €11.6 billion in 2020. This funding supports energy efficiency, renewable energy, innovation, storage, and new energy network infrastructure. The EIB, the European Commission, and Breakthrough Energy, launched by Bill Gates in 2015, have collaborated to build large-scale green tech initiatives in Europe and encourage investment in crucial climate technologies. In the three years preceding the pandemic, over two-thirds of EU towns boosted infrastructure investments, with a 56% focus on climate change mitigation. Local municipalities contribute 45% of total government investment. Basic infrastructure, such as public transportation or water utilities, is included in their investment. They also update public facilities including schools, hospitals, and social housing. Prioritizing energy efficiency in these projects will assist Europe in meeting climate targets. External variables, such as consumer pressure and energy taxes, are more relevant than firm-level features, such as size and age, in influencing the quality of green management practices. Firms with less financial limitations and stronger green management practices are more likely to invest in a bigger variety of green initiatives. Energy efficiency investments are good to both the bottom line and the environment. == Challenges ==

Tracking climate finance flows Information on climate finance flows is much better for international climate finance than for domestic climate finance. A number of initiatives are underway to monitor and track flows of international climate finance. For example analysts at Climate Policy Initiative (CPI) have tracked public and private sector climate finance flows from a variety of sources on a yearly basis since 2011. This work has fed into the United Nations Framework Convention on Climate Change Biennial Assessment and Overview of Climate Finance Flows and in the IPCC Fifth Assessment Report and IPCC Sixth Assessment Report chapters on climate finance. These suggest a need for more efficient monitoring of climate finance flows. In particular, they suggest that funds can do better at synchronizing their reporting of data, being consistent in the way that they report their figures, and providing detailed information on the implementation of projects and programs over time. There is also a need for improved reporting and tracking by domestic and private climate finance actors. This could be achieved through national regulations for mandatory and standardized disclosure. Reasons are among others a lack of universally agreed-upon definitions of what qualifies as international climate finance and no oversight. This has led to an inclusion of non-climate projects, a lack of transparency and ultimately a credibility issue regarding official international climate finance reporting. At the 16th Conference of the Parties in 2010 developed countries committed to the goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries, and the decision by the 2015 United Nations Climate Change Conference also included the commitment to continue their existing collective mobilization goal through 2025. Limits of Private Finance in Meeting Climate Goals Several international institutions caution that private capital alone cannot close the climate finance gap. The International Monetary Fund and OECD emphasize that many climate investments, particularly in adaptation, early-stage innovation, and vulnerable communities, generate high social benefits but limited private returns. As a result, sustained public finance, regulatory frameworks, and risk-sharing mechanisms are required to align private investment with long-term climate objectives. Economists state that climate adaptation initiatives should be an urgent priority for business investment. Reporting on voluntary carbon market reform has discussed the Integrity Council for the Voluntary Carbon Market (ICVCM) and its Core Carbon Principles benchmark for carbon credit quality and labelling. == See also ==