resources.120 However, successful implementation is dependent on effective MRV regimes, an area where some EMDEs and LDCs face challenges. Capacity building that accounts for the unique conditions of these economies can help and MDBs and international donor agencies are well-placed to offer such support. Sustainable investment funds Sustainable investment funds are a central element for financing the global transition to a low-carbon, climate-resilient future. By integrating environmental, social and governance (ESG) criteria into investments, capital can be directed towards projects promising both financial returns and positive environmental impacts, thus addressing investment gaps in critical sectors such as renewable energy and transportation. As the average investor seeks mean-variance optimization, by focusing on environmental and social goals, sustainable investment funds offer investment opportunities to a growing segment of responsible and value- driven investors. Providing a vehicle for aggregating the capital for this non-negligible proportion of the investing class, the funds can drive the adoption of green technologies and best practice, thus promoting broader market transformation.The scale of sustainable investment funds is growing, with trillions of dollars under management, driven by initiatives such as Europe’s Sustainable Finance Disclosure Regulation (SFDR) and the alignment by the Glasgow Financial Alliance for Net Zero (GFANZ) of $130 trillion in assets with net-zero pathways by 2050.121 These efforts target both institutional and retail investors to mobilize capital towards sustainable projects, particularly in regions with critical needs. However, scaling-up the funds presents challenges, such as the lack of standardized impact measurement frameworks. The success of sustainable investment funds depends on strong regulatory frameworks to ensure transparency and prevent greenwashing. Initiatives such as SFDR can enhance market clarity and investor confidence. Despite some progress in this direction, overcoming this issue requires global cooperation in an increasingly multipolar world. For EMDEs and LDCs, higher investment risks due to political instability and underdeveloped financial markets constitute a further obstacle.122,123 This creates challenges for adaptation financing in the developing world, as projects in many LDCs – which often lack clear revenue streams – are unlikely to attract private investment. Public and donor funding thus almost always becomes the only source of investment for these countries.124 Hybrid transition finance mechanisms blend policy with market strategies to mobilize capital for climate action. By leveraging the strengths of both public and private sectors, hybrid mechanisms can bridge the gap between public policy objectives and the financial returns sought by private investors. As such, they could potentially become the most consequential stream of finance in the drive to accelerate the global transition to a low-carbon economy. Mechanisms such as blended finance, public-private partnerships (see Figure 2), feed-in tariffs (FiTs), “feebates”, insurance and risk-sharing tools are emerging as indispensable elements in mobilizing transition finance.2.3 Hybrid mechanisms Bridging the Gap: How to Finance the Net-Zero Transition 19

Bridging the Gap How to Finance the Net Zero Transition 2025