Bridging the Gap How to Finance the Net Zero Transition 2025

Conclusion The economic significance of the transition finance gap is hugely significant and its drivers, such as fragmentation in climate policy-making and the global financial services sector, are wide-ranging. Fragmentation rears its head in multiple contexts. It exists as an issue within countries, where a clear lack of coherence in policy-making may be observed, and it emerges as a serious concern for international negotiators when it fuels divergence in the perception of international guidelines, such as the CBDR-RC principle. Other factors driving the evolution of the gap are insufficient public funding, limited private sector engagement, high cost of capital, inadequate project pipelines and the complexity of climate finance mechanisms and initiatives. Many of these issues are exacerbated in LDCs and many EMDEs due to political and regulatory uncertainty, institutional weaknesses and the need to prioritize more immediate needs such as poverty alleviation, infrastructure development and energy access. This, inevitably, creates a strikingly large and enduring gap in fortunes between developed and developing countries with respect to their ability to attract climate finance and investments. Addressing these issues demands a multi-faceted and innovative approach that exploits the strengths of both the public and private sectors, alongside robust international cooperation. It is imperative to develop clear, supportive policy frameworks, enhance institutional capacity, where necessary, and streamline financing mechanisms. Evidence suggests that only through comprehensive and coordinated global efforts can the aspiration to mobilize the requisite resources to meet climate targets and ensure sustainable development be achieved. This is a monumental challenge given the enduring nature of the geopolitical challenges the world currently faces. As a start, policy-makers should endeavour to address the pervasive lack of coherence in climate change policy-making to achieve efficiency gains and lower the cost of addressing climate change. New initiatives should be assessed from the perspective of how they fit with existing ones to avoid contradictions and duplication. Policy needs to be context-driven. Specifically, while a combination of market and regulatory interventions within existing policy frameworks may effectively and significantly narrow the transition finance gap in many developed countries and large EMDEs, owing to weaker institutional, regulatory and market structures, LDCs and many EMDEs will need to rely on public funding and foreign donations to leverage targeted private sector investments for adaptation and mitigation projects. In all instances, attention needs to be paid to the impact of policy-making on those least able to bear it. This can be achieved by using a data- driven approach to craft innovative instruments that eliminate the risk factors impeding the flow of critical capital to low-carbon innovation and climate projects, while forecasting the economic and social impact of climate policy on all segments of society. The transition to a net-zero future offers large future benefits; however, the costs in the early years are significant and must be equitably distributed to ensure support from all segments of society. More regulatory action is needed to continue to hew away at the market failure-inducing effects of climate change as a negative externality. Regulators and policy-makers should focus on enforcing financial disclosure rules, streamlining processes, incentivizing green investments and strengthening environmental regulations. Consequently, businesses need to prepare for a new era of aggressive environmental regulation, which the EU’s recent implementation of the CBAM is likely to drive forwards as it moves towards full implementation in 2034. The strengthening of the disclosure regime in countries such as the UK and across the EU bloc will enhance transparency regarding the exposure of supply chain networks to climate transition and physical risks, with implications for the cost of capital. An increased level of transparency should be welcomed by asset managers, banks, investors and consumers, who need to incorporate climate risk exposure in their decision-making.Businesses need to prepare for a new era of aggressive environmental regulation, while welcoming enhanced transparency on risks to supply chains. Climate finance and policies should be tailored to end users and focus on addressing the effects on vulnerable populations. Bridging the Gap: How to Finance the Net-Zero Transition 29