Defining the climate finance gap1 Annual investment in the low-carbon transition needs to multiply seven- fold by 2030, if the world is to stand a chance of steering the climate towards a Paris-aligned pathway. The sixth assessment report of the Intergovernmental Panel on Climate Change (IPCC),1 published in 2023, provides a comprehensive assessment of the current state of knowledge on climate change and its impacts. Most importantly, it emphasizes human activity – such as the burning of fossil fuels, land-use changes and industrial processes – as a significant driver of climate change and anticipates global surface temperatures will reach 1.5°C above pre-industrial levels between 2030 and 2035 in nearly all scenarios. In 2024, global surface temperatures temporarily exceeded 1.5°C above pre-industrial levels,2 underscoring the need for urgent and sustained action on greenhouse gas (GHG) emissions reduction across all sectors of the global economy. However, global action on the scale required to address the challenge requires several trillions of dollars in annual investments. The current level of global investment in climate-related initiatives falls significantly short, creating a substantial financing gap that impedes progress towards meeting climate targets and mitigating climate change impacts. To bridge this gap, it is crucial to mobilize diverse sources of public and private finance by deploying effective policy frameworks and innovative financial and market instruments. International cooperation and support are critical in addressing the finance needs of developing countries that are most vulnerable to climate change. Securing adequate funding for mitigation, adaptation and resilience not only advances climate action but also contributes to achieving the United Nations (UN) Sustainable Development Goals (SDGs) and to fostering equity more broadly. The climate finance gap for both mitigation and adaptation is considerable. According to the Climate Policy Initiative (CPI), annual climate finance requirements are projected to rise to $9 trillion by 2030 and exceed $10 trillion annually from 2031 to 2050.3 Mitigation finance alone must surpass $8.4 trillion per year by 2030, yet only $1.2 trillion was invested in 2021/2022.4 On the adaptation front, financing reached a record annual value of $63 billion in 2021/2022, a 29% increase from $49 billion in 2019/2020. The great majority (98%) of this funding came from public sources. Development finance institutions (DFIs) were major contributors, accounting for 86% of the total.5 Despite this progress, the Adaptation Gap Report 2023, published by the UN Environment Programme (UNEP),6 identifies an annual adaptation finance gap of between $215 billion and $387 billion, just for developing countries this decade, and estimates that these countries require between 10 and 18 times the total global public finance currently flowing into adaptation. Developing countries, with funding requirements in excess of $2.4 trillion per year by 2030,7 face unprecedented challenges in mobilizing climate finance. According to UN Trade and Development,8 an estimated $1 trillion needs to originate from sources external to these countries. Current flows of both climate and non-climate finance to developing countries continue to remain insufficient to meet their developmental needs, with total foreign direct investment (FDI) having fallen by 12% to $1.3 trillion in 2022.1.1 The climate finance gap in numbers Annual climate finance requirements are projected to rise to $9 trillion by 2030 and exceed $10 trillion annually from 2031 to 2050 – yet only $1.26 trillion was invested in 2021/2022. Bridging the Gap: How to Finance the Net-Zero Transition 5

Bridging the Gap How to Finance the Net Zero Transition 2025