Bridging the Gap How to Finance the Net Zero Transition 2025

This persistent disparity highlights a broader investment gap for sustainable development in developing countries, which collectively require approximately $3-4 trillion per annum in climate- related funding by 2030 to meet the UN’s Sustainable Development Goals.20,21 A substantial portion of this requirement, approximately $2 trillion, is expected to be sourced domestically, with the remaining $1-2 trillion expected to be sourced from external financing, including international aid, FDI and loans from multilateral development banks (MDBs).22 EMDEs and least developed countries (LDCs) face extraordinary challenges due to limited financial resources, while heightened vulnerability to the effects of climate change is yet another contributory factor to the plethora of obstacles to their development. Higher cost of capital (often five to 10 times greater than in developed countries)23 is an unwelcome consequence of the negative externality that is climate change. Public finance, particularly through grants and concessional loans provided by MDBs, can play a crucial role in mitigating the perceived risks acting as a barrier to much-needed private sector investment. By spending on de-risking measures, MDBs can help lower the required rate of return on projects, thus making them more attractive to private investors. This blended approach is essential for scaling-up sustainable projects in EMDEs and LDCs, especially given that the development priorities of these countries often centre around more immediate needs – such as poverty alleviation, infrastructure development and energy access24,25 – which often conflict with the contemplation or introduction of stringent net-zero compliant policies. This underscores the need for a balanced approach that integrates climate action with long-term economic growth, not at the expense of countries’ aspirations for development. For instance, economic development in many developing countries is undermined by energy poverty, with significant portions of their populations lacking access to electricity and clean cooking fuels,26 vital elements for economic expansion. Hence, fossil fuel resource-rich developing countries, such as Nigeria and Angola, would appear more inclined to address this issue by exploiting their natural resources and existing technologies, where they already have expertise. Nevertheless, technology transfer to these countries can help them better exploit their natural resources, such as solar power and tidal capacity, to generate renewable forms of energy. Since energy generation efforts in developed countries are predominantly focused on transitioning carbon-intensive infrastructure to low-carbon contexts (such as the decommissioning of North Sea oil infrastructure to facilitate offshore wind power generation in the UK), technology transfer can focus on repurposing existing infrastructure in developing countries. International cooperation and dialogue are vital for addressing the imbalance between developed and developing country climate finance and ensuring that developing countries achieve their climate goals without compromising their development objectives. Cooperation need not only centre on the provision of financial aid; it should also involve the sharing of knowledge and technology, which are crucial for building local capacity and resilience.27,28 Developed nations benefitted from 44% of the total tracked capital in 2021-22 while emerging markets and developing economies (EMDEs), excluding China, received only 14%. Bridging the Gap: How to Finance the Net-Zero Transition 7