Risk to Reward 2025

Insufficient, inefficient and unfair’ is what I use to describe the state of climate finance, which could be comfortably extended to development finance. Mahmoud Mohieldin, United Nations Special Envoy on Financing the 2030 Agenda for Sustainable Development Despite strong momentum in recent years, private climate finance in emerging markets and developing economies remains insufficient and is concentrated in only a few sectors and countries. Closing the current financing gap will require not only scaling international flows but also unlocking the vast pools of domestic capital already present in EMDEs, including by tapping into domestic savings and creating markets. Barbara Buchner, Global Managing Director, Climate Policy InitiativeUnderstanding the current role of private finance and how fast it must grow is essential to charting a credible pathway to 2030. Private climate finance to EMDEs from both domestic and international sources more than doubled in two years, from 2021 to 2023.11 The most significant annual jump occurred between 2022 and 2023, when flows increased from $95 billion to $187 billion. While this momentum is encouraging, international private finance, which increased from $17 billion in 2021 to $36 billion in 2023, remains limited as a proportion of total private climate finance at 19% in 2023 (see Figure 2).Recent trends show that domestic private climate finance has been the backbone of investment in EMDEs, rising from $64 billion in 2021 to $151 billion in 2023 – accounting for more than 80% of all private climate finance. This reflects growing household purchases of low-carbon technologies; nevertheless, local capital mobilization challenges such as shallow financial markets and credit risks persist.121.2 Trends in private climate financeCrucially, the problem is not a lack of financial tools. Over the past decade, an array of risk-sharing and investment mechanisms such as blended finance, guarantees, political risk insurance, climate bonds, first-loss capital and climate insurance have been developed and deployed at varying scales. The challenge lies in the absence of a coherent, system- wide mechanism to align these tools effectively. What is needed is transparent, streamlined and scalable architecture that can channel capital efficiently towards areas of greatest climate and development impact, while also supporting long- term economic growth in host countries. Local partnerships are also vital. A deep understanding of domestic market dynamics, regulatory frameworks and community needs ensures that financial solutions are contextually relevant and sustainable. By building trust, aligning incentives and fostering public-private collaboration on the ground, these partnerships enable capital to flow where it is most impactful. Without robust local alliances, even the most sophisticated financial mechanisms risk being underutilized or misaligned, leaving the most pressing climate opportunities untapped.Unlocking private capital at scale is essential not just to fill the climate finance gap in EMDEs, but to seize the opportunity these markets present. With EMDEs projected as future centres of global growth, sustainable infrastructure investment (estimated at $1.5-2.0 trillion annually by 2030) can deliver both strong returns and resilience.10 Even a 10-15% capture of this need translates to $150- 300 billion per year in investable opportunities. While first movers may encounter risks and challenges in the markets they enter, they can also access potentially favourable valuations before increased capital inflows affect prices. In addition, they may have opportunities to influence policies and market structures, develop relational capital that could pose barriers for later entrants, and diversify portfolios with assets that display low correlation with Organisation for Economic Co-operation and Development (OECD) economies, thereby supporting portfolio stability amid global fluctuations. This report calls for bold, coordinated action, through public-private collaboration to overcome data asymmetries, align incentives and scale up investment. Only by building a climate finance ecosystem that is efficient, inclusive and impact- driven can sustainable growth for all be achieved. From Risk to Reward: Unlocking Private Capital for Climate and Growth 8