5 key trends shaping the future of climate finance

Over the past year, climate finance has never been far from the headlines. At COP28 in 2023, delegates were told that between $5 and 7 trillion in annual investments will be needed to green the global economy and mitigate climate risk. At COP29, experts predicted this number will rise to $9 trillion by 2030. That means climate finance must increase by five-fold annually to avoid the worst impacts of climate change. 

So how do we unlock this vital investment? ADSW’s Advisory Committee on Climate Finance gathered experts from across the world of finance – from global banks and venture capital firms, to regulators, insurance companies and finance institutions. They identified five key signposts set to influence the future of climate finance.

1. Smart regulation to stimulate demand

The laws of supply and demand apply to climate financing as much as any other form of commercial activity. On the supply side, the last ten years have seen an explosion in the availability of green bonds and other sustainable assets. Experts noted, however, that the demand side is more complicated. 

With major global targets set for 2030 and 2050, organizations are under pressure to demonstrate their climate action – creating an appetite for greener financial products. Meanwhile, non-sustainable transactions and investments - such as those linked to oil and gas – are becoming more constrained as markets and lenders tend towards greener portfolios. In spite of these demand-side “push” factors, demand is not currently driving climate finance at the levels needed to meet international ambitions. 

To address this, the experts called on regulatory bodies to provide greater clarity and incentives, to increase the “pull” factor, boosting investor confidence and demand for climate finance.

2. Clear labelling to guide investors 

Another area which could benefit from greater clarity, according to the specialists, is the labelling of financial products. Against a backdrop of ambitious global climate targets and growing pressure for more sustainable portfolios, the stakes are high for investors. They are looking for detailed assurances on how their capital can reliably achieve those goals. 

By implementing better standards for the labelling of financial mechanisms, national development banks and development finance institutions can encourage demand for climate financing, drive engagement and help make reporting easier. 

3. Patient finance to supercharge climate tech

Climate tech is evolving faster than ever. Yet funding for vital new climate solutions frequently falls victim to an old trap: the chicken and the egg. Investors look for viability, in order to commit funding, but climate tech innovators can’t demonstrate viability without early-stage financing. Few investors have the will and resources to deploy capital for projects that may take decades to come to fruition.

The experts of the advisory committee identified a seemingly paradoxical solution: patient capital. While many seek out the next tech breakthrough, a slowly growing collection of progressively minded investors are recognizing the importance of long-term capital in supporting climate tech innovation. These include oil and gas companies with ready capital, looking to forge a future for themselves in a post-hydrocarbon world.

4. Clearing hurdles to unlock potential in the Global South

If we are to radically step up global investment to support climate action, we must address historical underinvestment in the Global South and recognize its climate financing potential. By way of example, experts cited Brazil’s potential for the export of clean energy and the importance of African nations in the management and protection of carbon sinks. 

With clear direction from leading financial institutions, robust monitoring and reporting, investors can be made more aware of this potential. If projects in the Global South are recognized as having solid financial returns as well creating impact, north-south capital flows can be unleashed at scale. 

5. Reporting guidelines to ensure ESG is not overlooked

With so many sustainable assets and green bonds available, investors are becoming ever-more stringent in their ESG requirements, beyond a company’s green credentials. For example, borrowers must be able to demonstrate their commitment to social responsibility as well as environmental action. 

In the long term, both investors and those seeking investment will benefit from this increased scrutiny. Improved sustainability standards and clear guidance for reporting on green investments, experts noted, can help drive greater alignment between climate action, social accountability and financial returns.

For deeper intelligence, read the ADSW Advisory Committee Insights Report: Climate Finance.