How to scale climate finance to $1.3trn by 2035, report

A new report from climate change think tank E3G proposes a blueprint to bridge the climate finance gap in developing countries.

The report highlights the current persistent shortfall in climate financing, with only $196bn reaching emerging and developing economies in 2023. | Photo by metamorworks on istock

A new report from climate change think tank E3G, has outlined a potential pathway to scale climate finance to $1.3trn (€1.1trn) per year by 2035 to support climate transition, adaptation, and resilience in developing countries.

The report highlights the current persistent shortfall in climate financing, with only $196bn reaching emerging and developing economies in 2023.

Following the agreement reached at COP29 in Baku to triple climate finance to developing countries, the report offers a possible blueprint to bridge the finance gap, while acknowledging existing barriers including sovereign debt burdens, limited fiscal space, investor uncertainty, and ineffective public finance systems, with multilateralism being key to tackling these challenges.

Key areas

According to E3G, the financing gap can be addressed by focusing on four key areas: freeing up fiscal space in developing countries, mobilising private capital through regulatory reform, creating a more effective delivery architecture, and scaling public finance mobilisation.

The report highlights the issue of a ‘climate debt trap’ where high sovereign debt burdens restrict developing countries’ ability to invest in climate adaptation and mitigation, while climate vulnerabilities exacerbate debt pressures.

According to E3G, international public finance remains essential, especially for adaptation and nature-based projects that struggle to attract private investment.

Interest from institutional investors in nature and climate adaptation is growing quickly as the risks and opportunities become clearer. However, these areas still receive too little funding. In the near term, impact investors are in the best position to recognise and value the non-financial benefits, E3G said.

Speaking to Impact Investor, Kate Levick, E3G associate director, finance and resilience, said: “Scaling up impact investment can be supported by measures that increase project pipeline and data flow. These include capacity building on the ground to support project initiation and design, measures to increase data flow e.g. widespread adoption of investment taxonomies for nature and adaptation, and risk-sharing actions by public actors such as provision of blended finance and guarantees.”

She added: “Multilateral development banks are potentially important actors, as they are able to drive forward progress in all of these areas with no or minimal additional strain on publicly funded balance sheets.”

Fossil fuel assets

The report also proposes the need for a rethinking of international investment treaties to phase out protections for fossil fuel assets.

Speaking to Impact Investor on how impact investors can leverage their influence to advocate for treaty reform while accelerating investment in climate-positive infrastructure in developing economies, Eunjung Lee, E3G senior policy adviser, clean economy, said “civil society has long called for investment treaty reform”.

“To move this agenda forward, investors’ voices are crucial. By speaking out against the perverse incentives provided by investment treaties, impact investors can help dismantle a legal system that still props up fossil fuel interests and delays the energy transition,” Lee added.

Looking ahead, E3G stressed that a siloed approach will fail in reaching the $1.3trn annual target. The report concludes that coordinated, simultaneous action across fiscal, regulatory, institutional, and multilateral areas will be crucial, as the financing challenge is deeply interconnected, with success depending on holistic, timely, and politically supported action.