Stone pillars in the surge tank area of the Metropolitan Area Outer Underground Discharge Channel in … More Kasukabe, Saitama Prefecture, Japan, on Friday, Sept. 22, 2023. Japan has financed enormously expensive infrastructure projects to protect cities from catastrophe, but old adaptation plans may not be enough against increasingly heavy rains. Photographer: Akio Kon/Bloomberg © 2023 Bloomberg Finance LP

Despite years of global pledges and financial innovation, climate finance is not reaching where it is needed most. The countries most exposed to these growing threats often remain the least equipped to finance effective adaptation and resilience. Adaptation, the work of building resilience to a changing climate, remains the orphan of climate investment.

A Climate Finance System Built To Fail The Most Vulnerable

According to the Climate Policy Initiative’s latest analysis, the Global Landscape of Climate Finance 2025, annual global climate finance reached a record-breaking $1.9 trillion in 2023, more than tripling over six years. Between 2021 and 2023, climate finance grew by an average of 26% per year, significantly faster than the 8% annual growth seen from 2018 to 2020. If this pace continues, the world could meet $6 trillion in annual climate investment by 2028.

Yet even this rapid growth leaves a significant gap between investment and needs. Some studies estimate that energy needs alone could require up to $2.4 trillion annually, while BloombergNEF and UN analyses project that aligning with the Paris Agreement will demand around $5.6 trillion per year from 2025 to 2030. When the scope expands to include sectors such as industry, buildings, transport, and especially adaptation and resilience, total investment requirements rise sharply. CPI estimates that $8.6 trillion per year is needed by 2030 to stay on track for a 1.5°C pathway.

For many emerging markets, the logic of global finance is cruelly circular. Climate risk increases sovereign risk, which raises borrowing costs, reducing governments’ fiscal space to invest in adaptation. Thus their vulnerability increases.

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“This holds back development and prevents the very investments needed to reduce their vulnerability,” said Professor Ulrich Volz, Director of the Centre for Sustainable Finance at SOAS, speaking at a recent panel co-hosted by SOAS and the Anthropocene Fixed Income Institute. The discussion laid bare a system that is structurally failing the Global South and explored how it might be rebuilt.

CPI data reveals that only about 10% of total climate finance currently goes toward adaptation, with little evidence of a significant upward trend.

The Measurement Bias In Climate Finance

Mitigation, the reduction of emissions through investment in clean energy transport and industrial efficiency, continues to attract the lion’s share of climate finance, driven in part by a record-breaking rise in private capital. For the first time in 2023, private climate finance exceeded $1 trillion, thanks to household spending on EVs, rooftop solar, and energy-efficient homes.

In contrast, the process of adjusting to the physical impacts of climate change, adaptation, remains drastically underfunded. The disparity is not just about money but about measurability. Mitigation benefits are easier to quantify: emissions reduced can be tracked in metric tons of CO₂, and financial returns can be modeled through carbon markets or energy savings. Adaptation, however, often delivers diffuse or delayed benefits: stronger infrastructure, early warning systems, or climate-resilient agriculture do not generate immediate profits, but they prevent future losses.

This measurability gap has led to a system that favors what can be easily counted over what is urgently needed. Adaptation is not optional, it is necessary to manage the impact of climate shocks. Yet until it is valued appropriately in financial systems, it will remain sidelined.

Adaptation: Undervalued, Underfunded

Climate finance remains dominated by debt instruments. Grants account for just 6% of flows, despite their critical role in funding adaptation and public goods. CPI also highlights that concessional flows have not scaled significantly.

While investment in clean energy and mitigation technologies has surged, adaptation finance remains chronically underfunded. Some argue this is due to its complexity and context-specific nature, which often lacks a clear commercial return.

“There is a business case for adaptation, and we can demonstrate that through better data and performance-based approaches that start to drive down the perception of risk,” said Amal-Lee Amin, Managing Director at British International Investment (BII).

BII is working across Africa and Asia to mainstream physical climate risk into private investment decisions, and is part of a growing movement to quantify resilience as a financial benefit. “If we are more consistent in demonstrating where risk is being managed, we should be reducing the cost of capital,” she said. This is critical to breaking the cycle of underinvestment.

The Failure of Financial Tools

Despite a growing array of tools such as green bonds, blended finance, and SDG-linked debt, access to capital remains out of reach for most.

Pablo Perez, Sustainable Capital Markets Structurer at BNP Paribas, noted that even mitigation finance tools like green bonds are often inaccessible to emerging economies due to technical complexity. He warns that the complexity and time to prepare documentation locks out most potential issuers, especially those without a dedicated debt management team.

And while development banks have tried to fill the gap, they often come with their own challenges. “There’s a critique that DFIs crowd out risk capital,” said Ulf Erlandsson, CEO of the Anthropocene Fixed Income Institute. “They pick the high-grade assets, whereas the higher-risk assets are left alone.”

From Risk Transfer to Risk Sharing

One of the more provocative ideas came from Simon Zadek, founding partner of Morphosis, who challenged the entire premise of de-risking, a common practice where public institutions take the first loss to make projects palatable for private investors.

“This isn’t de-risking,” Zadek said. “It’s a risk transfer, from private investors to taxpayers.” He argues the shifting of financial risk onto public balance sheets raises questions about the sustainability and fairness of this model in an increasingly climate-unstable world.

He pointed to remittances, an almost $700 billion annual flow to low- and middle-income countries, as a potential untapped source of resilience capital. “That’s more than all aid, development finance, and FDI combined,” he noted. The challenge is that we don’t have obvious mechanisms to channel that into adaptation investment.

Real Innovations, Real Limits

There’s a growing push for innovation in finance to keep pace with technological progress and rising climate risks, and some promising ideas are emerging. Erlandsson discussed CoRAL Bonds (Contingent Resilience-Linked Bonds) that reduce interest payments for countries meeting resilience targets.

Shakira Mustapha of the Centre for Disaster Protection emphasized the importance of climate-resilient debt clauses (CRDCs), which allow countries to pause debt payments after disasters without defaulting. “It is a time-bound deferral that is eventually repaid,” she said. “It’s not cancellation; it is a form of budget reallocation that’s really important for ministries of finance, especially when you’re fiscally constrained. Liquidity relief is valuable.”

Yet for these tools to scale, they need more than innovation. They require global coordination, regulatory backing, and most crucially, a willingness to rethink who bears the financial risk.

Rethinking the Architecture

Ultimately, panelists agreed that the challenge is not just about tweaking financial instruments. It is about redefining the financial architecture that governs development and resilience. From empowering SMEs to strengthening domestic capital markets, from simplifying debt instruments to monetizing resilience, the message was clear: we need new rules for a new era.

“We’re heading towards something between two and three degrees and in that situation, our normal understanding of how to apply risk-based solutions with fancy financial engineering kind of stops working,” said Zadek.

The world may well be approaching a tipping point, not just ecologically, but economically. If finance doesn’t evolve quickly, it may end up reinforcing the very risks we were hoping it would manage.