As climate change investing evolves, how do we mind the gap?

• Energy systems received more climate mitigation investment in 2023 (USD794 billion, 45% of all climate finance flows) than any other sector, but interestingly, also have the highest financing gap of USD2.1tn per year between 2024 and 2030 compared to 2023 levels. This figure rises slightly to USD2.2tn per year between 2031 and 2050.
• The second-highest climate finance flows in 2023 involved the transport sector, totalling USD540bn (30% of global climate mitigation investment). Like energy systems, the investment needed to transition transport is significant (USD1.9tn annually between 2024 and 2030), an almost 2.5-fold increase on current climate finance flows. However, this investment could help to realize the sector’s mitigation potential of GtCO2e per year by 2030.
  
  
  • Climate investment priorities include electrification of private road transport, public transport expansion, and freight decarbonization. Estimates for investment needs in electrifying transport vary, but low-emission vehicles  could require an average of USD2.4tn per year between 2024 and 2030.
  • More climate finance is required for transport in Western Europe than any other sector (37% of the region’s needs between 2024 and 2030).
  • Regional investment gaps in transport show a higher variability than for energy systems. Global climate finance needs for the transport sector are 3.5 times current climate finance flows, but investment would need to increase by between 26 and 38 times in the Middle East and North Africa, Latin America and the Caribbean and Sub-Saharan Africa.
  • The transport sector will require USD2.6tn in annual climate mitigation investment between 2031 and 2050, a 41% increase from 2024-2030 levels. This represents the largest rise in investment needs for any sector.
• The third-highest climate finance flows in 2023 (USD340bn) involved the buildings and infrastructure sector. However, the sector requires an average of USD1.1tn in climate investment between 2024 and 2030, meaning mitigation finance will need to rise more than threefold to close the gap and unlock its 3 GtCO2e mitigation potential.
  
  
  • Focus areas include scaling of low-carbon heating and cooking (which will require USD880bn annually between 2024 and 2030), and energy efficient retrofits (USD630bn annually between 2024 and 2030).
  • Buildings and infrastructure require the most climate mitigation investment as a proportion of total climate finance in Central Asia and Eastern Europe (26% of regional needs), the Middle East and North Africa (23%) and Western Europe (22%).
  • The relative net zero financing gap is greatest in the Middle East and North Africa, where investment needs are 13 times greater than 2023 investment flows.
  • Overall, the sector will require USD1.4tn in climate finance on average between 2031 and 2050, an increase of 27% on 2024-2030 levels, driven primarily by the need for low-carbon heating and cooling systems.
• The industry sector received USD27bn in climate mitigation investment in 2023, the second-lowest total in our study. Compared to current flows, meeting the USD590bn annual net zero financing gap would require a nearly 22-fold increase in climate finance flows. With the simultaneous decrease in high-carbon activities, this sectoral transformation could unlock 4 GtCO2e in annual abatement potential by 2030 – higher than that of transport or buildings and infrastructure.
  
  
  • Key areas include low-emission production of aluminum, cement, steel, ammonia, and other chemicals, as well as carbon capture and storage.
  • Despite having the lowest investment needs across all regions, there are some geographic disparities. The industry sector requires around USD100bn in mitigation investment annually in China between 2024 and 2030 and USD122bn in South and Southeast Asia (16% of regional needs) over the same period.
  • The global net zero financing gap in the industry sector is 22 times 2023 climate finance flows. The gap varies from seven times current climate finance flows in Western Europe to 48 times in China.
  • Between 2031 and 2050, industry will require USD650bn in annual mitigation investment, a 10% increase on the period between 2024 and 2030.
• The agriculture, forestry and other land uses (AFOLU) sector offers a climate mitigation potential second only to the energy sector (8 GtCO2e per year by 2030). However, to realize this, climate finance flows need to increase 60-fold from USD19bn in 2023 to an annual average of USD1.2tn in the period between 2024 and 2030.
  
  
  • Policy support and capacity building will be central to the sector’s transition, accounting for 40% of climate finance needs between 2024 and 2030.The development of sustainable crops and livestock practices will also require substantial support (28%).
  • Forest and biodiversity conservation is crucial, with 74% of AFOLU’s mitigation potential linked to transforming forest-related activities and developing carbon sinks.
  • AFOLU investment needs increase by a modest 7% between 2024 to 2030 and 2031 to 2050, demonstrating the urgent need for immediate investment. Delaying action until after 2030 will be insufficient to meet sectoral and climate goals. 

Recent policy developments

2024

Preliminary estimates suggest that climate finance flows increased by around 8% in 2024, surpassing USD2tn for the first time. While these projections are encouraging, they are lower than the 15% increase recorded between 2022 and 2023.   The transport sector remains the largest driver, buoyed by demand for EVs and supporting infrastructure.

This resilience is notable considering headwinds that likely slowed momentum.

• Macroeconomic conditions: interest rates, which were raised sharply over the 2022-2023 period, and remained high for much of 2024, have raised the cost of capital. The effects were particularly pronounced in EMDEs due to their higher reliance on external borrowing and vulnerability to currency fluctuations. The increase in U.S. interest rates typically elevates debt servicing costs for EMDEs with dollar-denominated liabilities. This scenario exacerbates existing debt burdens, and discourages capital inflows.
• Energy market dynamics: lower gas prices and higher electricity costs over the same period dampened heat pump sales in Europe.
• Grid bottlenecks: rapid renewable deployment outpaced infrastructure capacity, leaving 1,650 GW of solar and wind awaiting connection worldwide.

Despite surpassing the USD2tn milestone, the slowdown in growth suggests that the net zero investment gap could widen further in the coming years unless immediate global action is taken to accelerate climate investments across all regions and sectors. 

2025

Global clean energy investment in 2025 shows early signs of resilience to policy shifts and tighter market conditions, with offshore wind and small-scale solar driving an increase in renewables investment in the first half of the year.

In the United States, however, growth in renewable spending is set to level off as federal support eases, with knock-on effects for international capital flows to EMDEs.

At the same time, higher interest rates, supply chain pressures, and evolving regulatory frameworks are likely to heighten investor caution. With aid budgets under pressure and geopolitical priorities reshaping development policy, development finance institutions (DFIs) face growing pressure to “do more with less”.

This is likely to accelerate the use of innovative financial instruments and catalytic approaches to maximize limited resources. The International Finance Corporation’s recent inaugural securitization transaction exemplifies this approach, setting a new model for attracting institutional private capital into EMDEs.

Climate-related financial regulation and commitments are facing mounting legal and political challenges. In the United States, financial institutions have faced litigation over their participation in net-zero and ESG initiatives, prompting a wave of exits from voluntary climate alliances.  The Net Zero Banking Alliance (NZBA) has announced it will cease operations following a vote to dissolve the group, having already lost numerous members due to claims by some U.S. lawmakers that participation violated antitrust laws.

At the same time, global climate litigation risk continues to grow. While the full impact of these developments remains uncertain, they risk slowing the pace of portfolio decarbonization as financial institutions navigate conflicting regulatory pressures and political challenges.

Despite evolving federal policy frameworks, some U.S. states continue to advance climate agendas. Following California’s 2023 model, New York and Colorado have adopted emissions disclosure requirements, alongside renewable energy targets and net zero commitments.

This state-level regulatory environment has helped maintain the attractiveness of net zero investments, even while some renewable infrastructure companies take legal action against the federal government over cancelled projects.

For example, Iberdrola allocated a significant portion of its three-year investment plan to the U.S. and UK markets, with executive chair Ignacio Galán citing state-regulated electricity networks as a key factor in the U.S. market's appeal. Additionally, focus on data center capacity – driven by the expansion of artificial intelligence – is accelerating investment in clean energy infrastructure, particularly geothermal and nuclear. Major technology companies are securing long-term renewable energy agreements, further reinforcing sector growth.

Outside the U.S., global climate policy momentum has shown resilience through multilateral initiatives and regulatory frameworks. In March, for example, Germany and Japan reinforced Indonesia’s USD20bn Just Energy Transition Partnership (JETP) following the withdrawal of the U.S., ensuring the continuation of the coal-to-clean-energy transition plan. The proliferation of climate policies worldwide provides a buffer against individual country rollbacks. Even if regulatory requirements fluctuate in certain countries following political and business cycles, companies operating internationally are still likely to encounter increasing global climate disclosure obligations. Despite this progress, significant gaps remain between current ambition and policy implementation to meet global climate targets.

A slowdown in U.S. clean technology deployment could create opportunities for other major economies such as China, India, and Brazil, to capture greater market share in both production and investment. China already dominates the global manufacture of key technologies such as solar panels, batteries, and EVs, while Brazil and India are rapidly scaling renewable investment and could emerge as significant exporters by 2035. With clean technology accounting for 10% of global GDP growth in 2023, and the global clean tech market projected to exceed USD2tn by 2035, reduced U.S. leadership could accelerate the rise of alternative suppliers.