Context
Developing countries are highly vulnerable to the effects of climate change, although they have lower historical and current per capita greenhouse gas (GHG) emissions than developed countries. While strong climate action is, therefore, an imperative in the Global South, it also represents a major growth and development opportunity. Climate investment can enhance productivity, innovation and economic growth, whereas delayed climate action can heighten the negative consequences for the economy (OECD/UNDP 2025, IMF 2022). The Independent High-Level Expert Group on Climate Finance (IHLEG) estimates that developing countries, excluding China, will require USD 3.2 trillion per year by 2035 in investments for climate action and nature, of which USD 1.3 trillion per year will need to be sourced internationally (Bhattacharya et al. 2024).
Emerging market and developing economies (EMDEs) excluding China account for a quarter of the global gross domestic product (GDP). However, less than 15 per cent of the global annual climate finance flows reach these countries (World Bank 2024). The need to increase climate finance flows to these countries is often brought up at intergovernmental platforms, particularly the United Nations Framework Convention on Climate Change’s annual Conference of the Parties (COP). COP29 in Baku, Azerbaijan, was dubbed the “Finance COP” as a new goal pertaining to climate finance for developing countries–to be provided and mobilised by developed countries–was foremost on the agenda. This goal, known as the new collective quantified goal (NCQG), will replace the existing target of USD 100 billion per year, which is applicable until 2025. The climate finance outcome delivered by COP29 was widely seen as inadequate. On the one hand, it recognises the need for USD 1.3 trillion per year by 2035. On the other hand, it qualifies that “all actors” are to work towards meeting this overall target (UNFCCC. n.d.-a). It further stipulates that developed countries will only be “taking the lead” in mobilising USD 300 billion per year by 2035 (UNFCCC. n.d.-a). This effectively places considerable onus on developing countries to mobilise resources for achieving their climate goals.
The outcome text also specifies that “all climate-related outflows from and climate-related finance mobilised by multilateral development banks” will be included in the promised USD 300 billion per year by 2035 (UNFCCC. n.d.-a). This differs from the computation of the previous target of USD 100 billion, in which only multilateral development bank (MDB) public capital flows attributable to developed countries and the private capital they mobilised were counted. Thus, the USD 300 billion commitment is not even strictly comparable to the previous USD 100 billion target. This climate finance deal was struck against the backdrop of shifting global priorities linked to broader geopolitical developments.
Heads of state from countries responsible for over 70 per cent of global GHG emissions did not attend COP29 (Prasad and Manimaran 2024). This was followed by an announcement by the United States of America of its intention to withdraw from the Paris Agreement (The White House 2025). Subsequently, some large emerging economies were reportedly reconsidering their participation in the Paris Agreement (Lakshmi, Mariska, and Mooney 2025; Mooney and Nugent 2025). As some developed countries slash aid budgets and reconsider their participation in international organisations and treaties, concerns have grown over the flow of development finance in general, and climate finance in particular, through bilateral and multilateral agencies and development banks (Fitch Ratings 2025; Sheldrick 2025). Despite the unsatisfactory outcome on climate finance at COP29, there does appear to be a recognition of the need for a higher level of ambition and a commitment to work towards it.
This is reflected in the launch of the Baku to Belém Roadmap to 1.3T, a work programme that endeavours to identify the broad sets of actions needed to scale up international climate finance flows to developing countries to USD 1.3 trillion per year by 2035. The development of a credible roadmap for delivering climate finance to developing countries is critical to reduce uncertainty arising from the outcome of the previous COP. This assumes greater urgency as the Baku to Belém Roadmap to 1.3T is slated for release just before COP30. Any climate investment roadmap for developing countries should not be viewed in isolation. This is because developing countries need to concurrently pursue their development goals through economic growth and social sector expenditure along with climate action, but many of them are not well-positioned to do so. While these countries, in general, have underdeveloped financial systems relative to developed countries, many also have higher fiscal deficits, and some have unsustainable public debt.
Servicing elevated levels of sovereign debt has reduced the fiscal headroom for investments in development, including climate action, in many developing countries. Around 3.4 billion people live in countries that spend more on interest payments than on either health or education, which crowds out public investment (UNCTAD 2025a). Besides fiscal headroom constraints, the cost of capital for climate-related investments in developing countries is much higher than in developed countries. This stems from risks perceived by investors pertaining to investing in these countries, compounded by those associated with investments in climate-related sectors. A major portion of these risks generally pertains to country risks—those associated with macro or economy-wide factors—and are reflected in sovereign credit ratings. These may be further compounded by sector- and project-specific factors, that is, risks pertaining to investments in particular climate-related sectors. Often, there is a gap between perceived risks and real ones with information gaps leading to increased risk perceptions (Ghosh and Harihar 2021). Some studies indicate that biases against developing countries could influence credit ratings assessments, which may contribute to elevated costs of capital (Tennant, Tracey and King 2020; UNCTAD 2025b). Because of these circumstances, developing countries often lack the means and incentives to undertake climate action in the absence of external financial support from developed countries.
Climate is a global commons, and each unit of GHG emissions or its abatement anywhere has the same effect on the average global GHG concentration and, in turn, on average global temperatures (though the warming and its effects are not evenly distributed). Developing countries host some of the most renewable energy resource-rich sites in the world (United Nations 2023) and are often characterised by deployment at lower capital expenditure per megawatt (IEA n.d.-a). If low-cost capital from developed countries can be paired with the rich resources of developing countries, it may be possible to advance global decarbonisation at lower mitigation costs. Thus, financing climate action in developing countries could even be viewed as a strategic choice to accelerate global climate action and should be an important part of the global multilateral agenda. This is particularly because developing countries are expected to drive global consumption of energy and materials in the future for their developmental needs; thus, climate action in developing countries is critical for the success of global climate action (Bond et al. 2021).
Recommendations
Given the urgent need for credible steps to financially support climate action in developing countries, this policy brief suggests ways to maximise the delivery of climate finance and increase climate investment in these countries. As climate negotiators attempt to develop a credible pathway towards mobilising adequate and affordable finance for developing countries in the form of the Baku to Belém Roadmap to 1.3T, the solutions proposed in this policy brief are designed to inform this challenging task. These solutions entail interventions at various levels. We recommend the following six-point approach to maximise climate finance flows in developing countries.
1. Develop enabling policy environments and financial systems for climate-related investments in developing countries
As a first step, developing countries must create enabling investment environments that facilitate both domestic and cross-border capital flows. These include sectoral policies for transition (e.g., in sectors such as power, transport and industry), which address sector-specific bottlenecks in the flow of capital and cross-cutting policies (e.g., taxonomies, standards, and disclosures), which facilitate the linking of capital with credible investment opportunities. Further, financial supervisors could institute mechanisms for greening the financial system, including pricing climate risk into the flow of capital, to enhance the attractiveness of climate-related investments (e.g., disclosures on climaterelated financial risks for financial institutions, green monetary policy, concessions in financial institution capital requirements for holding green assets). Large emerging economies that have made headway in climate action may take the lead in sharing their experiences with developing countries that are in the initial stages.
2. Free up fiscal space in developing countries and optimise public expenditure for achieving the SDGs, including climate action
Near-term and structural solutions for indebtedness are critical to prevent debt repayment from crowding out developmental expenditure, including on climate action. Debt-for-climate and debt-for-nature swaps, based on a common framework for pricing carbon emissions and valuing natural capital, could help provide immediate debt relief. Rolling over sovereign debt at lower interest rates and longer tenures of repayment could be considered in some cases, but debt restructuring with principal reductions may be necessary if debtor countries cannot continue to service debt without compromising their economic recovery and long-term development. Programmes supported by the International Monetary Fund under its Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST) as well as the G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI) could play a key role in addressing the structural issues causing indebtedness. Normalising debt service pauses in cases of external shocks, such as climate-related disasters, could be a complementary measure. Further, SDG-aligned budgeting for public financial management could help orient public spending towards development, including climate action.
3. Leverage South-South cooperation and South-led multilateralism to enhance climate finance flows to developing countries
With the COP29 climate finance deal placing considerable onus on developing countries to mobilise finance themselves, cooperation between these countries could be an important lever. Emerging international finance hubs outside the Global North, such as the Gujarat International Finance Tec-City International Financial Services Centre (GIFT-IFSC) in India and existing and upcoming international financial services centres in Kigali (Rwanda) and Viet Nam, can be developed to service countries beyond their immediate jurisdictions. Regional development banks, including newer ones such as the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB), could serve as anchors by helping establish regional green banks/green finance platforms in these international financial centres to mobilise both regional and international capital and direct them to green investments. These green banks could play a key role in creating viable investment pipelines for channelling international capital by aggregating and derisking projects across developing countries. Green banks could also help build the capacity of developing countries to access international public capital by providing project preparation services. These emerging finance hubs, in conjunction with enabling environments, could also encourage investors from one developing country to invest in other developing countries’ markets. Cross-investments in local currencies (BRICS 2025) could enhance their suitability for funding climaterelated investments in developing countries.
4. For climate adaptation, enhance the availability of international public capital, largely on concessional terms, across developing countries
Adaptation has historically been a financially underserved sector and needs to be funded by public capital–mostly concessional or grant-based. The endeavour should be to strike a better balance between funding adaptation and mitigation in international climate finance flows, with a greater emphasis on concessionality in the flows for adaptation. These funds may also be used to provide superior insurance cushions against climate risks to build resilience. While the geographical distribution of these risks is non-uniform, with developing countries particularly vulnerable, incremental insurance costs–stemming from worsening climate impacts–should be covered by a common global pool of capital to reduce costs for developing countries. In this context, proposals such as the Global Resilience Reserve Fund (GRRF), that are predicated on pooling risks across vulnerable regions to lower the cost of insurance for individual regions and are to be capitalised by global reserve assets such as Special Drawing Rights (SDRs), could offer viable solutions. The scaled-up international public capital for adaptation should come from developed countries, consistent with the principles of common but differentiated responsibilities and respective capabilities (CBDR-RC) and equity. The fact that they have a legal obligation to do so was underscored by the International Court of Justice’s advisory opinion on the Obligations of States in respect of Climate Change (International Court of Justice 2025).
5. For climate mitigation, deploy international public capital in a targeted manner for maximum impact and supplement with innovative sources of financing
In contrast to the approach for adaptation, where the endeavour should be to support all developing countries, a more targeted approach may be adopted for mitigation. This targeted approach should focus on developing countries that lie at the intersection of high energy requirements and high clean energy potential. Overall, the objective should be to maximise decarbonisation outcomes per dollar of international public capital.
Public capital should be deployed to strategically underwrite macro and sectoral risks and crowd in private capital. Addressing macro or country risks (such as political or currency risks) through guarantees could lower the cost of capital and facilitate global climate mitigation at lower costs. This could be achieved by guarantees by multilateral institutions, such as the World Bank Group’s Multilateral Investment and Guarantee Agency (MIGA) or other institutions backed by international public capital (e.g., The Currency Exchange Fund, GuarantCo) that offer guarantees against commercial currency risk (currency hedging). In addition, funding proposed de-risking instruments, such as the Global Clean Investment Risk Mitigation Mechanism (GCI-RMM), which tackle both country-specific and sectoral risks could be another option. International public capital from MDBs could be used to fund guarantees. Once the existing headroom at MDBs is exhausted, callable capital, to the extent not used in capital adequacy determinations of MDBs, could be utilised to fund such guarantees. The enhanced clean energy deployment in the targeted countries could accelerate decarbonisation beyond what was factored into their nationally determined contributions. In such cases, excess mitigation outcomes may be exported, which, in turn, would generate additional revenue for climate action in host countries as well as help buyer countries advance their climate objectives. Accelerated decarbonisation in such countries could also facilitate the strategic relocation of energy-intensive industrial activities, thereby enabling the geographical diversification of key industrial supply chains. International public capital may also be used to strategically fund high-impact sectoral de-risking instruments, with interventions prioritised based on the amount of private capital mobilisation achievable. If capital is still insufficient relative to financing needs, innovative sources of financing, such as international carbon markets, solidarity levies (with due considerations of proportionality applicable to developing countries), rechannelled special drawing rights (SDRs), and philanthropic capital, should be leveraged.
6. Bolster the role of development finance institutions (DFIs) in building investable project pipelines and delivering finance, with a focus on channelling private-sector capital
Funding adaptation and mitigation, as elucidated in points 4 and 5, requires enhancing the capacities of DFIs at all levels – domestic, bilateral, and multilateral. Domestic DFIs in developing countries have first-hand knowledge of local financing opportunities, bottlenecks and potential solutions. By partnering with bilateral and multilateral DFIs, they could facilitate the development of investable project pipelines to enhance the flow of international capital. Domestic DFIs must be integrated into any country or regional platforms developed or supported by MDBs for delivering climate finance. Developed countries can demonstrate their commitment to supporting climate action in developing countries by scaling up finance flows from their respective bilateral DFIs, besides helping bolster multilateral DFI capacity. MDBs and vertical climate and environmental funds (VCEFs) are two important categories of multilateral DFIs. The G20 Roadmap towards Better, Bigger and More Effective MDBs, developed under the Brazilian presidency, calls for greater MDB interoperability and cofinancing with VCEFs (G20 2024). The Independent Expert Group, constituted by India’s G20 presidency, and the G20 Roadmap have proposed various options for expanding headroom for lending and investment at MDBs. These include balance sheet optimisation, recapitalisation, rechannelling of unused SDRs from MDB shareholders (countries) to support MDB lending and tapping non-government investors for funding support. Given that levers involving MDB shareholders are often subject to the vagaries of geopolitical developments, MDBs could consider focusing on attracting capital from private investors. For this purpose, MDBs could consider partnering with private capital to create ring-fenced funds managed by the former and funded by the latter.
