Our research shows that low- and lower-middle-income countries are disproportionally at risk of economic losses from, and are most exposed to, physical climate risks. As extreme weather conditions and worsening physical risks continue to increase and influence credit fundamentals, more frequent climate risks could pose an additional barrier to low-carbon economic development—especially because financing adaptation to, and recovery, from physical climate risks is more difficult for countries with fewer resources and more restricted access to capital.

The transition and adaptation financing gap in low- and lower-middle-income countries is a focus of multiple international forums. Developed economies may have resources to plan and prepare, but the global energy transition cannot successfully happen without developing and emerging economies. Closing the climate finance gap would require a significant scaling of international capital flows, and financing may become even more difficult in periods of slowing global growth and challenging credit conditions. Market participants estimate that trillions of dollars in climate finance mobilization are needed to fund their transition and adaptation needs, which most often far exceed these countries’ domestic funding capacities.

Public & Private Sources of Finance

Most broadly, climate finance represents financial flows to facilitate actions to mitigate and adapt to climate change. There is no single definition of climate finance, and thus the sources of finance vary across the definitions. The most common public sector funding ranges across domestic, bilateral, and multilateral funding, while private sector sources can include philanthropic capital, investors, asset managers, insurance companies, banks, and nonfinancial corporations.

Together, both public and private climate financing provide approximately $30 billion in annual capital flows for the world’s least-developed countries (3% of the world’s total climate finance flows), and $150 billion for emerging markets (excluding China), according to Climate Policy Initiative data.

Market participants are able to access climate finance through a plethora of instruments—not limited to grants, concessional loans, guarantees, equity, loans, bonds, insurance, funds, or swaps—all of which can be combined as blended finance solutions to address stakeholders’ specific and unique needs.

Few issuers in lower-income countries are issuing sustainability-labeled debt instruments—with just 1% of the sustainability-labeled bond market issued in low- and lower-middle-income countries. But high-income countries in Asia-Pacific, Latin America, and the Middle East have recently increased their share of issuance, which could lay the groundwork for issuers in lower-income countries in these regions to access the sustainable bond market.