13 ways to finance climate change projects

Climate finance is the lifeblood of our global response. And it’s about more than just money; financing sustainable projects is about survival, innovation, reshaping our world and safeguarding businesses and livelihoods. 

In this post, we’ll look at the diverse ecosystem of climate finance, unveiling the funding mechanisms driving climate change mitigation and adaptation efforts globally. Whether you're a policymaker, investor, or concerned citizen, understanding these is crucial to make informed decisions. 

Join us as we explore the complex world of climate finance, from the billions pledged by nations to finance climate change projects to groundbreaking fintech solutions from startups.

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Climate finance is local, national, or international funding from public, private, and innovative sources. It’s designed to support climate change mitigation and adaptation actions in order to accelerate progress and hit targets.  

The Paris Agreement calls on Parties with greater financial capacity to provide support to those with fewer resources, who are often more vulnerable to the impacts of climate change. This principle reflects the concept of 'common but differentiated responsibilities and respective capabilities' (CBDR-RC), acknowledging that while all nations must address climate change, they contribute differently to the problem. Additionally, many of the largest greenhouse gas emitters possess the financial means to take more robust action in mitigating and adapting to its consequences.

As Heloise Chicou, Regions4 Climate and Resilience Programme Manager, says "The COP28 Global Stocktake highlighted the Potential 2.8°C temperature rise by century's end, calling for a need for increased adaptation and funding to maintain a 1.5°C limit. With a critical financing gap for climate adaptation, the UNEP Adaptation Gap Report 2023 reveals that an estimated US$194–366 billion annually is needed per year by 2030, as developing nations require 10–18 times the current financial flows. Alarmingly, only 10 per cent of adaptation finance reaches the local level, where it is most urgently needed."

As part of the Copenhagen Agreement at COP15 in 2009, developed countries committed to providing $110 billion between 2010 and 2020. As of 2021, they had mobilised and provided $89.6 billion, just over $10 billion short and a year late. This goal was renegotiated at COP29 in 2024 in light of further needs brought to light by the Global Stocktake. 

The deal struck in Baku in November 2024 will see the developing world receive at least $1.3tn (£1tn) per year by 2035 to help them transition to low-carbon economies and cope with extreme weather. While this represents a tripling of finance to developing countries, the deal has been criticised by many. This is because only $300bn will be provided as grants and low-interest loans from the developed world, the forms in which funds are most needed. The rest will likely come from private investments, companies and other sources, some of which we'll look at below.

Climate finance is essential for mitigation and adaptation to climate change. Mitigation requires large-scale investments to significantly reduce emissions and transition to more sustainable economies. Adaptation needs substantial financial resources to cope with and reduce the impacts of a changing climate. 

With this in mind, a more realistic way to understand the climate crisis could actually be one of a funding crisis. 

Here are some stats that put the urgency into perspective: 

- The European Commission estimates €185 trillion is required to achieve net zero by 2050.

- Financing required for subnational governments alone to meet Paris Agreement goals exceeds $5 trillion annually.

- The World Economic Forum estimates developing countries require $2-4 trillion annually to avoid catastrophic climate change.-

- The UNEP Adaptation Gap Report 2023 estimates we need $194-366 billion per year to address the adaptation finance gap in developing countries. That’s 10-18 times more than current finance flows, and that figure doesn’t include investing in emissions reduction or addressing extreme weather impacts.

- According to the Intergovernmental Panel on Climate Change (IPCC), current financial flows for climate change mitigation need to increase 3-6 times to meet average annual needs by 2030. And while there is capital out there to close the gap, accessing it remains a challenge.

- 70% of the infrastructure investment needed for the low-carbon transition must be deployed in emerging markets and developing economies facing multidimensional crises.

- Climate change affects production facilities and sources of raw materials and  companies' ability to continue activities. Addressing it is, thus, of paramount importance for global and national economies. The impacts of climate change on international GPD are estimated at a loss of 10% if the planet warms by more than 3ºC, with the worst impacts in less developed countries.

- According to the UN Sustainable Development Goals Report 2024, only 18% of the Sustainable Development Goals (SDGs) are on track or achieved.

It’s not all doom and gloom, though: the Global Commission on Adaptation found that every $1 invested in five key adaptation areas could yield $2-10 in total net benefits. So mobilising funding is well worth the effort. 

Download our infographic to see these numbers at a glance.

Now you understand the need, let’s look at some of the financing instruments that can help governments, communities, and entities mitigate and adapt to climate change. 

Among other instruments, international climate funds provide grants, loans, and investments to fund initiatives (mostly) in developing countries to reduce greenhouse gas emissions (GHGs) and enhance climate resilience. 
Examples include: 

- The Global Environment Facility manages a range of funds, including the Least Developed Countries Fund (LDCF), which serves the goals of the Paris Agreement. Funded by donations from countries, to date, the LDCF has provided nearly $2 billion in grants to 408 projects and programs in developing countries.-

- The EU Mission on Adaptation provided €370 million of Horizon Europe funding by 2023 to finance European projects that contributed to understanding how to respond to, rebuild and build resilience to extreme weather events.  

- In Europe, Structural and Investment Funds (ESIF) provided €731 billion between 2014 and 2020 to fund green transitions, among other initiatives. And in the Spanish Basque Country,  EU Cohesion Funds are also being used to finance action to address the threats to 30-40% of local beaches from rising sea levels.

As climate change impacts become more apparent across all economic sectors and areas of life, national government funding is increasingly essential. 

Local governments (cities, local and regional governments) in particular are on the front lines of climate change, dealing directly with rising sea levels, droughts, floods, storms, and conflicts over natural resources. At the same time, cities are responsible for 70% of global greenhouse gas emissions (GHGs), so reducing their impact and boosting resilience is crucial. 

Heloise Chicou notes:

Fortunately, local authorities are uniquely placed to do just this by developing innovative, interconnected solutions. This is because they have jurisdiction over factors like urban and coastal areas, nature preservation, water management, etc. They also often act as ‘innovation laboratories,’ coming up with solutions that go on to inform national and global policies. However, many are hampered by limited budgets, delays in receiving resources from multilateral development banks, and the reluctance of financial institutions to invest. 

Despite the challenges, however, some are developing innovative approaches: 

- Rio de Janeiro has created a state commission to incorporate the SDGs into all state departments and state budgets. The state also uses local funds like the Environment Fund (sourced from oil royalties), Mata Atlântica Fund (from environmental fines), and Water Resources Funds to respond to extreme events.

- In Mexico, Guanajuato state has introduced new investment mechanisms, resulting in an annual increase of 3 million pesos. Mexico has also set up a national endowment fund to support capacity-building and facilitate access to external funding for Mexican foundations.
Other funding mechanisms available to authorities include national budgets, carbon pricing, and targeted funding programs, often financed by grants, bonds, and public-private partnerships, among others.

While they remain controversial*, carbon markets and taxes offer alternative sources of climate funding to governments.

Carbon trading involves quantifying emissions into carbon credits that can be traded between countries or companies that emit above or below their targets. Quebec, Canada, has pioneered this approach, linking its carbon market to California’s to create North America's largest market and the first to be operated by subnational states from different countries. Since 2023, it’s generated over $9.2 billion in revenue, $100 million of which Quebec has allocated to climate funds, including in Africa and the Caribbean.

Carbon or ‘green’ taxes are applied to products and services with large carbon footprints at varying points in the supply chain. For example, in 2006, Boulder, Colorado started charging consumers based on their fossil-fuel-based electricity consumption, using the revenue to fund energy efficiency and renewable energy programs. Actions like this can help disincentivise use of fossil fuels and promote the switch to cleaner alternatives. 

*Emissions trading has been criticised as enabling large companies or rich countries to continue to pollute at the expense of others rather than aiming for overall reductions. However, they look set to stay, being just one of the topics on the table at COP29 in 2024. There, an agreement was reached on how country-to-country trading and carbon crediting can work under the Paris Agreement. This should be good news for developing countries, which will benefit from new finance flows. Also, for least developed countries, which will receive capacity-building support to get a foothold in these markets.   

Blended finance combines public and private capital, allowing private investors and businesses to leverage public funds at low interest rates. This minimises risk and maximises benefits, making it easier to finance climate projects in developing countries.

Examples include: 

- Established by the UNFCCC, the Green Climate Fund (GCF) has committed $16 billion to 286 projects in 133 developing countries, at the time of writing. As of 2022, it had also attracted private co-investment of $17.5 billion, proving that this public-private finance can mobilise far more capital than public alone.

- Also established by the UNFCCC, the multilateral Adaptation Fund (AF) supports developing countries in addressing climate challenges. To date, it’s committed over $1 billion to climate adaptation activities globally. 

- Run by the UN Development Programme (UNDP), the Adaptation Pipeline Accelerator aims to speed up the flow of finance to vulnerable developing countries by turning adaptation priorities into attractive, investable projects for public and private finance. For example, Australia and Spain are partnering with the small island states of Tuvalu and the Dominican Republic, respectively, to develop solutions.  

Multilateral development financing plays a crucial role in mobilising climate finance for developing countries, emerging economies, and sustainable transition. And international financial institutions are key to this. 
As examples: 

- At COP28, multilateral development banks (MDBs) committed to providing $180 billion in additional climate finance through multi-year programs.

- Also at COP28, the World Bank committed to increasing climate finance targets to 45% by 2025, potentially reaching $40 billion annually.

- The African Development Bank Group has directed 40% of all investment to climate finance, increasing the total volume from $2.1 billion in 2020 to $3.6 billion in 2022.

- The Asian Development Bank has committed $98 million to its Climate Change Fund, which focuses on climate adaptation, clean energy, sustainable transport, low-carbon urban development, improved land use and reduced emission from deforestation and degradation.

These institutions offer grants and loans for projects that reduce GHGs and build climate resilience. Examples include renewable energy plants, electric buses, forest conservation, early warning systems, and climate-resilient infrastructure. 

At COP 28, the participants agreed on the establishment of a public-privately financed Loss and Damage (L&D) fund to help low-income developing countries offset and recover from damage from natural disasters caused by climate change. These may include loss of human lives, damage to infrastructure and buildings, loss of property and crops, ecosystem deterioration and other economic and non-economic losses. 

For example, nations may suffer losses to industries like tourism or fishing, or loss of cultural heritage, biodiversity and indigenous knowledge. To date, total commitments have amounted to $661 million with more voluntary contributions from nations, the private sector and philanthropic organisations expected.

As an example, Scotland has played a key role in establishing the Global Loss and Damage Fund, initiating the Communities First pilot programme in East Africa, South Asia and the Pacific. The programme aims to provide rapid and accessible funding as grants to reach communities directly affected by climate change.

Bonds are essentially a loan: you take one out, make regular interest payments over a predetermined period and repay the initial investment when the bond reaches maturity. In the case of ‘green’ or ‘sustainable’ bonds, however, the money must be spent on climate-related or sustainability initiatives. 

Sovereign bonds are issued by governments, like Brazil’s Sovereign Sustainable Bond Framework which provides the country with capital to work toward the country’s Nationally Determined Contributions (NDCs). Similarly, Indonesia's Shariah-compliant Green Sukuk bond initiative is helping tackle issues like urban waste management, among many others.

Green bonds may also be issued by private institutions to fund environmental or climate projects and have gained traction with investors seeking to align their portfolios with climate goals.

Given the sums required, it’s clear that public finance alone is insufficient: private sector involvement is crucial to close the funding gap. 

Fortunately, new market opportunities, risk mitigation, and reputational benefits are increasingly motivating the private sector to invest in climate action and collaborate with public entities. And since it manages an estimated $210 trillion in assets, mobilising this potential is crucial. 

However, unlocking private climate finance is complex. Financial institutions remain cautious and balancing climate action with profit maximisation remains challenging. Governments must create attractive conditions via better financial data, strong project pipelines, integration of climate into financial risk assessments, and development of policies to catalyse private finance.

Next, we’ll explore some of the private financing options out there. 

As the largest owners of equity in the 100 listed companies that disclose the highest GHG emissions globally, institutional investors have an important role to play in emissions reduction. 

Fortunately, sustainable, impact, or environmental, social and governance (ESG) investments are gaining traction with investors. ESG-specific mutual funds and exchange-traded funds (ETFs) reached $480 billion in assets under management in 2023.

ESG investing involves evaluating companies based on their ESG policies, among other factors. Investors may also insist that capital be invested in achieving corporate sustainability goals, like emissions reduction or improved labour conditions. 

Among other initiatives, Microsoft’s $1 billion Climate Innovation Fund aims to accelerate carbon reduction technology development by investing in companies working on solutions. Bill Gates’ Breakthrough Energy Ventures also supports those turning green ideas into clean products. 

Challenges persist with ESG investing, like the lack of reliable information for investors to make decisions. However, financial firms like MSCI, Morningstar and Bloomberg now provide company scoring systems based on ESG objectives. 

The interest rate on green loans is linked to the climate-related KPIs. This means an organisation or individual pays less interest if the objectives of their project are achieved. This might include retrofitting a factory to run on renewable energy, buying an electric vehicle or renovating a home to improve energy efficiency.

In an inflationary environment, this would allow more investment in renewable energy projects, which often have high upfront costs and could even help tackle inflation. For example, the war in Ukraine which began in 2021 pushed up oil and gas prices, but more investment in renewables would make us less vulnerable to events like this. 

Philanthropic and non-profit organisations can quickly deploy unrestricted funds and back high-risk ventures. This makes them well placed to address market failures in areas of need, assist underserved communities, or finance innovative solutions. 

These entities usually deploy a range of funding mechanisms, including grants, mission- and program-related investments, competitions and prizes, and venture philanthropy. As an example, the Rockefeller Foundation’s Zero Gap Fund has committed $30 million in catalytic capital, mobilising $1.04 billion from partners, to finance progress toward the SDGs.

As society, technology, and the climate finance landscape evolve, new trends and approaches are emerging to unlock new sources of funding and drive investment and innovation. 

Just a few of these are: 

These novel financing models offer innovative ways of raising capital by making climate investing accessible to a wider investor pool. 

- The online Climatize crowdfunding platform allows individuals to contribute variable amounts to energy transition projects starting at as little as 5€.

- Community investment involves local stakeholders directly investing in projects within their area, fostering a deeper connection between the project and the community.

As well as democratising climate investing, these instruments can benefit marginalised communities or small-scale initiatives that struggle to attract traditional funding. This is particularly valuable for local restoration projects or nature-based solutions like green infrastructure, which are crucial to combat climate change. However, challenges exist relating to security and transparency of investments, particularly in less developed areas. 

Pay-for-success (PFS) models, including social impact bonds and development impact bonds, offer an innovative approach to climate financing. 
Unlike traditional funding methods, they link financial returns directly to achievement of pre-defined social and environmental outcomes. Private investors provide initial capital for project costs, and beneficiaries or stakeholders commit to pay for outcomes as they are delivered. 

This allows projects to move forward where funds are unavailable or potential impacts are too uncertain to secure upfront funding. It also shifts risk from public agencies and conservation organisations while promoting result-oriented project implementation. It also incentivizes investors to support projects that are likely to be successful, as repayment is based on outcomes achieved. 

In situations where upfront and delivery costs need to be covered, these may be provided until success is achieved and full payments are released.

Climate risk insurance provides financial protection against the impacts of climate change like extreme weather and natural disasters. This suite of instruments covers everyone from individuals to governments, institutions, companies and communities against climate-related losses. They also ensure rapid post-disaster payments, helping to mitigate the financial burden. Crucially, they also spread risk across multiple parties before damage occurs, enhancing resilience and supporting recovery efforts.

As we’ve seen, addressing climate change demands significant financial resources to combat and adapt to its destructive effects on communities, businesses and nations. 

To understand how much is needed, it’s crucial to measure the gap between received funding and required funding. As Marina Mattera, Project Manager of Adaptation AGORA, explains, “This allows us to understand the scale of investment needed. It’s especially important for the estimated 3.6 billion people in highly vulnerable areas like Africa, Asia and parts of Central and South America, as well as small island developing states, among others. Many developing countries in these regions struggle to manage the losses and damages arising from climate change and need to understand the scale of finances required to address it.”  

Measuring the shortall is, however, easier said than done as quantifying the gap presents significant challenges due to varying methodologies and data limitations. 

To overcome these, two main approaches exist. The first is a top-down method that relies on macroeconomic models to project future investment needs. These models typically estimate the additional investment required to achieve specific climate targets, such as limiting global warming to 1.5°C. The second approach is bottom-up, which aggregates sector-specific or country-level estimates of climate finance needs.

Both methods have their strengths and weaknesses. Top-down approaches provide a comprehensive global view but may lack granularity. Bottom-up methods offer more detailed insights but can be inconsistent across sectors or countries. To improve accuracy, some studies combine both approaches, using bottom-up data to validate top-down estimates.

To learn more about how to measure the climate finance gap, see this article from the Adaptation AGORA project, which works to empower local communities to adapt to and mitigate climate change. 

Having explored the diverse landscape of climate finance, it's clear that addressing the climate crisis requires a multi-faceted and innovative approach to funding. 

To move forward, we need to mobilise ever-greater amounts of capital to fund proactive prevention strategies. It’s also essential to tackle regulatory obstacles and foster partnerships between governments, businesses, and international financial institutions to unlock the potential of public-private capital. And, of course, to be able to measure the climate finance gap and allocate funds where they need to go. 

By leveraging the full spectrum of climate finance options and developing new, innovative approaches, we can accelerate the transition to a sustainable, low-carbon future. The road ahead is challenging, but with strategic financial tools, cross-sector collaboration, and a collective commitment to change, we can build a more resilient and environmentally sustainable world for future generations.

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