Explore the $1.3 trillion funding gap facing emerging markets as COP31 puts climate finance under the lens.
This article appears in the November issue of Global Finance Magazine.
The New Collective Quantified Goal for climate finance, agreed upon at COP29 two years ago, envisioned raising at least $300 billion annually by 2035, framed by a broader objective to mobilize $1.3 trillion per year for emerging markets and developing economies, or EMDEs.
Yet, as COP31 convenes in Antalya, Turkey, this month, portfolio managers across institutional trading desks and sovereign debt offices see a stark mismatch between political rhetoric and capital-markets reality.
Independent High-Level Expert Group on Climate Finance estimates that EMDEs (excluding China) will need $3.2 trillion annually by 2035 to meet their climate and development goals. Domestic revenues, tax reforms, local capital markets, and fossil-fuel subsidy phase-outs can cover only $1.9 trillion. That leaves an external requirement of $1.3 trillion annually: a sevenfold increase over current cross-border flows.
Multilateral roadmaps project that private capital will meet half of this external need — approximately $650 billion — with multilateral development banks providing $300 billion to $400 billion, bilateral public sources $80 billion to $100 billion, and international levies supplying the rest. But official tracking often conflates non-concessional commercial loans and guarantee values with true grant-equivalent support, obscuring severe risk-return constraints.
An industry insider, speaking on condition of anonymity, noted that private capital is expected to focus overwhelmingly on mitigation assets in high-emitting, middle-income sovereigns: jurisdictions with commercial activity but limited scale. Conversely, the $300 billion public core of the NCQG is intended to prioritize adaptation infrastructure and grants for low-income countries.
Autopsy of the 1:5 Ratio
Blended finance strategically combines public or philanthropic capital with private commercial investment to fund sustainable development projects. It uses public funds to reduce risk, making emerging markets more attractive to private investors. While development finance orthodoxy has long touted a 1:5 public-to-private capital leverage ratio, joint MDB and OECD reporting shows that actual private co-mobilization in lower-income nations averages only $0.20 to $0.50 per public dollar.
However, “any headline number on blended finance obscures a large number of variables, so any generalization is going to be weak,” said Joan Larrea, CEO at Convergence, a global network supporting blended finance. Private involvement is gaining momentum, however: “Within the blended finance deals tracked, the ratio of private investment dollars mobilized relative to catalytic and concessional funding continues to grow.”
Private-sector dollars in blended finance transactions increased by 27% in 2025, reaching $11.2 billion, up from $8.8 billion in 2024, according to Convergence’s State of Blended Finance 2026 report. Commercial banks drove much of the growth, with their contribution rising from $4.3 billion to $7 billion. However, Larrea concedes that blended finance still lacks scale.
Regulations Deepen Gap
Under Basel III/IV rules, commercial banks face heavy capital charges for unrated emerging-market infrastructure debt. Similarly, Solvency II rules penalize institutional investors that allocate funds to unrated project debt without investment-grade wrapping. While MDB credit enhancements can suppress key risk parameters and reduce debt yields, underlying currency-hedging costs remain a serious obstacle.
Larrea pointed to structural shifts underway within multilateral channels.
“There remain regulatory and risk barriers to a lot of investors’ exploration of emerging markets,” she said, “but those who are doing so are using blended finance increasingly effectively. We do see room in transactions supported by MDBs and development finance institutions for the development banks to move down from senior positions to mezzanine or junior positions. That observation applies whether the transactions are blended—meaning whether donor money is also present—or fall into more traditional MDB/DFI business lines.”
The Silent Deal Killer
While global clean energy investment exceeds $2 trillion annually, according to International Energy Agency data, capital remains concentrated in advanced economies, China, and established project pipelines in India. Redirecting capital flows to high-capacity developing nations—such as South Africa, Indonesia, Mexico, Brazil, and Nigeria—requires mitigating severe foreign exchange and credit risks.
FX volatility frequently undermines project bankability. Clean energy projects generate revenue in non-convertible or volatile local currencies, whereas debt service and capital equipment are denominated in hard currencies like U.S. dollars or euros.
Local currency hedging in emerging markets can add 800 to 1,200 basis points per year to financing costs and restrict commercial tenors to three to five years. A standard 15-year solar asset cannot absorb hedging expenses on that level without driving costs beyond the means of local consumers or depressing returns below viable investment thresholds.
While broader emerging markets maintain functioning swap markets, said Joe Delvaux, senior-fixed income emerging markets portfolio manager at Amundi, liquidity in frontier markets is exceptionally thin and heavily dependent on central banks or primary export industries. In these economies, non-deliverable forward tenors typically stretch only six to 12 months, exposing investors to severe rollover risk.
When fully hedged returns fail to clear minimum investment hurdles, institutional capital simply walks away, Delvaux said: “If the investment does not pass certain key hurdle rates or possess such a decent net positive return post-hedging, why would an investor want to carry the risk if there is no major return being generated?”
Superimposed on currency risk is a compounding climate-sovereign feedback loop. Credit rating agencies are accelerating climate vulnerability downgrades and negative-outlook revisions across Global South sovereigns. As extreme weather events impair fiscal revenues and raise reconstruction costs, sovereign balance sheets weaken further. Lower sovereign ratings widen bond spreads, raising borrowing costs for local utilities and corporate borrowers to prohibitive levels of 12% to 18% or more.
Whether a project accelerates debt risks or enhances creditworthiness hinges on execution and viability, because delayed or failed projects can cause power deficits and blackouts that paralyze industry and strain national balance sheets. Conversely, well-managed projects can deliver vital energy, boost economic output, and strengthen sovereign credit profiles.
“It comes down to country by country, project by project,” Delvaux said.
Bridging the gap between core public finance and the NCQG’s $1.3 trillion goal requires structural reform, rather than reliance on financial leverage assumptions. Public-donor funding must target grant-based adaptation in low-income countries and absorb first-loss tranches that commercial capital cannot accept.
Concurrently, country-led platforms such as just energy transition partnerships—deals between developed economies and coal-dependent countries that aim to promote both development and the clean-energy transition—can aggregate projects into investable pipelines. Unlocking institutional capital at scale ultimately depends on expanding MDB balance sheets, establishing global FX guarantee facilities, and reforming international capital regulations to treat climate resilience as a productive capital investment.
Gilly Wright is a conributing writer based in the U.K.