Public finance for the sustainability transition is coming under severe pressure from strained budgets and competing priorities, not to mention the populist revolt that is upending politics in virtually every democratic country.

The European Union has cut its proposed €10 billion Strategic Technologies for Europe Platform — designed, in part, to support low-carbon innovation — to €1.5 billion and redirected the remaining funds to defence.¹ The Scottish government has diverted £460 million from its green energy fund to meet public-sector pay demands, scrapping its intention for that money to support renewable energy.²

Unsurprisingly, the Trump administration, which is withdrawing the United States from the Paris Agreement on Climate Change, is also cutting funding for the transition. It has rescinded a $4 billion pledge to the Green Climate Fund,³ one of the most important efforts to aid the transition in poor countries. Fortunately, other countries appear committed enough to the fund that they may make up for the American shortfall.

The US Environmental Protection Agency under Trump announced that it intends to claw back $20 billion in funding that was allocated in the previous administration for reducing pollution in disadvantaged communities⁴ — a tragic development given the health benefits that the investments could have brought to these communities.

At the 29th Conference of the Parties to the United Nations Framework Convention on Climate Change, in Baku late last year, the strained budgets of the rich countries contributed to a tense negotiation. A group of the least developed countries, who have long argued that they need more help to cope with the climate crisis, walked out in protest at one point. Eventually, negotiators agreed that developed countries would channel a rising annual sum to developing countries, reaching $300 billion a year by 2035.⁵ Many developing countries still regard the deal as inadequate, and are doubtful that even that sum will be delivered; thus, continuing tensions over finance are likely at the next Conference of the Parties, late this year in Belém, Brazil.  

In the climate struggle, public finance is particularly important because it has the potential to catalyse deals where private financiers are willing to participate but unwilling or unable to bear the entire risk. In addition to the new $300 billion goal, a commitment was made to deliver a ‘Baku-to-Belém Roadmap’ at the forthcoming conference on how to scale up total finance volumes, both public and private, across all sources to $1.3 trillion by 2035.⁶

The roadmap is expected to cover five strategic priorities, the first of which is the reform of large global development banks, such as the World Bank, with the aim of freeing up additional climate capital and reducing bureaucracy. Such reforms are thought to have the potential to significantly increase supplies of the most important types of finance that can catalyse further pools of capital.

A climate finance-focused think-tank, the Climate Policy Initiative, estimates that total flows to climate change mitigation and adaptation have been roughly half public and half private historically.⁷ This is now shifting as growth in private finance outstrips public, largely driven by the increasing cost competitiveness of clean technologies versus fossil. For example, the cost of one unit of electricity from utility scale solar has plummeted almost 85 percent since 2009, whereas the cost of an equivalent unit of electricity produced by a gas turbine was less than 10 percent lower in 2024 than it was in 2009.⁸

Despite the overall increase in private finance, we have yet to see any real solution to one of the biggest issues of the climate transition: the concentration of financial flows in Europe, the United States and China. These regions mobilised more than 75 percent of total climate finance in recent years, and the concentration has been increasing over time. The International Energy Agency estimates that developing countries will receive 18 percent of the world’s investment in clean energy sources in 2025, but 44 percent of its investment in fossil fuels.⁹

Whilst greater public finance can help redress this imbalance, the biggest barrier to investment in developing countries is often a perception of risk that does not always match reality. Emerging markets often face a much higher cost of capital even after risk measures like credit ratings are taken into account. The perception gap has developed from multiple factors: volatility in currency exchange rates, fears of political instability, historical market performance and others.

Much work is being undertaken to address the gap: for example, the global development banks have started to publish decades’ worth of data on default frequencies and recovery rates in emerging markets. This information enables the broader market to more accurately price risk based on real-world data and reduce the potential influence of sentiment. In other areas, smart guarantee mechanisms are being put in place to give project developers and lenders confidence that currency or default losses will be covered in the event that risks materialise; these guarantees can unlock up to 10 times their value in private funding, but tend to be relatively small.¹⁰ Scaling up these mechanisms is imperative if we are going to meet the volumes of finance required to prevent runaway climate change.

Elsewhere in the world of finance, some governments have been stalling on tighter financial rules relating to climate risk and disclosure. The United States, for instance, has sought to undermine climate rules for banks enforced by a global supervisory committee in Basel, Switzerland. And the securities regulator in the United States is backing away from rules adopted by the previous administration that would have required a modest level of climate-risk disclosure from companies listed on American exchanges.

In the EU, recently adopted regulations on sustainable business and finance are under attack as financial institutions and regulators realise the full administrative burden that some of the regulations entail. Simplification and streamlining of disclosure standards has become the rallying cry in Brussels. To meet these demands, the European Commission has proposed legislation that would roll back some of the regulatory requirements. Already, certain disclosure regulations have been pushed back, smaller companies exempted and requirements reduced.

A global consensus about the way forward may be emerging, however. At the time of writing, 36 jurisdictions around the world were adopting, or preparing to adopt, disclosure and auditing standards created by the International Sustainability Standards Board.¹¹ If this global alignment goes forward, that could reduce the reporting burden for companies that operate across jurisdictions, who might otherwise be subjected to conflicting or duplicative disclosure rules. In another hopeful move, the same body is expected to embed material corporate impacts and dependencies on nature into its disclosure framework. This would mark a critical evolution in global reporting norms, reinforcing the idea that long-term economic value is linked to the preservation of nature.

Away from disclosure standards, investor support for shareholder proposals on climate and sustainability issues has dropped sharply.¹² In the United States, the Trump administration has adopted rules making it more difficult for investors, including professional asset managers, to pressure companies on their sustainability commitments. However, those investors who understand that fiduciary duty means considering issues relevant to the long-term health of a business or portfolio, and that climate change is such an issue, are pressing on. Some forward-thinking asset owners have even gone a step further by using sophisticated techniques informed by top climate science institutions to help guide their investment decisions.

Over the past year, some banks and insurers have back-pedalled on climate commitments they made at the big Glasgow climate summit in 2021. Bank financing for fossil fuels rose in 2024, after having fallen the previous two years.¹³ It remains to be seen whether this is the beginning of a broader trend.

The insurance industry stands at the forefront of climate change. Its window of insurability is narrowing as extreme weather events grow in both frequency and severity. In parts of the United States, private insurers are withdrawing entirely, as escalating wildfires and hurricanes render some regions effectively uninsurable — leaving state programmes to fill the gap where possible. Financial innovations, such as parametric insurance (which pays out quickly once an observable trigger is met, e.g., rainfall above a set threshold), offer partial relief. Yet, the only sustainable path forward lies in decisive action to halt climate change as well as climate adaptation measures. Today just 7 percent of total climate finance is directed towards adaptation.¹⁴ This imbalance must be corrected urgently, as what were once considered extreme events are fast becoming the new normal. Nature-based solutions, which can abate emissions as well as improve crop resilience, cool cities or reduce flood risks, may offer a scalable route to both mitigation and adaptation simultaneously.

Notwithstanding the political headwinds in some jurisdictions, financial flows continue to shift away from dirty energy and towards clean energy. The International Energy Agency forecasts, for instance, that $2.2 trillion will be spent to develop clean energy this year, compared to $1.1 trillion that is likely to be invested in extracting fossil fuels.¹⁵ This is still more fossil expenditure than needed if the world’s climate goals are to be met, and it is less than half the spending on clean energy that will be needed by 2030, just a few short years away.¹⁶ But we are, at least, still headed in the right direction.

Giving us confidence in this direction is one huge area of opportunity: countries with high power prices where renewables have barely taken off. Building renewables in these markets can be highly profitable. In fact, some of the most successful infrastructure funds of the last decade have found their success by being renewable energy first-movers in these regions.¹⁷ Furthermore, while investment in advanced economies needs to double by 2035, investment volumes in the rest of the world need to increase by a factor of more than six, indicating plenty more runway for these capital flows.¹⁸

Despite the bleak headlines of recent months — strained budgets, regulatory back-pedalling and broken commitments — we remain optimistic for the longer term. We have seen setbacks in sustainable investing before, but it always comes back stronger. Climate finance has more than doubled in six years, private finance is starting to flow and the cost declines that are driving investment in renewable energy show no sign of abating. A few years from now, we hope and trust, this period of turbulence will have become a brief, bad memory.