Transition finance: bridging the climate investment gap

Introduction

Climate change is no longer a distant threat – it is already reshaping economies, societies, and ecosystems. Under current policies, global warming could exceed 3°C, resulting in macroeconomic losses of at least 18% of global GDP by 2050^[1]. Conversely, with the right action, significant economic value could be created through effective investment in the climate transition.^[2]

Businesses, consumers and investors each play a critical role in strengthening our economies and societies against the impacts of climate change. In this article, we explore finance’s role in facilitating the climate transition, examine the scale of the challenge, highlight the key actors involved, and clarify fundamental definitions that underpin this topic.

The role of finance in the climate transition

According to the UNFCC, Climate Finance is the local, national or transnational financing that seeks to support mitigation and adaptation actions that will address climate change. Mitigation activities include reducing or avoiding greenhouse gas (GHG) emissions or enhancing ‘sinks’, which remove GHGs from the atmosphere. Adaptation aims to reduce the vulnerability of human or natural systems to the impacts of climate change and climate-related risks, by increasing resilience and responding to risks.

Meeting current climate commitments will require USD 8.6 trillion^[5] of global climate finance annually between now and 2030, and over USD 10 trillion annually in the 2030s. Developing countries alone need USD 2.4 trillion annually by 2030, yet pledges from developed nations remain insufficient and lack transparent sourcing or deployment strategies^[6]. With every year of underinvestment, these numbers continue to climb. At the annual Conference of Parties (COP) 29, developed countries committed to fund developing nations to the tune of $300 billion per year by 2035 with aspirations to reach USD 1.3tn^[7]. Not only does this significantly under-address the issue, but there has also been limited diligence or data on how exactly these committed funds will be sourced or deployed.

To address the urgent need for real-world decarbonisation, we define ‘transition finance’ as capital deployed to help high-emitting industries and economies evolve toward sustainable business models, production and consumption methods which align with long-term climate goals.

This includes:

Transition finance is essential to ensure that industries responsible for a large share of global emissions can, and will, decarbonise. Achieving net-zero goals will require annual clean-energy and industrial decarbonisation investments of USD 4 trillion by 2030^[8]. Whilst many businesses are making commitments, research shows that corporate climate pledges often lack credibility unless backed by concrete action or investment plans^[9]. A significant part of this challenge lies in ensuring that financial flows are directed toward meaningful and measurable climate action and in identifying which solutions will achieve maximum impact.

Who is investing and where is it going?

The transition finance landscape is evolving rapidly, and in many markets data collection remains a complex process, with a lack of consistent reporting limiting transparency. Organisations such as the Climate Policy Initiative, Dark Matter Labs and Our World in Data, alongside larger data providers such as Bloomberg, have begun to demystify these capital flows through primary data collection efforts.

In 2024, global transition investment reached $2.1 trillion – an 11% increase from the previous year – primarily directed at clean energy and transport solutions^[10].

Despite rising investments, the current scale is insufficient to meet global transition targets. The ratio of public to private capital contributions remains roughly 1:1, whereas developing markets need ratios of at least 1:8^[11]. Investment by public and private-sector capital owners are also predominantly focused on mitigation activities, with approximately 10% of capital going to adaptation or ‘dual benefits’ use cases. Adaptation projects are typically complex with higher risks and less clear avenues for financial returns but are necessary for reaching a net zero future.

Geopolitical shifts and partisan debates have put public sector climate investment under pressure as governments face intensifying competition within tightening budgets funds are becoming more prominent. At the same time, partisan views around the importance and relevance of climate change, and perceived conflicts with economic growth, are affecting the investment landscape for corporates and private investors. This makes demonstrating viable returns and robust business cases even more important to unlock large-scale investment.

Investor perspectives

What can drive investors to deploy more capital?

Some of the challenges to overcome include lack of discoverability of projects, a mismatch in supply and demand of capital types, and a lack of consistency on taxonomies and impact measurement approaches which make assessing and monitoring investments challenging. Beyond the ethical and environmental benefits, and financial returns, compelling reasons to invest include managing climate-related risks and meeting regulatory requirements. As regulators impose further disclosure and reporting requirements on investors, the ability to classify and distinguish between green and non-green investments will become more important than ever. The confluence of regulatory and policy imperatives, with financial incentives and capital growth opportunities, will ultimately drive private sector capital flows at scale.

Conclusion

Climate and transition finance are essential to address the challenges of climate change. Investing in the transition is complicated and requires new approaches to succeed at scale and bridge the gap between today’s high-carbon industries and the low-carbon future. The Cambridge Centre for Alternative Finance (CCAF) explores how diverse capital structures, systems thinking, and supportive policies could help meet these pressing needs.