Better Climate Financing Depends on Better Data

Huge sums will be required to help businesses and communities the world over reach net zero and adapt to the increasing impacts of climate change. On that, there is nearly universal consensus. But as in many other fields of investment, what gets measured, gets financed. And therein lies the challenge.

Governments, investors, banks, and companies have been responding to calls for greater climate financing. Press releases detailing commitments to deploy or align financing with climate targets abound. New types of climate funds and products for investors proliferate. Companies are increasingly reporting how much of their own financing they are directing toward decarbonization or adaptation. What is less clear are how these various efforts add up—the amount of financing needed to reach climate targets, the flows currently available and deployed, and the funding gap that remains.

To provide some clarity on these points, The Rockefeller Foundation, in collaboration with BCG, aggregated data from across the climate finance arena, examined the methodologies that leading publications use, and attempted to triangulate missing insights. The resulting report confirms what many observers have suspected: despite all the activity to date, funding to support climate change mitigation and adaptation efforts faces a seismic shortfall. To attain net zero, public and private sector entities across the globe will need to deploy approximately $3.8 trillion in annual investment flows through 2025. However, our analysis finds that only about 16% of total need is being met.

A lack of complete and comparable data—especially about private sector climate finance—hinders efforts to close these gaps. Although this is a correctable problem, it will require governments, development finance institutions, private sector organizations, and others in the climate finance community to improve the quality, consistency, and frequency of their reporting.

New Insights on Where Gaps Are Most Urgent

Over the past several months, The Rockefeller Foundation and BCG conducted an in-depth examination of the technical literature on climate finance. The goal was to provide industry practitioners with a comprehensive view of how climate finance needs are evolving relative to flows, to identify where the most critical gaps in finance itself and also, critically, in areas that demand rapid improvements to the quality and coverage of climate finance data.

Our research revealed several insights on where the key financial and data gaps occur and what steps actors can take to close them:

• Financing to achieve real economy decarbonization remains a small fraction of what is needed. To attain net zero, public and private sector entities across the globe will need approximately $3.8 trillion in annual investment flows through 2025. Our analysis—derived from an examination of data from government and development organizations, financial institutions, private companies, and other investors—suggests that the capital currently deployed provides only about 16% of the total climate finance required to mitigate negative climate effects and adapt processes and infrastructure worldwide. When we looked through a wider lens that includes transition finance and financing deployed to intermediaries that target climate impact, we found that financing need outweighed flows by 66%.
• This gap is even more alarming for adaptation and resilience efforts, where financing flows in 2020 amounted to only 10% of what is needed. Viewed against the backdrop of the accelerating rate and scale of negative climate impacts on lives and livelihoods, the shortfall is even more acute in the most climate vulnerable countries. Investors point to an inadequate project pipeline and challenging financial returns profiles, among other issues. A&R only received a fraction of the $410 billion to $560 billion in annual financing that it requires.
• Our analysis identifies areas where catalytic capital could drive greater impact to close gaps. This report highlights places where overall gaps are likely to close (such as electric vehicles) and where they are widening (such as fuel cell technology). It also explores geographic disparities in available financing. Just as negative climate impacts fall disproportionately on emerging markets and developing economies, so do funding gaps, owing to higher project and sovereign risks.

Now Is the Time to Advance Needed Reforms

This is a crucial decade for climate finance actors to go from pledging support for climate initiatives to deploying it. Increased transparency and traceability will amplify the need for intensive efforts to resolve systemic and structural challenges.

All key participants must improve the quality and consistency of their reporting. Governments will have to trace capital-finance needs, flows, and outcomes in order to increase the availability of necessary structural interventions such as tax incentives and subsidies. Corporates will have to disaggregate climate finance initiatives—rather than rolling costs and allocations under business operations—so that they can accurately assess investments and performance. And market-return-seeking investors will have to be more transparent about the end use of their proceeds, so that others in the climate finance arena can better discern what gaps and needs remain.

There’s tremendous energy on the part of many institutions and organizations to meet this moment. But while the need for investment is great, the need for high-quality data and measurement is even greater.