COP31 Faces a $1.3 Trillion Annual Climate Finance Gap

By Grace Kim

$1.3 trillion a year is the external capital emerging markets and developing economies (EMDEs) outside China will need by 2035, according to the Independent High-Level Expert Group on Climate Finance—seven times current cross-border flows.

The group estimates that EMDEs excluding China need $3.2 trillion annually by 2035 for climate and development; domestic revenue, tax reform, local capital markets and fossil-fuel subsidy phase-outs cover only $1.9 trillion.

At COP29 two years ago, the New Collective Quantified Goal (NCQG) called for at least $300 billion annually by 2035, within a broader $1.3 trillion-a-year objective for EMDEs.

As COP31 convenes in Antalya, Turkey, this month, portfolio managers across institutional trading desks and sovereign debt offices see a sharp mismatch between political rhetoric and capital-markets reality.

How large is the financing gap?

Multilateral roadmaps divide the external requirement into four channels:

• Private capital: about $650 billion, half the need.
• Multilateral development banks (MDBs): $300 billion to $400 billion.
• Bilateral public sources: $80 billion to $100 billion.
• International levies: the remainder.

Official tracking often conflates non-concessional commercial loans and guarantee values with true grant-equivalent support, obscuring risk-return constraints.

An unnamed industry insider said private capital will focus overwhelmingly on mitigation assets in high-emitting, middle-income sovereigns with commercial activity but limited scale. The NCQG’s $300 billion public core instead targets adaptation infrastructure and grants for low-income countries.

Takeaway: Public money targets need; private capital follows commercial returns.

Why has blended finance not closed the gap?

Blended finance pairs public or philanthropic capital with private investment, using public funds to reduce project risk for private investors.

Joint reporting by MDBs and the Organisation for Economic Co-operation and Development (OECD) puts actual private co-mobilization in lower-income countries at only $0.20 to $0.50 per public dollar.

“Any headline number on blended finance obscures a large number of variables, so any generalization is going to be weak,” said Joan Larrea, CEO of Convergence, a global network supporting blended finance.

Convergence’s tracked deals show private investment rising relative to catalytic and concessional funding. Private-sector dollars rose 27% to $11.2 billion in 2025 from $8.8 billion in 2024, according to its State of Blended Finance 2026 report; commercial banks drove the increase, rising from $4.3 billion to $7 billion.

Larrea conceded the model still lacks scale.

Takeaway: Blended finance grows, but remains below the 1:5 benchmark.

Which rules hold capital back?

Basel III/IV rules impose heavy capital charges on banks for unrated emerging-market infrastructure debt; Solvency II penalizes institutional investors funding unrated project debt without investment-grade wrapping.

MDB credit enhancements can lower risk measures and debt yields, but hedging costs remain a major obstacle. Larrea said investors use blended finance more effectively despite regulatory and risk barriers.

She also sees room for MDBs and development finance institutions (DFIs) to move from senior debt into mezzanine or junior positions, meaning lower in the capital stack. The shift could apply to donor-supported and traditional deals.

Takeaway: Rules and capital structure decide who can engage.

Why do viable projects still fail to finance?

Global clean-energy investment exceeds $2 trillion annually, according to International Energy Agency data, but remains concentrated in advanced economies, China and established Indian pipelines. Redirecting capital to high-capacity developing nations—South Africa, Indonesia, Mexico, Brazil and Nigeria—requires absorbing severe foreign-exchange (FX) and credit risks.

Clean projects earn non-convertible or volatile local-currency revenue, while debt service and equipment cost US dollars or euros. Hedging can add 800 to 1,200 basis points (8% to 12%) a year and restrict tenors to three to five years, pushing consumer costs beyond local means or returns below viable thresholds for a 15-year solar asset.

Broader emerging markets retain functioning swap markets. Frontier liquidity is exceptionally thin and depends heavily on central banks or primary export industries; non-deliverable forward contracts typically run six to 12 months, creating severe rollover risk.

Joe Delvaux, senior-fixed-income emerging-markets portfolio manager at Amundi, tied capital flight to hedging-adjusted returns:

“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?”

The risk feeds back into sovereign credit. Rating agencies are accelerating climate-vulnerability downgrades and negative-outlook revisions across Global South sovereigns. Extreme weather weakens tax revenue and raises reconstruction costs; lower ratings widen spreads and push local utility and corporate borrowing costs to 12% to 18% or more.

Delayed or failed projects can cause power deficits and blackouts, paralyzing industry and straining national balance sheets. Well-managed projects can improve energy supply, output and sovereign credit. Delvaux assesses each country and project separately.

Takeaway: FX and sovereign risk can erase returns before climate benefits arrive.

What would unlock finance at scale?

Closing the gap requires structural reform, not leverage assumptions. Public donors must fund grant-based adaptation in low-income countries and absorb first-loss tranches (capital absorbing initial losses