How Emerging Economies Can Innovate to Close Climate Finance Gap

By Faridat Salifu

The alarming gap between the escalating needs for climate finance and the limited commitments from wealthier nations remains a persistent challenge.

With the impacts of climate change already devastating vulnerable countries, the need for urgent action is more pressing than ever.

At COP29, late 2024, leaders reiterated the stark disparity between pledges and actual disbursements, highlighting that the climate finance gap is widening at a time when every delayed dollar directly impacts lives, livelihoods, and long-term survival prospects.

Global estimates suggest that addressing the climate crisis will require up to USD$1.3 trillion annually, but developed countries have committed only USD$300 billion by 2035 a figure that critics, particularly from developing nations, consider insufficient.

While this is a significant increase from previous targets, it falls far short of what is needed, with analysts predicting that inflation and other financial pressures will further erode the value of these funds.

This financial shortfall calls for a rethink of how developing countries, which often have limited fiscal flexibility, can mobilize capital to tackle climate change without being entirely dependent on international aid.

Governments in these nations must innovate within their economic constraints to secure funds for climate adaptation and mitigation efforts. It’s clear that relying on pledges from wealthier countries is not enough to protect the most vulnerable populations. A more dynamic, localized approach to financing climate action is needed.

The challenge of financing climate action is complicated by the differing nature of mitigation and adaptation strategies. Mitigation efforts, such as renewable energy projects, often generate tangible economic returns through job creation in sectors like construction, operations, and energy.

These projects provide direct economic benefits, which, in turn, attract both public and private investment.

However, adaptation projects — essential for building climate resilience — often lack immediate financial returns. Infrastructure like flood barriers, drought-resistant agriculture, and improved water management systems, although crucial, don’t always offer direct revenue streams.

For many emerging economies, where budgets are already stretched thin, this disparity makes securing finance for adaptation projects especially difficult. The challenge, then, is finding innovative financing models that can bring in private capital while ensuring that local communities benefit directly from the investments.

These models need to be designed not only to attract investors but also to ensure that the social and environmental impacts of climate projects are felt at the local level.

Innovative Financial Models for Climate Resilience
To bridge this gap, developing nations can adopt several strategies that both generate capital and stimulate local economies. One such approach involves linking climate investments to local economic multipliers. For instance, the construction of flood protection infrastructure creates jobs and boosts local businesses.

Workers employed in such projects spend their wages within the community, generating additional economic activity. These investments can then be presented to investors as both climate actions and engines of local economic growth.

Another solution lies in the creation of impact-linked bonds, where returns for investors are tied to the achievement of measurable social or environmental outcomes, such as job creation, improved agricultural productivity, or the reduction of carbon emissions.

These bonds could attract a diverse range of investors, from governments to private impact funds, as they offer returns linked to the success of the project in creating tangible societal benefits.

By incorporating mechanisms like partial underwriting from international organizations, these bonds reduce investor risk while incentivizing the completion of climate projects that directly benefit the community.

Local carbon credit markets present another opportunity. These markets can empower local communities to take climate action, such as through reforestation or urban greening.

By generating carbon credits, these communities can then trade them on international markets, raising funds for reinvestment into additional projects. This approach also offers an avenue for compensating investors while tackling both climate and economic challenges.

Developing nations could also consider monetizing climate resilience through public infrastructure. For example, green infrastructure projects like renewable-powered transit systems or flood-resistant housing can be designed to generate revenue through user fees or public-private partnerships.

Additionally, shared savings models — where the financial savings from energy-efficient projects are shared between stakeholders — can provide the financial incentives needed to drive further investments in climate resilience.

Another option is debt-for-climate swaps, where countries negotiate with international creditors to forgive a portion of their debt in exchange for committing to specific climate initiatives.

This could provide much-needed funds for projects like mangrove reforestation, which can serve as natural flood barriers and protect communities from climate-related disasters. In this way, debt relief can be structured as an investment in long-term climate resilience.

Emerging economies might also issue green sovereign bonds tied to achieving specific climate targets. These bonds could offer lower interest rates in exchange for commitments to climate goals, attracting impact investors who are seeking both financial returns and environmental outcomes.

One underutilized resource in climate finance is the potential of international diasporas. Governments can tap into diaspora communities, which often have significant disposable income, by issuing diaspora green bonds.

These bonds could fund visible, impactful climate projects like solar farms or clean water systems in the home countries of diaspora members, generating a sense of ownership and connection to the project.

Additionally, remittance-based financing platforms could automatically allocate a percentage of remittances to climate funds, creating a reliable and steady stream of funding for adaptation efforts. Given that remittances represent a significant source of income for many developing countries, this could be a powerful tool for financing long-term climate projects.

To address the challenge of perceived risk in climate finance, technology-driven solutions can play a crucial role.

AI-driven climate risk insurance, for example, can offer customized insurance products that pool risks across multiple industries or regions, helping to reduce the financial vulnerability of climate projects. The premiums collected can be used to fund adaptation efforts, while payouts can provide a safety net for investors if climate events disrupt projects.

Blockchain technology can also improve transparency in climate finance. By tracking funds in real-time, blockchain can verify the progress of climate projects, ensuring that money is spent effectively and on target. This could enhance investor confidence and reduce the financial risks associated with climate projects.

Balancing Financial Returns with Social Impact
The ultimate challenge lies in balancing the financial returns for investors with the social and environmental outcomes of climate investments.

Risk mitigation tools provided by multilateral development banks or international financial institutions, such as guarantees for climate bonds, can play a crucial role in making investments more attractive to private investors.

Moreover, hybrid models that combine philanthropy with profit could be particularly effective. In these models, philanthropic funds can cover the high-risk elements of a project, while private investors can benefit from the returns generated.

This balance ensures that investors are incentivized to support climate projects, while also ensuring that social benefits like lives saved or communities protected are factored into investment strategies.

By embracing innovative financial models, leveraging technology, and tapping into underutilized resources, emerging economies can begin to close the climate finance gap.

With strategic reforms and partnerships, they can not only address the climate crisis but also create new economic opportunities for their people, ensuring that the benefits of climate action are felt in local communities and across generations.

Source: 360info™ –