Speaking at a panel on financing the energy transition during Temasek’s Ecosperity week, veteran financier Shriti Vadera said governments continue to rely on the unrealistic assumption that private capital alone can close the climate financing gap, even as many projects in developing economies remain commercially unviable without stronger policy support and public-sector intervention.
“There’s a sort of convenient untruth that the private sector is going to spontaneously combust and find ways of providing capital when it can’t go to things that are essentially not commercial,” said Vadera, who is chair of UK-based insurer Prudential plc and the World Bank Private Sector Investment Lab.
Her comments came as a vast majority of clean energy investment today remains heavily concentrated in a handful of major economies despite growing global momentum behind the low-carbon transition.
While investment in renewable energy and green technologies has accelerated sharply in China, Europe and previously the US, financing flows into emerging and developing economies continue to lag far behind what is needed to meet climate targets.
Vadera said emerging markets excluding China now account for roughly 30 to 40 per cent of global emissions, yet climate financing into these economies remains deeply insufficient.
She cited estimates showing emerging and developing economies require around US$1.3 trillion annually in transition financing for emerging markets, compared to roughly US$200 billion currently flowing into the sector.
The financing shortfall is particularly acute when it comes to allowing investors to participate in transition financing via equity, or the buying of shares, said Vadera. She described this lack of risk-bearing capital as the “biggest problem” facing transition projects.
“There’s a lot more debt [available], but the real problem is that 80 to 90 per cent of the financing is available in debt. The start of any capital stack at any project is the risk-bearing capital, and that is in much shorter supply,” she said.
Vadera highlighted that many climate discussions continue to overestimate the willingness of institutional investors to absorb risks tied to emerging market infrastructure, particularly where currency volatility, illiquid markets and inconsistent regulations remain unresolved challenges.
To unlock the trillions in private financing available in the capital markets, investments need to be rated, liquid and tradable, she said.
Vadera also called for the creation of standardised financial structures that allow climate-related debt to be packaged, traded and distributed more efficiently across global markets.
One such model currently being explored by the World Bank’s Private Sector Investment Lab involves creating originate-to-distribute models that pool loans and structure them into investable assets, while also standardising documentation, securitisation frameworks and debt issuance practices across multilateral development banks and domestic financial institutions.
The aim is to turn transition financing into a recognisable asset class that institutional investors can more easily access.
“That is the nearest thing we have to a solution that will be at the scale that is needed,” she said.
However, she stressed that financial engineering alone will not solve the problem.
For hard-to-abate sectors such as steel, cement and industrial decarbonisation, projects may never become commercially competitive without carbon pricing or direct public support.
“However much structuring you do, they’re not going to be bankable,” Vadera said.
Stronger policies and financing reform
Other speakers at the panel echoed the need for stronger policy frameworks alongside financing reforms.
Adair Turner, chair of the Energy Transitions Commission, said although the world has made substantial progress in scaling clean energy investment globally, many hard-to-abate sectors remain structurally more expensive to decarbonise than existing fossil fuel-based systems.
These sectors include green hydrogen, steelmaking, cement production and carbon capture technologies, where low-carbon alternatives continue to face higher upfront and operating costs.
“No amount of clever financial design will make things bankable unless there are carbon prices or regulation as a framework,” he said.
He noted that a growing number of renewable energy technologies have now reached cost competitiveness due to rapid technological advancements and manufacturing scale-up over the past decade.
The cost of solar photovoltaic systems and batteries, for example, has fallen by roughly 95 per cent over the past 15 years, helping make solar-plus-storage systems cheaper than new coal or gas-fired power generation in some markets.
The falling costs have also accelerated the economic viability of electric vehicles and industrial electrification technologies, particularly for low-temperature industrial processes such as food processing, textiles and manufacturing.
However, Turner cautioned against assuming that international capital alone would solve the financing challenge, as most transition financing would ultimately have to come from domestic savings mobilisation and stronger local capital markets.
He said policymakers must also address foreign exchange risks associated with renewable infrastructure projects in emerging markets, many of which generate revenue in local currencies but rely heavily on foreign-denominated financing.
Annual global investment in the green transition has doubled from around US$1 trillion in 2020 to approximately US$2 trillion today with much of that growth concentrated in China, Europe and the US.
Ma Jun, chairman of Green Finance Committee of China Society for Finance and Banking highlighted China’s extensive green finance system that has helped support the rapid scaling of renewable technologies and clean manufacturing, offering an example of how coordinated policy and financial system design can accelerate deployment.
China has established the largest green banking system in the world, with roughly US$7 trillion in outstanding green loans. It has also developed one of the world’s largest green bond markets.
This deep domestic financing base has enabled large-scale investment into solar, wind, electric vehicles, batteries and other clean technologies, supporting both domestic deployment and global supply chains.
Ma said that technology deployment may now matter more than financing cost reductions, given the steep learning curves in clean technologies.
“Technology is more important. While finance can optimise and reduce costs by one to two per cent, the right technologies can cut costs by as much as 50 per cent,” he said.
He also stressed the importance of developing interoperable green taxonomies and stronger local green financial systems across emerging economies, to ensure that capital is consistently directed towards credible transition activities.
According to Ma, many developing countries still allocate only a small share of domestic bank lending towards green projects, leaving major financing capacity untapped.
He suggested that strengthening domestic green financial systems could unlock significantly more transition finance without relying excessively on foreign capital inflows.
