Emerging market and developing economies (EMDEs) have enormous investment needs in climate mitigation and adaptation, and other areas to attain better and more inclusive economic, social and ecological conditions and to achieve the Sustainable Development Goals (SDGs). Most countries in the Global South also face significant impacts and risks from climate change and nature loss that need to be accounted for by the financial sector.

Monetary and financial authorities, as well as banks and other financial institutions, in developing and emerging economies are increasingly seeking to address sustainability risks and scale up sustainable lending and investment.

The financing gap for climate mitigation is estimated at US$2.4 trillion annually between 2016 and 2035, while adaptation finance needs are estimated at $180 billion annually between 2020 and 2030 (IPCC 2018, Richmond and Hallmeyer 2019). Before Covid-19, the UN estimated that developing countries were facing an annual financing shortfall of $2.5 trillion for advancing the SDGs and the Paris climate goals.1 The pandemic has widened this financing gap substantially. There clearly is a need to scale up financing for development, and to make sure that all financial flows are aligned with climate and other sustainability goals.

The trajectory to date suggests that international private capital flows are unlikely to fill the gap, despite new ambitious initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ) that aim to mobilise private climate finance to emerging and developing economies. Likewise, official development assistance (ODA) from the member countries of the Organisation for Economic Co-operation and Development’s Development Assistance Committee (DAC) – which accounted for $179 billion in 2021 (OECD 2022) – and from other donors can provide important impetus to further economic development and help to leverage private international finance, but it will not be nearly enough to meet climate investment needs and the SDGs. To address the climate investment and SDG financing gap, mobilising domestic financial resources through the local banking system and capital markets and channelling them into domestic investments will be crucial. The successful implementation of low-emission development strategies and National Adaptation Plans or National Adaptation Programmes of Action can only be achieved if domestic resource mobilisation is strengthened.