Policy support, private sector pledges and declining costs of clean energy technologies are set to drive growth in climate investments in 2025, supporting the global transition towards sustainability.
However, emerging economies face significant challenges in securing sustainable financing despite their proactive participation in sustainable investment initiatives.
Mobilizing financing to implement climate pledges will remain a key hurdle, particularly for these economies, where the cost of capital is typically high and public sector budgets are severely constrained.
At COP29, advanced economies agreed to increase climate investment for emerging markets, committing to a target of US$300 billion annually by 2035. However, this falls far short of the estimated US$1 trillion per year required to meet climate goals, underscoring the urgent need for innovative financial solutions like blended finance, guarantees and sustainable debt.
Multilateral development banks have pledged to leverage their balance sheets and expertise to scale such solutions, according to the latest report from Moody’s Ratings, but progress is expected to be gradual. Emerging economies face higher credit risks due to their greater exposure to climate-related shocks and lower resilience, which can weaken fiscal strength and amplify social risks.
Higher policy uncertainty and global fragmentation, according to the Moody’s report, could increase risks for green investments in 2025. While competing industrial policies have bolstered spending on clean energy and emerging green technologies – offering opportunities for new revenue streams – policy swings, potential tariffs and supply chain disruptions could make returns less predictable. These risks could offset the benefits of lower interest rates and create additional challenges for investors.
Reduced US engagement on climate under the new administration could dampen global action. However, even without robust international coordination, the world’s largest economies and emitters are likely to continue pursuing their climate agendas at various paces.
China and the EU accounted for 66% of global clean energy investments in 2024, with Japan and the UK also playing significant roles. Meanwhile, in large emerging markets, such as India, energy security concerns and rapidly growing power demand, the report notes, are expected to drive policy support for renewable energy and clean energy investments.
Emerging markets are increasingly recognizing the value of the International Sustainability Standards Board ( ISSB ) – established by the International Financial Reporting Standards ( IFRS ) Foundation – in enhancing investor confidence and improving access to sustainable financing. More developing economies, particularly in Asia, the Middle East and Africa, are expected to adopt ISSB principles as part of their national regulatory frameworks.
The Asia-Pacific region is leading this effort, according to data from Sustainable Fitch and the IFRS Foundation, with over 400 companies already referencing ISSB standards.
Investors are also exploring newer and more specialized environmental, social and governance debt labels, demonstrated by a growing interest, according to Sustainable Fitch, in emerging types of labelled bonds, such as blue bonds, which exclusively finance water-related projects, and orange bonds, which are dedicated to advancing gender equality. These niche financial instruments are expected to diversify the sustainable financing landscape further and attract a broader range of investors.