Unlocking the Future: Why 2025 Is Crucial for Global Climate Finance

Understanding the Financial Needs

The $1.3 trillion goal set for 2035 is not just a number; it represents the lifeline for vulnerable nations grappling with the escalating effects of climate change. These regions, often with limited resources, face disproportionate risks from extreme weather events like floods, droughts, and wildfires. To build resilience and transition to low-carbon economies, they need robust financial support that can bridge the gap between current capabilities and future needs.

Developing countries require funds to fortify infrastructure against climate impacts and invest in renewable energy projects. Without adequate finance, communities will continue to bear the brunt of climate-induced disasters. Yet, the challenge lies in ensuring that the money reaches those who need it most, particularly grassroots organizations and marginalized populations. The current shortfall in adaptation finance underscores the urgency of reforming how funds are allocated and distributed.

Sources of Funding and Political Will

Mobilizing $1.3 trillion by 2035 requires a multifaceted approach. Public funding from developed nations, multilateral development banks (MDBs), and innovative financial mechanisms must all play a role. Bilateral aid, concessional loans, and grants remain crucial, but they alone cannot meet the demand. MDBs have a proven track record of leveraging taxpayer dollars into larger sums, making them indispensable partners in this effort. However, political headwinds may hinder progress, especially if member countries hesitate to increase their contributions.

Private capital holds significant potential but comes with its own set of challenges. Investors perceive low-carbon projects in developing countries as risky, demanding higher returns than similar ventures in wealthier nations. To overcome this barrier, smart public policies can de-risk investments and create an enabling environment for private sector participation. Governments must also explore unconventional sources of finance, such as taxes on polluting industries or debt-for-nature swaps, which could inject billions into conservation efforts.

Driving Private Investment through Policy Innovation

Unlocking private capital hinges on creating favorable conditions for investment. Countries like China and India have demonstrated that strategic policies can catalyze green investments. By setting ambitious renewable energy targets, subsidizing clean technologies, and introducing financial instruments like green bonds, governments can instill confidence among investors. Public-private partnerships further enhance the appeal of low-carbon projects, reducing perceived risks and encouraging broader participation.

However, achieving the necessary scale of private investment remains a formidable task. Financial instruments like guarantees and risk-sharing mechanisms are essential but insufficient on their own. Policymakers must rethink how investment risks are assessed and develop new frameworks that prioritize climate and nature-related investments. International conferences, such as the Finance for Development Conference, offer platforms to advance these discussions and forge consensus on global finance reform.

Financing Nature Conservation for a Sustainable Future

Nature plays a vital role in mitigating climate change, yet economic incentives often favor its destruction. Forests, wetlands, and oceans provide invaluable ecosystem services that underpin global prosperity. Despite this, deforestation continues at an alarming rate, driven by short-term gains over long-term sustainability. Innovative financing models can reverse this trend by aligning economic interests with conservation goals.

Proposals like the Tropical Forest Forever Facility (TFFF) exemplify how creative finance can protect natural habitats while generating returns for investors. By rewarding countries for preserving forests and penalizing deforestation, TFFF aims to mobilize billions in private capital for conservation. Similarly, initiatives like debt-for-nature swaps and carbon markets can channel funds toward protecting biodiversity and restoring ecosystems. Governments must also redirect harmful subsidies toward sustainable practices, ensuring that economic policies support rather than undermine environmental health.

Promoting Sustainable Growth Through Strategic Partnerships and Innovative Finance

Emerging markets face a daunting challenge: a $4 trillion shortfall in achieving the UN’s SDGs and climate goals. ILX Management, established in 2022, has devised a scalable model to channel private capital into these regions. By collaborating with Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs), ILX mitigates investment risks and attracts substantial institutional funds, primarily from pension providers.

Addressing the Financing Gap with Institutional Capital

Institutional investors represent an untapped reservoir of capital that could significantly narrow the funding gap. According to OECD data, reallocating just 3.7% of global institutional assets towards sustainable activities in developing countries would suffice to fill this gap. ILX leverages this potential through its private debt funds, ILX Fund I and II, which focus on syndicated loans originated by MDBs and DFIs. These loans are structured to ensure both financial stability and alignment with development and climate finance objectives.

By co-investing alongside MDBs and DFIs, ILX reduces perceived risks associated with emerging market investments, making them more appealing to institutional investors. This strategic partnership not only mobilises private capital but also preserves scarce concessional funds for projects where they are most needed.

Expanding Investor Base and Portfolio Diversification

ILX’s initial success was marked by the launch of ILX Fund I in early 2022, anchored by Europe’s largest pension fund manager, APG, with an initial commitment of $750 million. Achmea Investment Management also contributed, bringing the total commitments to $1.05 billion. In 2024, ILX launched its second fund, ILX Fund II, attracting commitments from Danish pension providers Sampension and Akademiker. The original investors increased their allocations, pushing ILX’s Assets under Management (AuM) to $1.7 billion.

This expansion underscores ILX’s ability to attract a diverse investor base while providing access to a broad and diversified portfolio. Loans organised by various MDBs and DFIs, including ADB, DEG, EBRD, FMO, IDB-Invest, and IFC, offer stable returns that are largely uncorrelated with public market volatility. This diversification mitigates risks and provides pension funds with a reliable investment landscape.

Impactful Sectors and Economic Development

ILX’s investment strategy focuses on core sectors such as infrastructure, renewable energy, agribusiness, manufacturing, and financial institutions. These sectors not only offer attractive risk-adjusted returns but also contribute significantly to economic development and environmental sustainability in emerging markets. By investing in these areas, ILX ensures that investors do not have to compromise on returns for impact; instead, they achieve both.

The success of ILX Fund I exemplifies the viability of this innovative approach. Aligning the interests of institutional investors with development objectives, ILX has created a replicable and scalable model adaptable to various contexts. Pension funds, with their long-term investment strategies and risk profiles, are ideal partners for MDBs and DFIs, further enhancing the effectiveness of this model.

Setting a Precedent for Future Initiatives

As the global community seeks effective mechanisms to finance the SDGs and climate goals, ILX stands out as a testament to the power of strategic partnerships and innovative financial structures. The firm’s co-investment model not only addresses the pressing need for development finance but also sets a precedent for future initiatives aiming to channel finance where it is needed most.

ILX’s innovative approach will be discussed at the OECD Community of Practice on Private Finance for Sustainable Development Conference in Paris. Scheduled for February 4-5, the conference will convene over 500 professionals to exchange policy solutions and advance the mobilisation agenda towards the 2030 Sustainable Development Goals and beyond.