Green Finance and Climate Funding Trends in 2025

The global focus on climate finance has intensified in 2025. With rising climate risks, financing for environmental projects is crucial. Green finance and climate finance have expanded rapidly. International commitments and domestic initiatives shape the evolving landscape.

Global Green Finance Growth

Green finance involves capital raised for environmentally positive projects. It grew from socially responsible investing in the 1970s. Climate finance, a key subset, targets mitigation and adaptation under the UNFCCC framework. By 2024, issuance of Green, Social, Sustainability, and Sustainability-linked (GSS+) bonds crossed USD 5.7 trillion. Annual flows exceeded USD 1 trillion for the first time. However, most funds remain in developed countries. Developing nations receive limited cross-border finance due to risks and geopolitical factors.

International Climate Finance Commitments

At COP29 in Azerbaijan, global climate finance targets were revised. The annual goal increased from USD 100 billion (originally set for 2020, revised to 2025) to USD 300 billion by 2030. Despite this, the London School of Economics estimates the world needs USD 6.3-6.7 trillion yearly by 2030. Emerging and developing countries excluding China require USD 3.1-3.5 trillion annually. The gap marks the scale of financing challenges.

Finance Structure Challenges for Developing Countries

In 2022, OECD data showed USD 92 billion in public climate funds for developing nations. Of this, 69% were loans, 28% grants, and only 2% equity. The debt-heavy nature raises costs for energy transition projects like renewables. Domestic demands in these countries compete with climate finance needs. Developed nations’ increased support is critical but complex to secure.

Multilateral and Private Sector Roles

At COP29, the World Bank and other Multilateral Development Banks pledged USD 120 billion annually for low- and middle-income countries by 2030. This includes USD 42 billion for adaptation. Private sector mobilisation is expected to add USD 65 billion. These combined efforts aim to bridge part of the finance gap.

India’s Climate Finance Leadership

India’s net-zero goals require USD 10-20 trillion by 2070. Adaptation costs may reach INR 57 trillion by 2030. In 2022, India mobilised USD 50 billion domestically for clean energy. It issued Sovereign Green Bonds in 2023, raising INR 8,000 crore for projects like energy-efficient locomotives. Market infrastructure is growing with draft climate taxonomy and planned carbon markets by 2026. Regulatory frameworks from SEBI and RBI promote investor confidence.

Challenges in India’s Green Finance Landscape

India faces a shallow bond market and weak financial health of electricity distributors. Fiscal constraints and creditworthiness issues limit climate project funding. Sector-specific policies and phased net-zero strategies are needed. Encouraging foreign climate finance and recycling capital from mature projects can strengthen flows. Addressing these challenges is vital for a sustainable transition.

India’s Global Advocacy for Equitable Finance

India uses platforms like G77+, BRICS, and G20 to push for fair financial flows. It calls for reforms in multilateral development banks and credit rating agencies. Supporting the Global South remains a priority in international climate finance discussions.

Questions for UPSC:

1. Taking example of global green finance, discuss the challenges developing countries face in accessing climate finance and suggest solutions.
2. Examine the role of Multilateral Development Banks in climate finance. How can their functioning be improved to support sustainable development?
3. Analyse India’s approach to climate finance and green bonds. Discuss in the light of the country’s broader net-zero and adaptation goals.
4. Critically discuss the impact of fiscal constraints and financial market limitations on the implementation of climate projects in emerging economies.

Answer Hints:

1. Taking example of global green finance, discuss the challenges developing countries face in accessing climate finance and suggest solutions.

1. Climate finance flows are heavily concentrated in developed countries; developing nations receive limited cross-border investments.
2. High proportion of loans (69%) vs. grants (28%) and minimal equity (2%) increases debt burden for developing countries.
3. Macroeconomic risks, geopolitical priorities, and creditworthiness issues deter private and public investors.
4. Competing domestic priorities limit governments’ ability to allocate sufficient resources for climate projects.
5. Solutions include increasing grant and equity-based finance, debt restructuring, and enhancing creditworthiness of projects.
6. Strengthening international commitments and reforming multilateral development banks to provide more concessional finance.

2. Examine the role of Multilateral Development Banks in climate finance. How can their functioning be improved to support sustainable development?

1. MDBs pledge substantial climate finance (e.g., USD 120 billion annually by 2030 for low- and middle-income countries).
2. They provide concessional loans, technical assistance, and help mobilize private sector investment.
3. MDBs play a key role in adaptation finance, critical for vulnerable countries.
4. Improvement areas – increase grant and equity financing, reduce reliance on debt-heavy instruments.
5. Reform governance to better represent developing countries’ interests and priorities.
6. Enhance coordination with private sector and national governments for tailored financial solutions and capacity building.

3. Analyse India’s approach to climate finance and green bonds. Discuss in the light of the country’s broader net-zero and adaptation goals.

1. India needs USD 10-20 trillion by 2070 for net-zero transition, with adaptation costs estimated at INR 57 trillion by 2030.
2. Mobilised USD 50 billion domestically in 2022 for clean energy and efficiency projects.
3. Issued Sovereign Green Bonds in 2023, raising INR 8,000 crore for sustainable infrastructure like energy-efficient locomotives.
4. Developing market infrastructure – draft climate taxonomy, planned carbon market by 2026, and regulatory frameworks from SEBI and RBI.
5. Focus on building investor confidence and attracting private sector participation to scale green finance.
6. India’s international advocacy emphasizes equitable climate finance flows and reforms in MDBs and credit rating agencies.

4. Critically discuss the impact of fiscal constraints and financial market limitations on the implementation of climate projects in emerging economies.

1. Shallow bond markets limit availability of long-term capital for climate projects.
2. Weak financial health of key sectors (e.g., electricity distribution companies) impedes project viability and financing.
3. Limited fiscal space restricts government spending on climate priorities amid competing demands.
4. Creditworthiness issues of subnational entities reduce access to affordable finance.
5. These constraints delay project implementation, reduce scale and increase costs of energy transition.
6. Addressing these requires phased strategies, sector-specific policies, improved financial instruments, and capital recycling mechanisms.