Climate Finance Gap Hits US$1.5tn Despite Record Flows
A US$1.5tn gap in climate finance persists despite record-breaking investment in clean technology. This was a key message from leaders at London Stock Exchange Group’s (LSEG) session during London Climate Action Week 2025.
Ravi Menon, Singapore's Ambassador for Climate Action, suggested carbon markets and blended finance could help bridge this shortfall. He stated this is necessary to align with the Paris Agreement's 1.5-degree pathway.
This gap exists even as cleantech investment hit a record US$2.2tn in 2025, double the amount for fossil fuels, according to the International Energy Agency (IEA).
Tim Gould, Chief Energy Economist at the IEA, noted that energy security concerns have surprisingly accelerated clean energy investment rather than fossil fuels.
Infrastructure and emerging market challenges
However, securing funds remains a constraint in specific sectors. Jaakko Kooroshy, Head of Sustainable Investment Research at LSEG, highlighted major gaps in grid investment and energy efficiency.
Mobilising capital for climate projects in developing nations is also a major challenge. Leslie Maasdorp, CEO of British International Investment (BII), stressed the need for local ownership, noting that international development finance institutions (DFIs) can only play a "complementary role".
He cited BII’s creation and successful exit of the Indian renewable firm AYANA. The project mobilised over US$1bn and created 4.6GW of power.
Indonesia also faces major financing constraints. Dr Adi Budiarso of Indonesia’s Ministry of Finance explained the country can only cover 70% of the US$270 billion needed to meet its 2030 climate targets.
Industrial decarbonisation's 'missing middle'
Financing industrial decarbonisation presents unique challenges due to the sheer scale of capital required.
Shaun Kingsbury, Co-Chief Investment Officer at Just Climate, identified a “missing middle” in climate finance. He explained that many projects are too large for venture capital, too asset-heavy for growth capital and too early for infrastructure funding.
As an example, Kingsbury cited Just Climate's investment in a new €6.5 billion green steel plant in Sweden. The plant uses hydrogen to cut emissions by 95%.
The steel sector is a priority, producing up to 8% of global emissions. Kingsbury stressed, “You can’t decarbonise steel or concrete with an app. You have to build steel plants.”
Developing new UK finance mechanisms
In the UK, financial institutions are creating new financing mechanisms for domestic climate projects.
Chris Sood-Nicholls of Lloyds Banking Group described a collaboration on social housing retrofits. The programme started with £500 million from Lloyds and has since attracted £1.6 billion from other providers.
Sood-Nicholls explained that this creates lower-cost capital that will allow social housing providers to accelerate these essential programmes.
Corporate strategy and skills
Corporate boards are experiencing rising pressure to integrate climate considerations into their core business strategy.
Julie Baddeley, Chair of Chapter Zero, noted that boards have moved from simple awareness to actively implementing net-zero and resilience strategies.
However, she warned of a persistent skills gap in corporate climate expertise. Baddeley noted a lack of experts in middle management to draw upon for senior and boardroom roles, which could hamper progress.