Transition Finance: The Need for Realism in Emerging Markets
Transition finance has become a crucial topic as the world ramps up efforts to combat climate change. However, experts warn that relying solely on private capital will not be sufficient to bridge the vast funding gap facing emerging economies. At Temasek’s Ecosperity Week 2026, Shriti Vadera, chair of Prudential plc and the World Bank Private Sector Investment Lab, emphasized that a new, more realistic approach is needed if climate goals are to be met.
Private Capital Alone Isn’t Enough
Vadera cautioned that governments and policymakers are making a “convenient untruth” by assuming that private capital will spontaneously fill the climate financing gap. In many developing economies, climate projects remain unbankable without robust policy interventions and public sector involvement. She noted that the majority of clean energy investments are still concentrated in major economies such as China, Europe, and the US, while emerging markets lag far behind.
According to Vadera, emerging markets excluding China now contribute 30 to 40 percent of global emissions, yet receive only a fraction of the required transition finance. She cited figures indicating these economies need roughly US$1.3 trillion annually in transition financing, but currently attract only about US$200 billion each year.
The Equity Gap and Investment Challenges
One of the most pressing issues is the lack of equity financing—risk-bearing capital that forms the foundation of any successful project. Vadera described this equity gap as the “biggest problem” for transition projects. While debt financing is more readily available, it does not address the need for investors willing to take on higher risks in uncertain markets.
Institutional investors remain wary due to factors such as currency volatility, illiquid markets, and inconsistent regulatory environments. To unlock substantial private capital, investments must become more liquid, tradable, and rated. Vadera advocated for standardized structures that would allow climate-related debt to be more efficiently packaged and distributed through global markets.
Innovative Approaches to Transition Finance
The World Bank’s Private Sector Investment Lab is exploring new models, such as originate-to-distribute frameworks. These aim to pool loans and transform them into investable assets, while standardizing documentation and securitization practices across multilateral and domestic institutions. The goal is to create a recognizable asset class for transition finance, making it more accessible for institutional investors.
However, Vadera stressed that financial innovation alone cannot solve the challenge. Hard-to-abate sectors like steel, cement, and heavy industry may never be commercially viable without significant public support or policies such as carbon pricing. “No amount of structuring will make these projects bankable unless there are policy frameworks in place,” she remarked.
The Role of Policy and Domestic Capital Markets
Other experts echoed the importance of policy reform and robust domestic financial systems. Adair Turner, chair of the Energy Transitions Commission, pointed out that while global clean energy investments have doubled in recent years, many sectors remain costly to decarbonize. Technologies such as green hydrogen, carbon capture, and sustainable steelmaking face high upfront and operating costs, deterring private investment in the absence of supportive regulation.
Turner highlighted that much of the transition finance needed will have to come from domestic savings and local capital markets, not just foreign investors. Addressing foreign exchange risks is also crucial, as many renewable projects in emerging markets rely on foreign-denominated financing but generate revenue in local currencies.
China’s Example and the Importance of Technology
Ma Jun, chairman of the Green Finance Committee of China Society for Finance and Banking, shared insights into China’s success in building the world’s largest green banking system, with approximately US$7 trillion in outstanding green loans and a robust green bond market. This deep domestic financing base has enabled rapid deployment of clean technologies, from solar and wind to electric vehicles and batteries.
Ma argued that technology adoption is now as important as cost reductions in finance. While transition finance can optimize costs by a few percentage points, technological advancements can slash costs by up to 50 percent. He also stressed the need for interoperable green taxonomies and stronger local green financial systems across emerging economies to ensure capital flows to credible projects.
Unlocking the Future of Transition Finance
The consensus among experts is clear: achieving the scale of transition finance necessary for the global energy transition requires a blend of strong policy support, innovative financial structures, and robust domestic capital markets. Relying on private capital alone is unrealistic, particularly for emerging economies facing unique risks and challenges. Policymakers must focus on reforming financial systems, supporting technology deployment, and mobilizing domestic resources to accelerate the transition to a low-carbon future.
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