The climate finance reservoir surged to USD $1.9 trillion in 2023, yet just 3.7% supports climate adaptation and resilience (CAR) activities. While mitigation funding deepens, deadly floods, droughts, and cyclones devastate vulnerable regions. Thousands have died, millions have been displaced, and billions of dollars have been lost in economic damage – yet CAR finance remains neglected. Clean energy finance is essential, but forms only one part of a larger puzzle.
At CGAP, we believe in the power of development finance institutions (DFIs) to restore equilibrium. As we argued in this June 2025 CGAP report, it is specifically ‘indirect’ investments by DFIs in financial systems – from capital market instruments and banks to fintechs, insurers, and microfinance providers – that matter most to increasing the volume and quality of CAR financing.
As we’ll explore later in this blog series, DFIs are not a single magic solution, with multiple areas where they could still improve. For example, their track record on CAR finance through financial sector investing is mixed, reflecting varied levels of will, skill, and opportunity. Many also still lack any material CAR finance investment footprint. Despite these factors, there are four structural reasons why DFIs are uniquely positioned to lead in scaling financial system-based CAR solutions.
Agenda-setting influence
DFIs are major investors. Their position at the head of many investment supply chains gives them strong influence over co-investors, investees, ecosystem actors, and others downstream. In the first database of its kind, funded by AFD, researchers at Peking University list 544 sub-national, national, regional, and international DFIs accounting for about USD $23 trillion in assets under management (AuM). This represents approximately 10% of total world investment.
DFIs' position at the head of many investment supply chains gives them strong influence over co-investors, investees, ecosystem actors, and others downstream.
Beyond their economic heft, DFIs also set bold internal targets (e.g., IFC aims for 45% of all its commitments each year to qualify as climate finance), and collective targets (e.g., the 2X Challenge). These targets then cascade into DFI asset allocation and origination strategies, as well as onto their investees (e.g., as part of its $75m loan to HBL – Pakistan’s leading bank – British International Investment (BII) requires that 50% of the proceeds are directed to smallholder farmers vulnerable to climate change impacts).
Impact intentionality
As publicly funded or backed financial platforms, DFIs are mandated to proactively address public policy objectives. As such, they have the potential to fix, incubate, and shape markets; deliver equitable and sustainable private sector development; and mobilise third-party commercial capital. Their long-term outlook and low cost of capital allow them the flexibility to bear risk and innovate in pursuit of these impact objectives.
Several DFIs now embed impact into internal investment operations using ex-ante and ex-post investment impact score tools. These new tools assess the likely future and actual materialised impact of each transaction (e.g., DEG’s Development Effectiveness Rating (DERa); IFC’s Anticipated Measurement & Monitoring (AIMM)). Both include climate components.
DFIs also convene and collaborate through new market structures to achieve impact goals. In 2020, BII, AFD, the UK Foreign, Commonwealth and Development Office (FCDO), and the Global Centre on Adaptation (GCA) founded the Adaptation and Resilience Investors Collaborative (ARIC). Run by the UNEP Financial Initiative (UNEP FI), it now contains 18 DFI and other members that are collectively engaged in investing and strengthening the CAR finance market worldwide.
Specialist climate finance skills
Unlike their commercial counterparts, many DFIs today have dedicated, high-quality impact teams to support and guide the day-to-day core business of investment origination, due diligence, investment committee preparation, client management, deal closing, and portfolio management.
While most DFIs have a central ‘climate or nature finance’ team and/or an ‘ESG’ team (e.g., BNDES – the Brazilian Development Bank, NABARD - the Indian National Bank for Agriculture & Rural Development, and FMO – the Dutch DFI), the more advanced approaches involve several full-time climate professionals that are embedded within mainstream investment operations with a sector-specific focus, including within financial sector investment departments (e.g., IFC and its Financial Institutions Group; and BII in its Financial Services Group).
Material financial sector investment footprints
Most DFIs have a department of investment officers (IOs) dedicated to investing in financial firms or funds via debt, equity, or risk-sharing instruments. A recent study by EDFI (the Association of 15 DFIs in Europe) made the financial sector the single largest sector recipient of EDFI capital, or about 33% of some USD $60 billion total AuM. Given that commercial financial institutions comprised 53% of all private CAR finance per annum between 2019 and 2022, this DFI experience is a critical advantage to leverage. Traditional project finance alone will not deliver the specialist capital that is sometimes needed to finance the variety within the often context-specific CAR asset class. Financial intermediaries (banks, NBFIs), fund platforms, and venture capital each have an important role to play.
If global climate finance is a reservoir, it is one that has not distributed investment flows effectively downstream.
The takeaway from all this is that if global climate finance is a reservoir, it is one that has not distributed investment flows effectively downstream. Mitigation channels are deeper and increasingly well-navigated, while adaptation pipework remains narrow, fragmented, and leaky. We believe DFIs are uniquely placed to show leadership. Our first call to action is to the DFI community: harness your influence; leverage your capabilities, and make strategic investments in strengthening the financial systems that can redirect these flows.
The responsibility doesn’t rest with DFIs alone, however. Global Climate Funds (e.g., Green Climate Fund) and specialist fund managers (e.g., BlueOrchard) must also step up. Over recent months, CGAP has engaged climate finance teams at eight leading DFIs – the Asian Development Bank, BII, BNDES, FMO, IFC, JICA, NABARD, and Proparco – to understand how they approach CAR finance. In the coming months, CGAP invites you to ‘look under the hood.’ Join us in exploring the barriers and opportunities ahead through a series of upcoming blogs, events, and new partnerships.
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