Climate finance in 2025: Record capital, uneven impact

At the halfway mark of 2025, global climate finance appears to be having a banner year. According to the International Energy Agency (IEA), clean energy investments are expected to reach $2.2 trillion, more than double the $1.1 trillion slated for fossil fuel projects. Electricity-related infrastructure—from renewables to grid modernization—accounts for over $1.5 trillion, reflecting clear momentum behind the energy transition.

Yet headlines can be misleading. Underneath the surge in green capital, fossil fuel financing remains remarkably durable. Major economies continue expanding LNG terminals and approving new coal plants. Spurred by rising electricity demand—especially from AI-powered data centers—even advanced economies are leaning on fossil-based backup power. The transition is gaining capital, but not yet displacing carbon at the speed or scale required to meet global climate goals.

This is the tension shaping the climate finance landscape in 2025: a system flush with investment dollars but stalled by uneven policies, vague definitions, and infrastructure bottlenecks. The result is a sector caught between stated ambition and practical execution.

Climate finance is often framed as a race to fund the future. Transition finance, by contrast, is about funding the bridge. It focuses on decarbonizing carbon-intensive sectors—steel, cement, aviation, shipping—that cannot flip to renewables overnight. But this is where progress has been slow and confusing.

Recent data from South Pole’s 2025 Net Zero Report captures the dilemma. While 44% of financial institutions plan to grow their green holdings, 72% intend to keep fossil investments through at least 2035. Most asset managers claim they prioritize companies with “credible” net-zero plans, yet only 12% of firms are currently aligned with a 1.5°C scenario.

The roadblocks are structural. There’s no global standard defining what counts as a legitimate transition investment. Sectors like steel or aviation may have pathways to decarbonization—via hydrogen, CCUS, or synthetic fuels—but they lack the policy clarity and technical benchmarks that investors need to justify early capital deployment. Even among climate-conscious funds, ambiguity means hesitation.

This limbo is especially damaging for early-stage technologies. Green hydrogen, carbon capture, and next-gen bio-based materials all require upfront risk-taking. Without stronger definitions, blended finance mechanisms, or de-risking tools, these technologies may remain stuck in pilot mode—well-intentioned but underfunded.

Climate finance doesn’t move in a vacuum. Its direction is shaped by geopolitics, regulation, and policy signaling. In 2025, this landscape is increasingly fragmented.

In the United States, partisan divisions have curbed international climate contributions and introduced volatility into domestic policy. More than $18 billion in proposed federal climate financing—including funds for the UN Green Climate Fund and bilateral aid—has been frozen or rolled back by Congress. While clean tech investment continues domestically, the broader political climate has introduced caution.

Europe, by contrast, is pushing forward. The EU’s new Omnibus Package simplifies sustainability disclosure rules under the Corporate Sustainability Reporting Directive (CSRD) and expands the taxonomy to include more transition and enabling activities. These regulatory updates give investors more certainty—and more usable data—on which to base decisions.

This divergence creates a patchwork environment for financial institutions. A global asset manager must now adapt to competing frameworks, inconsistent taxonomies, and varying levels of public support. As a result, climate capital is increasingly concentrated in jurisdictions with strong policy clarity and credible carbon pricing—leaving others behind.

The latest UN climate summit, COP29 in Baku, marked both progress and limits. A new global finance target—$300 billion annually by 2035—triples the previous commitment. But this still falls far short of the estimated $2.7 trillion needed each year by developing countries alone to stay on track with Paris-aligned pathways.

What’s more promising is the “Baku to Belém Roadmap,” a multilateral initiative aiming to scale annual climate finance to $1.3 trillion by 2035. It prioritizes unlocking Article 6.4 of the Paris Agreement, which governs international carbon markets. If implemented well, Article 6.4 could usher in more credible, liquid cross-border carbon trading—a game changer for climate project financing.

Also gaining traction is the Tropical Forest Forever Facility (TFFF), a $125 billion blended-finance proposal aimed at paying tropical countries for forest preservation. While still in development, the TFFF could become the largest nature-based climate finance mechanism to date, with potential to be replicated across the Global South.

These initiatives show promise—but they hinge on follow-through. Historically, the climate finance space has been plagued by ambitious pledges that fail to materialize in time, scale, or form. Without concrete enforcement tools and transparent monitoring, this risk remains.

Southeast Asia sits at the frontline of the climate-finance gap. Rich in renewable potential but constrained by fiscal and technical capacity, the region needs an estimated $190 billion in concessional finance annually from 2026 to 2030 to meet its net-zero targets, according to the Asian Development Bank’s SEADS initiative.

Indonesia’s story illustrates the challenge. From 2018 to 2023, it allocated IDR 702.9 trillion (~US$46.9 billion) to climate efforts—just 16.4% of what’s needed to meet its NDC targets. The good news is that deals like the Indonesia–Singapore floating solar project are drawing international capital and raising the region’s profile.

Meanwhile, Singapore’s FAST-P Fund (Financing Asia’s Sustainable Transition Partnership) is emerging as a key regional player. By pooling public and private capital to de-risk sustainable infrastructure investments, it aims to build a pipeline of bankable projects. This is critical. Institutional investors are increasingly eager to deploy climate capital—but they need investable assets with strong governance and risk guarantees.

Ultimately, Southeast Asia’s success will hinge on its ability to scale credible climate investments that can absorb international capital and deliver measurable emissions reductions. Without that, even generous pledges will stall.

Climate and transition finance is having its moment—but its future depends on sharper definitions, stronger institutions, and faster deployment. The financial sector is showing up, but the plumbing—taxonomies, regulations, risk-sharing tools—isn’t yet fit for purpose.

The second half of 2025 is a pivot point. Will clean energy investments continue scaling? Will international carbon markets under Article 6 finally become usable? Will transition finance shed its ambiguity and find traction in hard-to-abate sectors?

If the answers are yes, 2025 could be remembered as the year climate finance turned the corner from optimism to operational reality. But if policy fragmentation and execution gaps persist, capital will keep circling without landing where it’s most needed. One thing is clear: climate finance is no longer a niche—it’s a system-wide imperative. Those who shape its rules now will define its impact for decades to come.