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Most of the total climate funding will likely need to come from the private sector—but so far, there isn’t enough.1 Deloitte estimates that there may be as much as a US$2 trillion2 private funding gap for next-generation climate technologies to achieve the goal of limiting global temperatures to 1.5°C (of preindustrial levels) by 2030.3
Contrary to popular belief, most “climate hardtech”4 innovations may have surpassed the point of technical difficulty. True, direct air capture and aviation decarbonization represent real challenges.5 And batteries with the gravimetric energy density anywhere near today’s jet aviation fuel don’t exist.6
But what can deter investment is the lack of a viable business model, given that carbon’s polluting effects may not be fully priced in. Consumers are often unwilling to pay the “green premium”—that is, the additional cost for less-polluting energy sources.7 As Bill Gates points out, “In many cases, clean alternatives appear more expensive because fossil fuels are artificially cheap.”8 For example, green hydrogen, which is derived from water, costs around three times its much more pollutant “gray” counterpart, which is produced from fossil fuels.9
Then, there is the difficulty of working out when and how to make a systemic shift—the “chicken and egg” dilemma. Who moves first: the consumer or the producer? Some organizations aim to solve for this exact dilemma by “using their purchasing power to create early markets for innovative clean technologies.”10
This prediction addresses the current state of climate funding, and the measures financial services institutions (FSIs) could take to help bridge the private funding gap for climate technologies in stages before deployment.11
FSIs have a broad and pivotal role to play. They should continue to provide support by helping create a market for climate-related instruments and facilitating project finance and term loans for projects that deploy climate tech. While FSIs are adept at this, there may still be significant potential to develop new, innovative financing instruments such as green deposits and emission reduction–linked bonds to fund these types of transformations, possibly affording them new business opportunities.
That said, while the bulk of overall climate funding is likely needed for scale-up and deployment, much remains to be done to fund climate technologies that are not yet commercially deployed. FSIs can support early-tech start-ups directly through equity investments or by insuring them.
Some investors have shown their willingness to back climate early tech. For instance, Breakthrough Energy Ventures has invested almost US$2.5 billion across three funds.12 Just Climate recently raised US$1.5 billion from institutional investors, exceeding its target by US$500 million.13 BNP Paribas’s Solar Impulse Venture Fund aims to invest €150 million in American and European cleantech start-ups.14
Blended finance, where philanthropy and/or development finance are used to mobilize private capital, can help hard-to-fund projects, especially in developing countries. Standard Chartered Bank, Société Générale, DWS, and Mitsubishi UFJ Financial Group are some of the active private investors in blended finance.15
Moreover, large global FSIs are increasingly joining coalitions such as the Glasgow Financial Alliance for Net Zero (GFANZ), committing to align lending and investment portfolios and ramp up green capital. The GFANZ is trying to accelerate country-specific climate finance flows and build a bankable pipeline of projects in countries such as Colombia and India.16
To stimulate the market for green bonds, government actions like the tax credits embedded in the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) are intended to address the "green premium" issue referenced earlier. And early returns suggest it might be working: around US$2.3 trillion have been issued in green bonds so far in 2023, with US$487 billion raised in 2022.17 Meanwhile, green loans, typically smaller in size than green bonds and arranged privately, constituted just 2% (~US$10.4 billion) of the market in 2022. So far this year, 70% of loan instruments originate from Asia-Pacific and Europe combined.18
Industry estimates suggest that about 75% of climate funding will flow from the private sector.19 But while the private sector may account for the bulk of funding, governments can—and are—playing a role in the net-zero transition through policy interventions and financing.
One potential role for governments to consider is to try redressing the market failure that carbon is underpriced, which could explain green premiums, at least in part.20 Some governments have considered policies to promote low-carbon products by levying carbon taxes, such as the European Union’s (EU’s) proposed Carbon Border Adjustment Mechanism.21
Other policy responses may include tax incentives or government funding, which could de facto derisk private investments. The United States’ IRA, which allocates over US$400 billion in spending and tax incentives to accelerate the transition to clean energy, is expected to help drive investment in carbon capture and green hydrogen.22 Separately, the EU has unveiled its own “Green Deal Industrial Plan."23
In addition to government policy action that could help derisk and incentivize private investment, the official sector—central banks, international bodies, and supervisors—will likely continue playing a role in this space. For example, the Bank of England and European Central Bank now have climate goals. The central banks of Japan, China, Singapore, Hong Kong, the United Kingdom, and the EU have implemented measures to encourage green financing, via financing facilities, grants, or changes in monetary policy.24
Despite these examples of progress, FSIs’ efforts to mobilize private capital to climate tech could be improved. The total issuance of green bonds to date is less than half of the annual issuance from 2025–2030 needed to address the stark risks of climate change.25
With blended finance initiatives from US and EU governments coming online, developing a robust, climate-centred financial ecosystem can be paramount in addressing the funding gap. Here are some steps FSIs can consider to help close that gap and meet their own climate commitments:
According to the Intergovernmental Panel on Climate Change’s 2023 Sixth Assessment Report on greenhouse gases, emissions must peak before 2025 and decline 43% from 2019 levels by 2030 to limit global warming to 1.5°C.27 Given the risk of triggering potentially catastrophic tipping points, bridging the funding gap, and doing so promptly, is important to the broader effort of reducing carbon emissions. FSIs are in a privileged and powerful position: They may hold the key to unlocking the power of groundbreaking climate technology. And they should use it.
Our prediction of the private funding gap for early-stage climate mitigation technologies is based on the difference between publicly available forecasts of current funding growth rates and our analysis of the total funding requirement for the forecast period of 2021–2030. The funding requirement for climate early tech is a function of the total climate funding, calculated as a percentage of GDP, an estimation of technologies that are in concept or at the prototyping stage using Greenspace Navigator, and the fraction of funds likely to flow from the private sector. Lastly, we estimate the potential availability of private funds (i.e., venture capital funding and green bonds) raised by financial corporates, during the forecast period to arrive at the funding gap.28
Sophie Boehm, Katie Lebling, Kelly Levin, Hanna Fekete, Joel Jaeger, Richard Waite, Anna Nilsson, et al., State of climate action 2021: Systems transformations required to limit global warming to 1.5°C, World Resources Institute, January 2021.
View in ArticleDeloitte Center for Financial Services estimate. Please refer to the methodology section.
View in ArticleIbid.
View in ArticleClimate hardtech is defined as breakthrough technologies and solutions, involving substantial scientific or engineering challenges, that could help mitigate climate change.
View in ArticleSara Budinis, Direct air capture, International Energy Agency, September 2022; Stanley Porter, Tarek Helmi, Geoff Tuff, Peter Sanders, and Susan Cattozzo, Decarbonizing aviation: Clear for take-off, Deloitte, accessed July 2023.
View in ArticleDavid Hyde, Beth Barker, Paul Hodgson, Rob Miller, and Miruna Rapeanu, Target true zero: Unlocking sustainable battery and hydrogen-powered flight, World Economic Forum, July 2022.
View in ArticleKatherine White, David J. Hardisty, and Rishad Habib, “The elusive green consumer,” Harvard Business Review, July–August 2019.
View in ArticleBill Gates, “Introducing the green premiums,” Gates Notes, September 29, 2020.
View in ArticleEmanuele Bianco and Herib Blanco, Making the breakthrough: Green hydrogen policies and technology costs, International Renewable Energy Agency, 2021.
View in ArticleFirst Movers Coalition, “About us,” accessed July 2023.
View in ArticleDeloitte Center for Financial Services estimate. Please refer to the methodology section.
View in ArticleBreakthrough Energy, “Breakthrough Energy Ventures: Investing in innovation,” accessed July 2023.
View in ArticleJust Climate, “Just Climate announces close of inaugural $1.5 billion industrial climate solutions fund,” June 8, 2023.
View in ArticleBNP Paribas, “Cleantech: BNP Paribas and Solar Impulse are launching an investment fund dedicated to startups,” May 27, 2021.
View in ArticleConvergence, “Blended finance,” accessed July 2023.
View in ArticleGlasgow Financial Alliance for Net Zero, “Amount of finance committed to achieving 1.5°C now at scale needed to deliver the transition,” November 3, 2021.
View in ArticleLiam Jones, Q1 2023 market update: Sustainable debt shows recovery, Climate Bonds Initiative, May 22, 2023; Climate Bonds Initiative, “Interactive data platform,” 2022.
View in ArticleJones, Q1 2023 market update.
View in ArticleBoehm, Lebling, Levin, Fekete, Jaeger, Waite, Nilsson, et al., State of climate action 2021.
View in ArticleMichael Raynor and Derek Pankratz, A new business paradigm to address climate change, Deloitte Insights, October 16, 2020.
View in ArticleCouncil of the European Union, “Council agrees on the carbon border adjustment mechanism (CBAM),” press release, March 15, 2022.
View in ArticleMichelle Chan, “IRA spurs US$232bn of green deals,” IFR, March 4, 2023.
View in ArticleEuropean Commission, “The Green Deal Industrial Plan: Putting Europe’s net-zero industry in the lead,” accessed July 2023.
View in ArticleDaniel O. Beltran, Hannah Bensen, Amy Kvien, Erin McDevitt, Monica V. Sanz, and Pinar Uysal, “What are large global banks doing about climate change?,” International Finance Discussion Paper 1368 (2023).
View in ArticleLiam Jones, 5 steps to $5trillion by 2025, Climate Bonds Initiative, October 17, 2022.
View in ArticleRicardo Martinez, Michele Crish, Karl Ehrsam, and David Sherwood, Centering around sustainability in financial services firms, Deloitte Insights, June 4, 2021.
View in ArticleIntergovernmental Panel on Climate Change, AR6 synthesis report: Climate change 2023, 2023.
View in ArticleDeloitte Center for Financial Services estimates and analysis based on our review of Deloitte Greenspace Navigator, combined with inputs from publicly available sources, including the IMF Datamapper, the Climate Policy Initiative, Climate Bonds Initiative Global State of the Market report, and the Goldman Sachs Research Carbonomics report.
View in ArticleThe authors wish to thank Taariq Phillips of Deloitte & Touche LLP, David Schatsky of Deloitte LLP, and Patricia Danielecki and Paul Kaiser of the Deloitte Center for Financial Services for their contributions to the development of this article.
Cover image by: Natalie Pfaff
