Climate change has become the most complex economic challenge of our era, yet the world continues to finance it with a set of tools that no longer match the scale or structure of the problem. The science is unambiguous: global emissions must fall by 43 per cent by 2030 if we are to have any chance of keeping warming within 1.5°C. Yet ambition in climate diplomacy is chronically undermined by a financing architecture designed for another age.
Emerging markets and developing economies (EMDEs) must build green, climate-resilient infrastructure at an unprecedented pace. But they are also confronting shrinking fiscal headroom, rising debt-service burdens, and a global financial system that remains hesitant to channel large volumes of private capital into their economies. The result is a widening gap between global climate commitments and the finance required to honour them.
The Failure of Linear Finance
For more than a decade, advanced economies and multilateral development banks (MDBs) have been expected to anchor global climate finance. The record, however, has been consistently disappointing. The much-publicised US$100 billion annual pledge remains only partially met, and even where funding materialises, it flows primarily as debt rather than grants or equity. Adaptation finance—the lifeline for vulnerable economies—has actually declined in recent years.
MDBs, for their part, remain bound by traditional lending models that prioritise sovereign creditworthiness. Expert groups have recommended a tripling of MDB lending by 2030, along with operational reforms to make their support more agile and responsive. Yet the underlying structural limitation persists; expanding sovereign loans in a world of already elevated public debt does not create sustainable fiscal pathways for climate action.
Private capital has long been portrayed as the missing piece in this puzzle, but the data reveal the limits of this hope. Despite extensive efforts at “mobilisation”, private contributions to global climate finance remain a fraction of what is needed. Green bonds make up less than 3 per cent of global bond markets; most issuances originate in wealthy economies. The gap between expectations and actual flows underscores a fundamental misalignment between risk, return, and the structure of climate investments in EMDEs.
A financing model that relies on ever-increasing sovereign debt at one end and uncertain private participation at the other is not only inadequate—it is analytically flawed. A linear model cannot solve a circular problem.
The Case for Circularity
What is needed is a financing architecture in which public and private capital reinforce rather than substitute for each other. Circular finance offers this possibility. It recognises a fundamental truth: sovereigns must lead in early-stage infrastructure investment, but they cannot (and should not) remain locked into these assets for decades. Instead, governments should be able to recover capital once revenues are stabilised, redeploy resources into new projects, and repeat the cycle without breaching fiscal constraints.
India’s experience with Infrastructure Investment Trusts (InvITs) illustrates how such circularity can be operationalised. Developed initially during 2013–14 and refined in subsequent years, InvITs function as pooled investment vehicles that hold revenue-generating infrastructure assets. Once an asset is complete, the sponsoring government or public authority can transfer it into an InvIT. Investors purchase units on the market; the proceeds allow the sovereign to repay debt and reinvest in new projects. Private capital replaces public capital, and the investment cycle begins again.
This approach alters the structure of risk itself. Instead of expecting private investors to shoulder the early, most volatile stages of infrastructure development, InvITs invite them in once the asset is already producing stable revenue. The risk-adjusted returns become more attractive. The asset pool can be diversified. Exit options become clearer through capital market listing. Long-term investors—pension funds, sovereign wealth funds, insurance funds—gain predictable cash flows, while governments gain fiscal breathing space.
In a world where the need for green infrastructure runs into trillions, circularity is not merely an innovative financial tool. It is an analytical necessity.
The Global Architecture Lag
Despite its advantages, circular finance remains constrained by the absence of a global framework. Taxonomies vary widely across jurisdictions, and even basic definitions—such as what constitutes “green” infrastructure—lack standardisation. This creates uncertainty, raises the risk of greenwashing, and undermines investor confidence.
Regulatory fragmentation is another barrier. Many smaller EMDEs lack deep capital markets, making it difficult to list infrastructure investment vehicles domestically. Harmonised regulations across countries would enable such vehicles to be listed in regional financial centres—such as Singapore, Hong Kong, and Johannesburg—allowing global investors to participate in green infrastructure across borders.
Credit-rating methodologies, too, lag. Conventional assessments do not adequately reflect the diversified risk structure of InvITs or the long-term nature of infrastructure cash flows. As a result, ratings often undervalue these instruments, increasing the cost of capital precisely where affordability matters most.
Above all, EMDEs need support to build the institutional capacity required to prepare bankable, life-cycle-based project reports. Without this, even the most sophisticated instruments cannot unlock financing at scale.
A New Financial Imagination
The transition to a green economy is frequently described as a technological, energy, or geopolitical challenge. But beneath all these lies a financing challenge that demands conceptual clarity and institutional imagination.
Suppose we continue to rely on linear, debt-driven models of climate finance. In that case, EMDEs will remain trapped: responsible for the world’s most urgent infrastructure transformation yet constrained by the very tools meant to enable it. Circular finance offers a path out of this trap—not by replacing public investment or private enterprise, but by integrating them into a continuous cycle of creation, monetisation, and reinvestment.
The world cannot green its economies with 20th–century financial structures. It must adopt iterative, blended, and circularly anchored models. The stakes are too high for anything less.
Green development is no longer a distant ambition. It is an analytical imperative—and above all, a responsibility we can no longer defer.
Disclaimer: Statements expressed in this blog reflect the personal opinion of the author and do not represent the position or policy of GBPG or entities we are affiliated with. While we strive to ensure the accuracy of the information presented, we make no guarantees regarding its completeness, reliability, or accuracy.
