Where’s the money? Transition finance in a post ODA world

With the cutting of UK aid spending to a notional 0.3% of GNI, the Trump administration’s obliteration of USAID and a general European retreat from development funding, is the era of Global North financial support for less developed economies over? With annual spending of top foundations totaling about $11 billion, a fraction of the $223 billion in ODA globally, or even the $65 billion provided by the U.S. alone. Given this financing gap we need to seriously re-think how limited public funds should be used in this post-ODA world?

One thing is clear: the need for more cash hasn’t gone away. A green and fair transition demands urgent investment at scale, and we need to move from billions in investment to trillions to have a chance of limiting runaway climate change. Governments, businesses, and financial institutions are very good at pledging funds towards climate action. They’re a lot less accomplished at actually stumping up the cash; every climate COP concludes with a resounding chorus of “ok, great, but where’s the money?”

Don’t worry, financial corporations will surely save the day

To bridge this financial chasm, many looked to the private sector, and argued that with some clever policy shenanigans that use public money to encourage private investment (PPFIs, blended finance, concessional debt, impact bonds, first-loss capital etc etc), governments could unlock a veritable fire hydrant of private cash with which to invest in renewables, support struggling economies, develop domestic industries and so on.

Oddly, this hasn’t so far seemed to work out either, and the hedge funds, investment banks and pension companies of Wall Street have continued to evince a marked preference for financing oil companies, arms manufacturers and nebulous tech start-ups over Nicaraguan women’s farming cooperatives.

It’s also a distinct possibility that all this hot air around private capital has merely distracted us from the very real responsibility of national governments to address these issues. Alas, the pragmatist in me also recognises that if we rely on governments alone to fix these crises, then we might be waiting a while.

Misaligned Incentives and Risk Aversion

As we have seen through our work on Local Green Enterprises Private and Public finance have different qualities and capabilities, harnessing and shaping initiatives to recognise this while achieving just and green outcomes for societies is a key task for policy makers at this time.

Public-private finance initiatives were designed to unlock private capital by de-risking investments in green infrastructure and innovation. Yet, the flow of funds remains stubbornly inadequate, with money failing to reach the communities that need them most. There are three key reasons why:

1. Risk and Return Misalignment – Private investors seek predictable returns, while many green projects—especially in emerging markets—carry higher perceived risks. Principal researcher, at IIED, Ritu Bharadwaj, says “Mobilising private capital at scale remains a significant challenge due to the high-risk perception of Least Developed Countries (LDCs) and SIDS. Without addressing these structural issues, the private sector will remain hesitant, and these nations will continue to struggle to access the resources needed for resilience, development, and growth.”
2. Public funds meant to de-risk these investments often fail to provide enough certainty or are structured in ways that still leave investors hesitant.
3. Short-Term Thinking – Many investors and financial institutions (and increasingly governments) operate within short-term profit cycles that are ill-suited to the long-term nature of climate investments. Public policy frameworks are also inconsistent, creating regulatory uncertainty that further deters private capital.
4. Unequal Access to Finance – The current model disproportionately benefits large-scale projects and established players, often in high-income countries. Meanwhile, MSMEs, local communities, and the majority world struggle to access financing at a reasonable rate. The interest cost on external borrowing is on average three times more for developing countries than for developed countries, according to the Brookings Institute, exacerbating global inequalities in climate resilience and mitigation efforts.

The Solution: Redesigning Incentives for Green and Fair Outcomes

To make public-private finance truly work for the climate, we need to rethink how these initiatives are structured. Here’s what can be done:

1. Shift risk properly to unlock capital: Governments and multilateral institutions must take on more of the initial risk by providing first-loss capital, long-term guarantees, and blended finance mechanisms that genuinely attract private investors. The aim should be to shift risk in a way that encourages participation and creating a regulatory environment to ensuring funds go towards impactful socially just projects, not just the safest bets.
2. Redefine returns to include social and environmental impact: Profit and financial returns alone cannot be the metric for success. We need to optimise for social and sustainability outcomes- that is the quid pro quo of de-risking. How do we create frameworks and incentives that account for environmental and social returns, rewarding investors for achieving sustainability outcomes. Green bonds, sustainability-linked finance, and regulatory incentives can help align private investment with real-world climate benefits. But the market can’t have everything its own way. Governments need to be rewarded by making this upfront investment.
3. Strengthen policy and regulatory certainty: Governments must provide clear, stable, and long-term policy frameworks and longer term transition strategies that reduce were possible uncertainty for investors. Subsidies, tax incentives, and mandatory climate disclosures can help ensure that green investments remain attractive and that capital isn’t scared away by policy fluctuations.
4. Democratise climate finance: Public-private initiatives should prioritise accessibility, ensuring that local businesses, cooperatives, and communities—especially in the majority world—have access to finance. Decentralised finance models, microfinance for green entrepreneurs, and targeted public investment canhelp. Underpinning this we need public engagement campaigns making the case to voters about why and how we do this. By giving communities access to resources we can unleash innovation and impact as we see in our Roots of Resilience campaign with She Changes Climate.
5. Make accountability and transparency non-negotiable: PPFIs must be held accountable for their real-world impact. That means mandatory reporting on where funds flow, what outcomes they achieve, and who benefits. Havinga system of penalties appropriate to enforce poor performance and to deter asset stripping is critical to this effort. Governments and financial institutions should commit to full transparency, ensuring finance isn’t just promised but actually delivers for people and the planet.
   

The Bottom Line: Public-Private Finance Must Serve People and Planet

Right now, public-private climate finance is simply not delivering anywhere near the amount of money needed to save us from climate disaster. What’s needed is clear: an up-front division of risk and rewards, clarity about incentives, stronger policies and regulation, and most importantly an operationalised commitment to fairness. With this framework we may be able to turn financial pledges into real-world climate action.

Currently the world cannot afford for these initiatives to fail—we need a finance system that truly works for people and planet, not just for profit. Public ownership, strategic borrowing, risk-sharing mechanisms, democratised finance, better regulation and transparency are all critical to closing the climate finance gap and accelerating the transition to a green and fair future.

- Jean McLean