Fighting climate change: World faces financing gap of USD 27 trillion by the end of the decade

Study by KfW Research BCG reveals:

• Global investment in climate action must grow by 30 per cent annually
• Development and promotional banks can make crucial contributions to closing the gap
• By creating suitable conditions, policymakers around the world can unlock the full funding potential

If global climate investment continues to move at the current pace, by the end of this decade there will be a shortfall of around USD 27 trillion (EUR 24.6 trillion) to fight climate change. These are the findings of the strategic consulting firm Boston Consulting Group (BCG) and KfW Research, KfW Group’s centre of economic expertise. The paper outlines along multiple dimensions – from the business model to the necessary framework conditions – how development and promotional banks around the world can make a significant contribution to closing this gap. They can do this by reducing barriers to private climate finance. The analysis comprises key recommendations for action, for example on modifying the product portfolio, strengthening operational processes and harnessing synergies with other actors.

In order to achieve the goal of limiting the global temperature rise to 1.5°C compared with the pre-industrial era, both public and private capital will be required to meet the huge overall investment needs. Multilateral coordination of financial flows is a key criterion for success. Besides fulfilling a wide range of mandates, promotional and development banks around the world can also contribute various capabilities to climate finance and thereby co-design cooperation and strategic progress in the most urgent financing projects of our time.

“Global investment in climate action must increase by at least 30 per cent each year – that is around three times faster than today”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“Development and promotional banks can contribute to lowering considerable barriers that stand in the way of private climate finance: by reducing complex risk profiles, by supporting high initial investments and by providing long-term capital and closing knowledge gaps.”

“Development finance institutions (DFIs) such as KfW play an extremely important role in financing climate action measures”,

said Dr Alexander Nossmann, co-author of the study and partner at BCG.

“DFIs will be instrumental in building a bridge between public and private capital providers by making investment in climate transformation more attractive through their product offerings. That will have a decisive impact on tackling the climate crisis.”

The joint study illustrates that policymakers the world over also play a key role in enabling both development and promotional banks as well as private financiers to unlock their full climate finance potential. The aim is to successively create the right frameworks in the real economy and financial industry for climate-friendly investments and their financing. In the study, which was published on the occasion of the 28th UN Climate Summit (COP28), KfW and BCG underscore the urgency of rising up to the financial challenges. The experts outlined the following specific steps:

• By focusing on regional and global cooperation, development and promotional banks can bundle climate finance activities and leverage synergies, for example through joint digital platforms
• They can adapt their product portfolio in order to better address the complex risk profiles of the transformation and incorporate large amounts of private capital for the long term, for example through investment syndicates, the assumption of risks or the issuance of green bonds
• Development and promotional banks can align their operational processes more closely with the targeted mobilisation of climate finance, for example through modern ESG risk management, efficient and customer-oriented structures and stronger digitalisation
• Appropriate frameworks in the real economy and financial industry can support the financing of climate action measures, for example through systematic carbon pricing, incentives for the establishment of green technologies of the future, a differentiated regulatory treatment of climate investments and further integration of capital markets
• Not least, optimal capital allocation needs an adequate information base, which primarily means greater, data-based transparency of the climate impacts of the investments carried out

Ideas from the joint study will also be brought into the international debate on the ground at COP28 in Dubai. Jens Burchardt, partner at BCG, Admassu Tadesse, CEO of the Eastern and Southern African Trade and Development Bank (TDB), and Stefan Wintels, CEO of KfW Group, will debate on this at the Pavilion of the International Development Finance Club (IDFC) on Friday, 8 December 2023, at 11 AM local time.

You can find the joint study by BCG and KfW Research here: www.kfw.de/studien

About BCG

Boston Consulting Group (BCG) supports partners with leaders in business and society to tackle challenges and capture opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, Boston Consulting Group works closely with clients to embrace a comprehensive transformational approach. Its consulting services enable complex changes, open up growth opportunities, generate competitive advantages, improve customer and employee satisfaction and thereby bring about lasting improvements to business outcomes.

Achieving lasting success requires a combination of digital and human skills. BCG’s diverse, global teams bring deep industry and broad functional expertise in order to spark change. BCG delivers solutions through leading-edge management consulting, technology, digital ventures, analytics and new business models that question businesses’ status quo. BCG works in a collaborative model across the firm and throughout all levels of the client organisation, creating outcomes that help our clients thrive. With 30,000 employees and offices in more than 100 cities in over 50 countries around the world, BCG generated USD 11.7 billion in turnover in 2022.
For more information go to www.bcg.de

About KfW and KfW Research

KfW Research is KfW’s centre of economic expertise. KfW Research makes an important contribution to the economic-policy debate by offering up-to-date analyses, indicators and surveys of the economy and businesses in Germany and around the world. The analyses and positions address key fields of action that are of relevance for creating a liveable future: Sustainability and sustainable finance, innovation, entrepreneurship and digitalisation, investments, finance and growth as well as transforming the global environment.

KfW is one of the world’s leading promotional banks. It has been committed to improving economic, environmental and social living conditions around the world on behalf of the Federal German Government since 1948. Its financing and promotional activities are aligned with the 2030 Agenda of the United Nations and contribute to achieving the 17 Sustainable Development Goals (SDGs) around the world. KfW funds its promotional business very predominantly via international capital markets.

KfW has 80 offices spread out across the globe. As a bank committed to responsibility, KfW promotes people, countries and institutions that think ahead.
For more information go to www.kfw.de