Growth Of Climate Financing: Do Venture Capital And Private Equity Have A Role To Play?

Climate finance has become a critical driver for global competitiveness and resilience, particularly ascapitalflowsincreasinglyfavourlow-carbon, climate-alignedgrowth. Internationalagreements such as the Kyoto Protocol and the Paris Agreement recognise the principle of common but differentiated responsibilities, requiring wealthier nations to take the lead in emissions reductions and to provide financial and technological support to vulnerable countries. Underlying climate risks and accelerating environmental pressures underscore the urgency of deploying large-scale investments that can drive both meaningful emission reductions and long-term adaptation. In this context, venture capital and private equity play vital roles by channelling private capital into innovative climate solutions, bridging early-stage innovation and commercial scale, respectively, while addressing mitigation and resilience globally.

Rise of Venture Capital in

Climate Financing

Venture capital (VC) has become a vital force in nurturing early-stage climate innovations. Startups backed by VC firms are pioneering new technologies across renewable energy, sustainable agriculture, and smart infrastructure, areas that often struggle to attract traditional financing. Beyond financing innovation, early-stage VC acts as a powerful signal to established corporations, commonly referred to as incumbents, indicating which new climate technologies have commercial potential. This validation reduces uncertainty and highlights emerging market opportunities, prompting incumbents to accelerate their own investments and initiatives in climate technology and sustainability to remain competitive. VC-backed startups often pioneer disruptive innovations, attracting incumbents' attention through strategic partnerships, acquisitions, or increased internal research and development efforts. This dynamic drives faster adoption and scaling of climate solutions across industries.

Research by the European Corporate Governing Council shows that the impact of VC signals is stronger when startups have higher valuations, revenue growth, and notable media coverage, and when incumbents already possess complementary assets or prior climate focus. High-profile VC firms also amplify the signalling effect, leading incumbents to intensify their climate strategies.

This dynamic between startups and incumbents creates a ripple effect across industries by encouraging knowledge sharing, competitive investment and collaboration. Startups' innovations push incumbents to respond faster through partnerships, acquisitions, or enhanced research, accelerating the spread of climate solutions and supporting a quicker transition to a low-carbon economy.

Private Equity's Role in

Climate Financing

On the other hand, private equity (PE) is playing an increasingly important role in building climate resilience by directing capital into both mitigation and adaptation efforts. Recent industry analysis highlights that the market for climate adaptation and resilience is already worth trillions of dollars and covers areas like climate intelligence, resilient construction materials, flood defences, and water management. Leading PE firms such as Blackstone and Energy Capital Partners are actively investing in these sectors, using innovative financing approaches and close portfolio engagement to help scale solutions that address climate risks acknowledgement that climate change not only presents significant risks but also opportunities for realising long-term asset and hence investment value.

VC and PE in Africa's Climate Financing Landscape: Progress, Challenges and Strategic Opportunities

VC and PE are driving significant advancements in climate solutions globally by not only bridging the gap between innovation and commercial scale but also actively funding both these phases. On the African continent, this dynamic is equally visible but presents unique challenges and opportunities. According to the 2024 AVCA Report, 17% of private investment recipients in Africa were climate- related ventures, underscoring the growing interest of investors in climate-tech startups and resilience-building businesses, particularly in renewable energy, clean infrastructure, and climate- focused financial services such as carbon markets. One key trend in 2024 was the emphasis on a 'just transition' investors, sector participants, and international institutions alike, with nearly one in five deals going to climate-focused ventures according to African Climate Policy Centre. However, the aggregate investment value in this segment in 2024 was approximately USD 1.5 billion, less than half the USD 3.4 billion recorded in 2023, reflecting market fluctuations and capital deployment challenges

Despite these hurdles, African startups continue to gain global recognition for their innovations. Startups from South Africa and Kenya secured places on the prestigious Time100 Climate list and featured prominently among finalists for The Earthshot Prize, a leading international platform spotlighting breakthrough climate innovation. This recognition underscores Africa's vital contribution to global climate innovation and highlights the crucial role of VC and PE in nurturing and scaling these impactful solutions. By providing both capital and strategic support, VC and PE investors enable these startups to address local climate challenges while driving sustainable development.

There are also inspiring examples of private capital supporting climate resilience in vulnerable communities. For instance, some funds are investing in innovative insurance products such as parametric climate risk insurance by companies like Ibisa, which protects against weather-related losses for smallholder farmers.

Additionally, agri-tech solutions are supported by investments in firms like SunCulture and Apollo Agriculture, offering solar-powered irrigation and input financing to help farmers adapt to climate risks. These investments blend social impact with environmentalgoals.However,private investment in climate adaptation remains insufficient to meet Africa's urgent needs. Estimates suggest Africa requires over USD 50 billion annually to address adaptation needs, but currently receives around USD 11 billion per year, leaving a shortfall of nearly four times this amount. This financing gap underscores the potential for VC and PE to play a pivotal role by mobilising private capital, deploying innovative financial instruments, and providing patient growth capital tailored to climate resilience projects. By supporting early-stage climate technologies and scaling adaptation solutions, VC and PE can help bridge this funding gap and unlock sustainable development opportunities for vulnerable communities.

Closing the significant financing gap for climate adaptation requires expanding beyond traditional public grants and concessional loans to include innovative financial instruments such as green bonds, social bonds, blended finance, impact investments, and guarantees. PE and VC funds are particularly well-positioned to leverage these instruments by mobilising private capital, accepting higher risk profiles, and providing long-term patient capital essential for scaling climate adaptation solutions. These tools can attract a wider range of investors, including institutional and philanthropic investors, by aligning climate goals with social impact and risk-return expectations. The National Adaptation Plan Global Network notes the growing maturity of innovative financing tools such as green bonds, impact investments, and blended finance. It highlights the importance of tailoring these instruments to local contexts and improving systems for measuring adaptation outcomes to build investor confidence and scale climate financing.

At COP29 in 2024, developed countries pledged to raise climate finance to USD 300 billion annually by 2035, a significant increase but still far below the USD 1.3 trillion estimated by the UNFCCC as necessary to adequately fund global adaptation and mitigation efforts.

Effective governance frameworks are critical for the transparency, equitable distribution, and impact measurement of climate finance flows. Institutional reforms are needed to improve reporting standards, accountability mechanisms, and climate justice integration in financial systems. As global climate finance architecture evolves beyond 2025, emphasis on tracking investments and outcomes with inclusion of the voices of affected communities will be key to ensuring resources reach those most in need and deliver intended climate benefits.

To mobilise large-scale private finance, it is essential that investment instruments like guarantees, risk-sharing facilities, and blended finance models are designed to fit country-specific economic, institutional, and risk contexts. Scalable and replicable products that de-risk investments have successfully attracted private capital into underserved sectors and geographies. Continuing to pilot, refine, and scale such solutions offers a promising pathway to closing the climate finance gap and ensuring balanced flows between mitigation and adaptation priorities.

Growing climate impacts such as rising floods, droughts, and extreme weather highlight the urgent need to scale adaptation finance alongside mitigation. Adaptation finance remains underrepresented in total flows partly because of a lack of standardised definitions and metrics for adaptation activities, which limits comparability and investor comfort. Advances in financial innovation and risk management tools present opportunities to overcome these challenges and direct more funds toward resilience- building projects that protect vulnerable communities and ecosystems.

Despite increased climate finance commitments, funding distribution remains uneven, with high-vulnerability regions receiving disproportionately low shares, especially for adaptation. Targeted policy interventions, capacity building, improved climate risk data, and development of domestic financial markets are vital to ensure climate finance is channelled to where it is most needed. Closing these disparities is essential for equitable and effective climate action that reaches the grassroots and addresses sectors such as agriculture, water security, and disaster risk management.

According to the United Nations Environment Programme, Africa requires between USD 1.6 and 1.9 trillion in climate finance by 2030 to meet mitigation, adaptation, and loss- and-damage targets, far exceeding current funding levels.

Africa currently receives only about 3% of global climate finance, with an estimated USD 277 billion needed annually to meet Nationally Determined Contributions (NDCs). Major sources of funding include multilateral development banks such as the African Development Bank, bilateral partnerships, growing green bond issuances in countries like Kenya, Nigeria, and South Africa, and emerging carbon market initiatives that leverage Africa's vast natural resources.

Africa's private sector engagement in climate finance is increasing, with innovations in impact investing, blended finance, and fintech solutions expanding access to capital for smallholder farmers and green enterprises. Adaptation finance focused on drought-resistant crops, renewable- powered irrigation, and nature-based solutions is gaining importance due to the continent's heavy dependence on climate-sensitive agriculture.

Kenya exemplifies many of these trends. It has developed a green bond market to finance renewable energy, sustainable infrastructure, and climate-smart agriculture. Nevertheless, structural challenges such as limited access to concessional finance, perceived high investment risks, policy inconsistency, and underdeveloped domestic financial markets hinder the full potential mobilisation of climate finance.

To unlock the continent's climate finance potential, stronger policy frameworks aligned with climate goals are vital, alongside innovative blended finance models that can de-risk investments and scale private capital flows. Regional cooperation can also strengthen negotiating power with international donors and promote best practices across African nations. Technology-driven solutions, including blockchain-based carbon credits and AI-enabled risk assessment tools, represent promising avenues for improving transparency and efficiency in climate finance deployment across Africa.

A 2025 investor sentiment survey reveals that while climate tech markets remain dynamic, they are becoming more mature and discerning. There is ongoing enthusiasm for clean energy and resilience, but investors are cautious about the uncertain policy landscape and the challenging path from pilot projects to large-scale commercial deployment. Notably, 69% of investors predict a tightening in funding for "first-of-a-kind" (FOAK) projects, highlighting a reluctance to bridge the gap between early innovation and robust, infrastructure-scale certainty. At the same time, capital is stacking up for core sectors such as energy security, grid modernisation, and adaptation technologies, with a strong belief in the energy sector's long-term growth potential.

A 2025 Boston Consulting Group (BCG) publication identifies climate adaptation and resilience as the next trillion-dollar investment frontier, with significant opportunities in energy, infrastructure, and industry. The report notes that leading PE firms are moving from commitments to action—scaling businesses that combine technology, climate resilience, and sustainable infrastructure.

According to McKinsey's 2025 Global Private Markets Report, private equity deal value rebounded by 14% in 2024 to reach USD 2 trillion, the third-highest year on record. The rebound was led by large buyouts in North America and Europe, indicating renewed investor confidence despite headwinds in the venture capital segment.

The African Development Bank projects Africa's GDP to grow between 3.8% and 4.2% in 2025, outpacing global averages. This anticipated growth, coupled with rising local investor participation, suggests renewed optimism for VC investment in renewable energy and sustainable technologies across the continent.

Artificialintelligence(AI), energyinnovation, andadaptation technologies continue to attract the lion's share of new investment. Energy innovation, for instance, accounted for nearly 35% of all climate tech funding in 2024, with green hydrogen and alternative fuels each surpassing USD 1 billion in new investments. Geographic trends show strong momentum in mature markets, but developing regions, especially Africa, Southeast Asia, and Latin America, are emerging as priorities for investment, leveraging local economic opportunities and untapped market potential.

Despite strong growth signals, obstacles remain. Policy uncertainty, high borrowing costs, exit backlogs in private equity, and increased demands for transparency and impact measurement all present ongoing challenges. Top- performing funds and experienced management teams are better positioned to thrive as standards, both financial and impact-oriented, become more rigorous across climate finance.

Recent trends show that climate-focused investments continue to grow despite market uncertainty. In 2023, VC and PE invested more than USD 56 billion in climate solutions, with growing attention on adaptation and energy transition sectors. While VC drives early innovation, private equity, especially growth equity, plays an increasing role in commercialising and scaling these technologies globally. Investors remain optimistic for 2025 as new financing models such as hybrid debt-equity instruments, co- investmentvehicles,andevergreenfundsemergealongside collaborations with sovereign wealth funds, private wealth managers, and impact-focused organisations. PE's strong governance enables active portfolio management focused on decarbonisation, making it a key player in delivering climate finance. This combined private capital ecosystem is essential for accelerating the global transition to a low- carbon and more resilient economy.

Conclusion

The roles of VC and PE in climate financing are now indispensable. VC-led innovation and PE-driven scale have together created a dynamic environment characterised by entrepreneurial urgency and disciplined growth.

For investors, policymakers, and industry professionals, the imperative is to foster environments that combine ambitious public stewardship with private sector ingenuity. The time is ripe for bold partnerships and investments that will define the sustainable industries of tomorrow.

By harnessing the full potential of VC and PE in addition to other forms of financing, we can not only meet climate goals but also unlock new avenues for prosperity and resilience in a changing world.

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