Climate finance is stuck. Can insurance unblock it?

Climate finance reached $1.9 trillion in 2023, an important milestone for climate-aligned investments. Yet, financing remains far below what is needed, particularly in emerging markets and developing economies (EMDEs), which are on the frontline of climate impacts and often least equipped financially to respond.

By 2030, EMDEs will require roughly $2.4 trillion annually to meet climate and development goals, including $1 trillion from external sources, primarily private finance.

The gap between available capital and what is needed underscores a clear reality: the future of climate finance hinges on unlocking greater engagement from the private sector.

At the core of private investment decisions is the risk-reward equation. In EMDEs, this equation is often skewed by the widespread perception that investment risks are much higher than in developed markets.

EMDEs are often perceived as high-risk markets due to factors such as macroeconomic and regulatory uncertainty, currency volatility and limited financial infrastructure. While some of these risks are present, many are overstated, and distinguishing between perceived and actual risk is essential to unlocking private capital for climate-aligned and sustainable development projects.

New data from the Global Emerging Markets Risk Database, the largest credit risk dataset for developing countries, along with recent analyses by the International Finance Corporation (IFC), show that the high perceived default risk in EMDEs overstates the real risk.

This report shows that across more than 10,000 private-sector loans in 169 countries, average default rates were just 3.54%, comparable to firms in advanced economies, with recovery rates exceeding global benchmarks. Even during periods of global stress, many emerging market companies defaulted less than expected.

Yet despite this performance, the perception gap persists and continues to inflate the cost of capital. For private sectors to invest at scale, climate-aligned projects must be bankable. And there is a direct link between insurability and bankability: for if a project cannot be insured, it is unlikely to attract private investment.

Insurance has a unique and underleveraged role to play in addressing these risks, both as an underwriter and as an investor. Insurance can be a strategic enabler by offering data, modelling, risk pooling and innovative products that help investors navigate uncertainty and build resilient, bankable pipelines.

However, traditional insurance models, built on historical data, are being outpaced by systemic climate risks that evolve faster than the industry can adapt. Without decisive action, parts of the economy could become uninsurable, putting communities and capital flows at risk.

“If an asset or operation is uninsurable, it’s likely uninvestable. Insurance today goes beyond protection. It serves as a barometer of climate readiness and long-term asset value,” explains Laurenca Tubiana, Chief Executive Officer, European Climate Foundation. “The role of the insurance sector in a changing climate is not merely a technical or market issue; it is a systemic, political challenge that demands collective action.”

Enhancing the role of insurance is critical for mobilizing private capital and scaling climate solutions. However, while expectations about the role of insurance have grown rapidly across the climate finance landscape, greater clarity and alignment about what insurers can realistically contribute is needed.

Insurers are far more than providers of loss coverage. They are long term investors, system stabilizers and risk managers. Their strengths in risk modelling, engineering assessment, catastrophe analytics and long-duration capital allocation make them uniquely positioned to translate risk uncertainty into financial insight.

These capabilities allow insurers to act as a bridge between insurability and bankability by helping shape projects in ways that reduce uncertainty and improve investment readiness.

At the same time, insurers operate within solvency and prudential requirements that shape how they can participate in investment structures. A more productive approach begins with a clearer understanding of the specific capabilities’ insurers can apply in climate finance.

Their value lies in using risk expertise at the stages of the investment process where insurance’s unique capabilities are best leveraged and aligned with solvency and prudential requirements.

There are several practical steps to take to integrate insurers more effectively into climate finance mechanisms. These are:

Early engagement and alignment across the value chain are critical for insurers to support investability of climate projects.

A persistent blind spot in climate finance is how late insurers are brought into project development. Engaging insurers early in project design, not just after financing, is key to unlocking investable climate projects.

This is because their expertise and climate data can identify risks before they become costly, while clear demand signals from tenders and investment guidelines encourage resilient, risk-informed design. Early collaboration closes perception gaps, reduces financing costs and helps build robust project pipelines in emerging markets.

As Linda Freiner, Group Chief Sustainability Officer at Zurich Insurance, observes: “Insurance is often brought in too late; early engagement enables more effective risk assessment and mitigation.”

Critical steps to better integrate insurance into the process are to:

Regulatory and data limitations currently restrict insurers’ full engagement. Addressing these barriers is essential to mobilize private capital.

Insurance should be seen as a proactive enabler of resilience and market stability, not merely a post-crisis safety net. While the technical expertise and climate insurance solutions exist, the key challenge is scaling them and securing political alignment.

To unlock its full potential, insurance must shift from reacting to crises to signalling resilience and financial viability. This requires innovation, adoption of new technologies and tailored products designed for specific sectors, regions and project types.

Insurance should be embedded as the “third pillar” of climate finance, alongside lending and investment, to mobilize private capital, expand fiscal space in developing economies and accelerate the transition.

Strategic deployment of existing insurance tools could increase Paris-aligned investment flows by up to 40%, positioning insurance as a central enabler of climate finance rather than an afterthought.

Freiner says: “Public-private partnerships play an essential role in integrating insurers into the climate finance ecosystem by facilitating early collaboration between governments, insurers, investors and development finance providers to help build critical infrastructure that is resilient for the future.”

But moving from ambition to action requires testing partnerships, demonstrating scalable models and embedding resilience at the core of investment. Collaboration between insurers, investors, credit rating agencies and policy-makers is essential to convert ambition into tangible capital flows for a just and resilient transition.

In 2026, we’ll be exploring solutions to strengthen the role of insurance as a key enabler for scaling private capital into climate-aligned projects. If you’re interested in being involved, we’d love to hear from you.