Each day, investment officers at development finance institutions (DFIs) walk the tightrope between delivering commercial returns and development impact. When climate objectives are layered onto that balancing act, most DFIs follow the path of least resistance. This typically means investing in larger ticket size, easier to identify climate mitigation transactions, which means most DFIs’ climate portfolios skew heavily towards mitigation. As a result, even though some DFIs have adopted new and ambitious climate targets, like British International Investment (BII) allocating 30% of new commitments and the European Bank for Reconstruction and Development (EBRD) channelling 50% of investments to green finance, climate adaptation and resilience (CAR) finance activities continue to be critically under-funded. According to the Climate Policy Institute, they remain “a fraction of what is needed to avoid costly and catastrophic future impacts.”
In a previous CGAP blog, we argued that DFIs are uniquely positioned to lead on CAR finance, particularly through financial sector investments. However, many are not yet playing that role. This blog examines what prevents DFIs from leading and what they can do differently. Our next blog will highlight the areas where some DFIs have made progress, which provide practical insights for others to follow.
Based on interviews with a dozen leading DFIs and ecosystem builders, we have identified five ‘kinks’ in the climate finance pipework that are currently limiting a more decisive pivot towards CAR finance.
1. Progress building taxonomies and frameworks has not yet translated into operational clarity
While taxonomies and eligibility frameworks have advanced – for example, through national taxonomies in countries such as Rwanda and Brazil, and bespoke tools like the International Finance Corporation (IFC)’s CAFI – they have not yet become simple tools for deal origination and qualification.
Adaptation and resilience are inherently context-specific and heterogeneous – varying across markets and over time. And the true ‘resilience value’ of climate-proofed assets is often poorly captured by accounting systems. As a result, investment officers and impact teams still lack simple, operational tools and playbooks to identify, qualify, and report CAR investments.
This challenge is particularly acute in financial sector investing, where CAR is rarely linked to discrete projects. DFIs must rely on financial intermediaries to tag activities across diffuse loan portfolios. And while 87% and 52% of DFIs reference the MDB Joint Principles and EU Taxonomy, respectively, application is uneven, CAR coverage remains shallow, and standards are not fully interoperable across markets.
Under tight time and approval pressures, investment officers gravitate toward clear, repeatable origination pathways and deal archetypes – explaining why CAR finance is undercounted and why CAR transactions remain deprioritized.
2. Internal capacity, incentives, and institutional prioritization are inconsistent
Most DFIs that CGAP interviewed described CAR investing as a ‘corporate priority’. Yet this ambition rarely cascades into CAR-specific investment strategies, asset allocation targets, or incentives for investment officers. In practice, investment officers’ behavior is more strongly shaped by annual commitment targets, risk-return metrics, and broader impact objectives.
Some DFIs – including BII, IFC, and the Dutch Entrepreneurial Development Bank (FMO) – have introduced impact scoring frameworks or labelling processes, such as IFC’s AIMM or BII’s Impact Score, that incentivise and increase visibility of CAR finance deal flow. But CAR finance transactions – often smaller volume and more time-consuming – rarely offer sufficient internal reward to materially shift investment officer behavior when higher ‘scores’ can be achieved through more straightforward deals.
Other DFIs – including the Asian Development Bank (ADB), FMO, and IFC – are developing high-performing in-house climate teams that work alongside investment officers. While this is a positive trend, it is not yet industry-wide practice, nor is it often well-integrated into the mainstream investment cycle. Climate expertise frequently remains centrally located and only loosely connected to deal-making, which is led by investment officers. Even when climate experts are ‘embedded’ into investment teams, they are often heavily outnumbered by investment officers – by as many as 50-to-1 at some leading DFIs – leaving them overstretched and with limited influence.
3. As a nascent investment sector, there is a scarcity of demonstration cases and success stories
A persistent constraint to scaling CAR finance is the limited visibility of proven, replicable examples of successful investments, including through financial sector channels. In the absence of concrete commercial impact theses for this still nascent investment space, DFIs and their FI partners struggle to build confidence, benchmark risk-return profiles, and develop effective origination strategies.
Across CGAP’s interviewees, establishing a shared repository of CAR finance deals was consistently cited as the single most important priority for unlocking capital flows. To help close this gap, CGAP will publish a series of CAR finance deal archetypes in 2026, drawing on transaction-level case studies from leading DFIs and climate funds.
4. DFIs rely on local financial intermediary partners that often have weak CAR finance capacity and readiness
DFIs can finance CAR activities directly. But, as CGAP has argued, it is indirect investment via local financial intermediaries that is most likely to shift the needle and lead to greater impact. Local financial intermediaries bring last-mile reach, contextual understanding, client relationships, and balance sheets that can drive scale sustainably.
For capital to flow effectively through these channels, financial intermediaries must be literate in adaptation and resilience – able to identify climate-relevant uses of capital, adjust credit and risk processes, and report CAR outcomes without excessive burden. In practice, many wrestle with the same structural challenges, often under greater commercial pressure and with fewer internal resources.
These constraints are compounded by the high transaction costs of partnerships with DFI and climate funds – extended due diligence, negotiation, reporting, and conditions precedent – which, without dedicated technical assistance from DFIs, limit local financial intermediaries’ readiness to originate and scale CAR finance.
5. DFIs have a low-risk appetite and limited resources for “technical assistance” to build markets
Most DFIs recognise that market-creation and pre-investment technical assistance are essential to enable the origination and structuring of viable CAR transactions. This support is most effective when paired with small, risk-bearing capital, such as returnable grants and first-loss facilities, that help early-stage CAR activities reach stable cash flows and investment readiness.
Yet these interventions remain under-resourced: technical assistance typically represents less than 1% of annual commitments at several leading DFIs, with only a fraction directed towards CAR. In many institutions, technical assistance is managed separately from investment teams, limiting its integration into deal cycles.
At the same time, internal risk-return constraints restrict the use of flexible capital – despite DFIs’ low cost of funds, public mandates, and access to concessional climate finance that could enable greater deployment toward CAR.
The slowness of the pivot toward large-scale CAR finance is not a failure of intent – it’s the symptom of a system that needs re-plumbing. The pipework is largely in place, but the flow is restricted.
To turn on the taps, the next phase must be operational – simplify and integrate taxonomies and frameworks into the way investment officers and their financial intermediary partners do deals, align incentives with CAR outcomes, invest in shared standards and demonstration cases, and deploy risk-bearing capital alongside technical assistance.
DFIs have the mandate, balance sheets, and risk-bearing levers to shift the incremental progress seen today into a surge in CAR finance flows. The question is no longer whether they should lead, but how quickly they’re able to re-plumb the system.
