1. Pillars
  2. Country-led investment for sustainable development, climate, and resilience
  3. Domestic Financial Systems: Domestic Financial Sector and Capital Markets

Domestic Financial Systems: Domestic Financial Sector and Capital Markets

Domestic financial systems will need to contribute around USD 750 billion annually to climate and development investment by 2035, implying a nearly tenfold increase in climate finance from domestic financial institutions and markets (Bhattacharya et al., 2025). Banking, pension, and insurance assets in EMDEs, projected to grow from USD 17 trillion in 2022 to USD 46 trillion by 2040, are a substantial potential source of long-term investment, but mobilizing them requires deeper capital markets, appropriate frameworks, and stronger capacity (Huisman et al., 2024).

Status

Domestic financial-sector climate finance is growing rapidly but remains well below investment needs. Financing intermediated by domestic financial institutions more than doubled between 2021 and 2024, while institutional investors remain largely untapped. Sustainable-finance frameworks, pension investment-rule reforms, and local-currency capital markets are expanding, with emerging credit-enhancement mechanisms supporting longer-term investment. However, progress remains uneven across EMDEs, with lower-income countries, SMEs, households, and adaptation particularly underserved. Evidence on the aggregate impact of recent reforms on financial allocation and financing costs remains insufficient.

Scale

Magnitude relative to the need

Slow

Climate finance from domestic financial institutions has more than doubled, driven almost entirely by commercial financial institutions, but remains far below requirements. In EMDEs excluding China, commercial financial institutions and institutional investors provided USD 76.5 billion in 2024, up from USD 36.7 billion in 2021 and around 36% of tracked domestic private climate finance (Abraham et al., 2026). Commercial institutions accounted for USD 76.2 billion, yet climate finance represents only around 5% of their portfolios (World Bank, 2024b). Institutional savings remain largely untapped, with investors contributing just USD 0.3 billion (Abraham et al., 2026).

Speed

Pace of reform against what's needed

Slow

Sustainable-finance frameworks are expanding, while pension-investment reforms, local-currency markets, and credit-enhancement mechanisms are beginning to mobilize additional capital. Since 2021, 60 EMDEs have introduced at least one climate-related financial policy, including 50 with disclosure measures (OECD, 2026c). Thirty EMDEs now have sustainable-finance taxonomies, including eight introduced in 2025, among them Jordan, Zambia, Rwanda, and Uganda (Government of Jordan, 2026; Sidqui, 2026). Mexico began implementing expanded pension-investment rules in 2026 (Randall, 2026), while Colombia and Nigeria have also reformed pension rules (Brigard Urrutia, 2026; SEforAll, 2026). Implementation remains constrained by data gaps, compliance costs, and limited regulatory capacity.

Reach

How far it extends across countries and institutions

Stalled

Access to long-term domestic finance remains uneven, particularly in shallower markets and for smaller borrowers, while tracked domestic private climate finance remains overwhelmingly focused on mitigation. In 2024, mitigation accounted for around USD 209 billion in EMDEs excluding China, against USD 0.4 billion for adaptation and USD 1.1 billion for dual-benefit activities (Abraham et al., 2026). More than 60% of SMEs, in both EMDE and developed economies, surveyed by the SME Climate Hub identified inadequate finance and fiscal support as major barriers (SME Climate Hub, 2025). Guarantee facilities such as InfraCredit, Dhamana, and InfraZamin are extending local-currency finance, but remain small relative to needs (PIDG, 2026).

Action fronts

Climate finance reform advances on five fronts, from replenishing the funds that already exist to reshaping how the whole system works. These are the fronts where Domestic Financial Systems: Domestic Financial Sector and Capital Markets is making headway.

  • Revamping

    Overhauling the institutions, rules, and instruments that climate finance runs on

  • Reshaping
  • Re-channeling

The Path Forward

Domestic financial systems need to grow substantially and diversify across climate-aligned investment, mobilizing domestic savings and expanding long-term finance beyond larger emerging markets and mitigation. This requires scaling financing from commercial banks, pension funds, and insurers, and embedding taxonomies and disclosure frameworks in financial decisions across mitigation, adaptation, resilience, and nature. Frameworks should be interoperable and evidence-based, while access must broaden for SMEs and households by linking sustainable-finance and financial-inclusion strategies. Deeper local-currency capital markets, credit enhancement, and MDB-supported capacity-building for regulators and financial institutions will be essential.

Actors

Cooperation is required between these actors and audiences to drive progress foward in Domestic Financial Systems: Domestic Financial Sector and Capital Markets.

Commercial banks

Pension funds

Insurers

Central Banks

Financial regulators

Ministries of finance

Related Action Areas

Domestic Financial Systems: Domestic Financial Sector and Capital Markets | Climate Finance Reform Compass