Raising the Bar: What It Will Take for VCEFs to Deliver  

The state of climate finance is at a critical juncture. As concessional climate finance becomes increasingly scarce, public funds must be deployed with precision to catalyze greater investment. Vertical climate and environment funds (VCEFs) hold strategic levers of scarce concessional capital for emerging markets and developing economies (EMDEs). The need is greater than ever to support and shape markets to crowd in private climate investment.  

The last two G20 presidencies prioritized the efficiency and efficacy of the four largest VCEFs—the Green Climate Fund (GCF), the Global Environment Facility (GEF), the Climate Investment Funds (CIF), and the Adaptation Fund (AF)—to support this challenge.  

The challenge  

Actors across the system are looking to VCEFs as holding critical levers of concessional climate finance to mobilize private flows. Various changes in the climate finance landscape are shaping this imperative:  

• First, the composition of climate finance is shifting. After several years of increasing flows, public climate finance fell to USD 646 billion, a  13% decrease  from 2022 to 2023 amid constrained domestic budgets, while private investment picked up pace to exceed USD 1 trillion (CPI, 2025). In addition, EMDEs are increasingly affected by climate disasters, which contribute to cycles of sovereign debt and hinder economic growth.  

• Second, the G20 has different priorities under the US Presidency in 2026. With little expectation that this presidency will progress the climate finance agenda, it will be vital for other stakeholders to keep up the momentum.  

The  action needed 

The Brazil and South Africa G20 presidencies of 2024 and 2025 explored challenges and opportunities for the VCEFs to progress toward a more fit-for-purpose system. Recommendations included harmonizing accreditation, financial instrument innovations, and greater reductions in the cost of capital across EMDEs.  

The funds, donor and borrower countries, and supportive stakeholders must sustain collaboration and momentum. Previous work has identified critical topics and recommendations for VCEFs to organize around, and efforts at the individual fund level will be critical to accomplishing their goals.  

CPI has supported the G20 presidencies, the Sustainable Finance Working Group (SFWG), and the Independent High-Level Expert Group (IHLEG) on:  

• In-depth analysis of the VCEFs’ mobilization efforts, support for country platforms, fund efficiency, and the harmonization of the VCEF system. This office report of the expert group included recommendations to support the overall VCEF system. 

• Examining financial and non-financial collaboration across VCEFs, multilateral development banks (MDBs), and national development banks (NDBs), working with GFANZ, FiCS, and the AfDB to examine how successful examples of collaboration can be replicated and built upon. 

• An initial review of the VCEFs’ progress against the recommendations as part of the SFWG’s October 2025 report . This highlighted diverse support underway, from previously planned improvements to emerging reforms, with each fund outlining steps taken to improve systems and processes to accelerate scale and impact from their resources. This early review also highlighted that these reforms are the first of many steps for the VCEFs to mobilize and scale catalytic climate finance at the required volumes.  

The VCEFs have taken on the 2024 SFWG recommendations in addition to pre-existing efforts to improve the system, stating their intention to continue internal and external work to improve climate finance access and impacts. The past two years have seen positive developments toward a more integrated system. Early examples include establishing the Climate Project Explorer and delivering the joint results report from COP30. Progress must now continue and accelerate to meet the Paris Agreement milestones. And, emphasizing collaboration at the highest levels, heads of the MDBs and VCEFs met for the first time at the 2026  IMF and World Bank Springs Meetings.  

Building on previous work, CPI identifies three critical opportunities that will support a broad range of VCEF goals and efforts toward meeting the 2024 SFWG recommendations: 

Sequential financing to leverage VCEF fund additionality:   

The VCEFs have a unique opportunity to leverage sequential financing to support each stage of a project, considering their differentiated strengths and areas of focus. Sequential financing requires a series of backers with financial tools appropriate to different steps in project development. Successful sequential financing provides the right support to help develop a project from ideation, to pilot, through to scaling in order to build strong project pipelines for funded programs that see impact.  

In practice, this could look like: 

1. Grant resources committed to providing technical assistance (TA) and capacity development as foundational steps and project preparation support. 

2. Concessional seed funding provided by a different source to operationalize the initial efforts and demonstrate potential impact. 

Catalytic funding from larger pools of capital that can ultimately be provided to de-risk projects and mobilize private sector investment.   

This sequential support is particularly critical for project success in developing and climate-vulnerable countries, which face additional challenges in attracting and deploying climate finance. These approaches can also support projects that are first movers and market openers to demonstrate viability in underdeveloped markets.  

VCEFs are already leveraging their distinct operational approaches and mandates to deliver this kind of project financing model. In Rwanda, nature-based and forest investments from the CIF are building on the results of GEF support for ecosystem restoration and community resilience. The CIF’s USD 31 million in concessional finance has mobilized an additional USD 200 million in co-financing from the World Bank. The AF and the GCF are working to update a scale-up framework under which AF-supported projects that demonstrate impact will be considered for further expansion and transformation using GCF funds.

2. Greater collaboration with the underutilized PDB ecosystem  

National and regional public development banks (PDBs) are ideally placed to understand local needs, tailor solutions for the local operating environment, and deliver on nationally determined contributions (NDCs) and national adaptation plans (NAPs). PDBs are also eager to access new pools of funds and deploy innovative instruments that create real-economy impacts for climate and development.  

With over 530 PDBs worldwide delivering around 10% of global investment, PDBs, and particularly national development banks (NDBs) are gaining attention as potential pathways to channel climate finance to local beneficiaries. Initiatives like the FiCS Lab and its Incubator have demonstrated demand from PDBs to deploy innovative instruments in their target geographies and sectors. Capacity and fundraising must now be boosted to help translate ambition into implementation.  

Historically, the VCEFs have successfully supported PDBs in increasing their capacity to develop and operate “green windows” that can ring-fence climate finance while also being responsive to regulatory and market conditions in their region. The GCF helped establish the Development Bank of Southern Africa’s Climate Finance Facility, increasing the bank’s capacity to meet local climate finance demands and attract additional sources of financing, in a model that many PDBs are looking to emulate.  

More indirectly, VCEFs can support financial platforms that channel funding to local operators. The Blue Co Caribbean Umbrella Coordination Programme, a project preparation facility managed by the Caribbean Development Bank (CDB), uses GCF grants to channel support to NDBs in the region with projects in their pipelines that are too small for standalone funding. This arrangement has enabled NDBs like the Bahamas Development Bank to tap international climate finance that would have otherwise been unattainable.   

3. Alignment with country-driven investment plans 

Country platforms have also drawn attention as a way to strengthen domestic markets and support reforms to enhance stability in EMDEs. Their effectiveness depends on conscientious, strategic, country-driven investment plans and coordination among national and international stakeholders for institutional capacity building and project pipeline development. These plans must align with current and proposed national strategies—including NDCs, NAPs, and other national priorities–  which vary significantly across countries.    

To deliver on their mandate to support country priorities, VCEFs can support market development and reforms to attract capital. Current EMDE markets are often considered to be too narrow or shallow, without the maturity required to attract institutional investors. 

The GCF’s Readiness Program, which offers USD 7 million to each eligible country per cycle, is a key resource to support country-driven development of investment plans. This program supported the development of the Brazil Investment Platform (BIP) in 2024. Monitoring the progress of this platform and its structure will provide valuable lessons for the new wave of country-led platforms.   

The CIF’s new Industry Decarbonization Program combines national coordination and MDB support. The program has committed to disburse USD 1.75 billion across seven selected countries with high-emitting industries to support the operationalization of low-carbon pathways and investment plans that require input from national, private, and international stakeholders. 

Next for VCEFs: Addressing the Cost of Capital Challenge   

Beyond seeing meaningful progress against the existing G20 recommendations and VCEF ambitions, the funds and supporting stakeholders will need to tackle a growing cost of capital challenge. As VCEFs and other public financiers shift from de-risking individual projects to shaping entire markets, it will beis key to understand how their interventions can expand market depth and participation in EMDEs. A central constraint is the high cost of capital, driven by real and perceived country risks, including currency volatility, political instability, and weak institutional capacity. Crucially, the cost of capital is not fixed. It responds to credible reductions in these underlying risks and to signals that improve investor confidence in local markets. This is highly responsive to changes in the real and perceived risks of local investments.  

It is important to discern where current VCEF investments in EMDEs are contributing to market development and lowering the cost of capital for domestic borrowers. This includes assessing which investment types have been most impactful and where the opportunities lie for improving existing approaches. Answering these questions can help identify how to deploy VCEF grants and investments more catalytically and to greater effect. 

As parts of the public climate finance ecosystem contract, hopefully for the short-term, VCEFs will need to maximize their ability to mobilize private resources. Cost of capital should be added to the evaluation metric—not as a requirement, but as an opportunity to enable greater real economy transformation.