Mobilising private capital at the scale required for climate action will depend less on ambition and more on rules. As climate finance accelerates globally, the absence of robust legal frameworks and credible definitions of what qualifies as “green” risks misallocating capital, undermining trust, and entrenching greenwashing. To unlock trillions in climate investment, law and finance must work in tandem, aligning investment protection with verifiable climate outcomes and anchoring capital flows in science-based taxonomies.

The urgency of reform was evident at recent global climate negotiations, where geopolitical shifts exposed both the fragility and importance of institutional leadership in climate finance. As traditional public funding remains constrained, the role of private capital has moved from complementary to essential.

The Climate Finance Gap and the Limits of Public Funding

The scale of the challenge is stark. Global climate mitigation financing needs are projected to reach approximately $8.4 trillion per year by 2030. By contrast, public climate finance remains below $100 billion annually, revealing a structural imbalance between ambition and deployment. Closing this gap is impossible without mobilising private investment at unprecedented levels.

Governments have increasingly relied on de-risking mechanisms, where public actors absorb part of the financial or regulatory risk to make cross-border climate projects viable. While effective in principle, these mechanisms operate within an investment law architecture that was not designed for climate conditionality.

Legacy international investment agreements were created to protect investors from arbitrary state action, not to ensure alignment with environmental objectives. In some cases, they have even penalised governments for policy changes aimed at meeting climate commitments. This tension exposes a fundamental flaw: investment protection without alignment can actively work against climate goals.

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Rethinking Investment Protection Through Climate Conditionality

Rather than dismantling the global investment regime, a more pragmatic approach is emerging. One proposal gaining traction is the Green Investment Protocol under the UN climate framework. Initially proposed by legal scholar William Burke-White and now being advanced with support from the OECD, the protocol seeks to condition investment protection on climate alignment.

Under this model, investors would retain cross-border legal protections, but only for projects that meet verified climate criteria. Protection would no longer be automatic. Instead, it would be earned through alignment with recognised climate objectives. Early implementation could focus on projects linked to UN-backed funds such as the Green Climate Fund or the Global Environment Facility.

The appeal of this approach lies in its balance. By conditioning protection rather than removing it, the protocol preserves investor confidence while reducing the risk that governments face litigation for climate-aligned regulation. Importantly, it avoids the need to renegotiate hundreds of bilateral treaties, offering a harmonised overlay that adapts existing structures to climate realities.

Why Defining “Green” Is the Real Bottleneck

Legal reform alone is insufficient without a credible answer to a deceptively simple question: what counts as green. Without enforceable definitions, de-risking mechanisms risk channelling capital toward projects that look sustainable on paper but fail to deliver real emissions reductions or resilience outcomes.

Widespread reliance on ESG scores has not solved this problem. Many ratings frameworks reward disclosure rather than performance, allowing companies to score well through reporting sophistication rather than measurable impact. This creates a systemic credibility risk for climate finance, shifting incentives toward branding instead of decarbonisation.

A more durable approach prioritises emissions-based evaluation and alignment with science-based thresholds. The objective is not to discard ESG frameworks entirely, but to sharpen them around verifiable climate performance. For mitigation-focused finance, emissions outcomes remain the most credible anchor.

Interoperability as the Missing Link in Global Taxonomies

As countries and regions develop sustainable finance taxonomies, fragmentation has become a growing concern. Capital flows efficiently across borders only when investors can rely on a shared language of definitions, thresholds, and safeguards.

Interoperability does not require uniformity. Instead, it depends on shared core principles such as clear activity classifications, science-based thresholds, and “do no significant harm” guardrails. Voluntary standards, including those developed by the Climate Bonds Initiative, have laid early groundwork for alignment.

Multilateral efforts have accelerated this process. The Taxonomy Roadmap Initiative, launched at COP29 and expanded ahead of COP30, provides guidance to governments on aligning national taxonomies through common principles. Regional approaches, such as ASEAN’s traffic-light system, classify activities as green, transitional, or misaligned, offering flexibility without sacrificing clarity.

As of late 2025, nearly sixty sustainable finance taxonomies had been issued or were under development worldwide, spanning more than fifty jurisdictions. In several countries, taxonomies are now embedded in national climate strategies and updated climate commitments, signalling a shift from voluntary guidance to policy infrastructure.

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From De-Risking to Pay-for-Performance

The most effective climate finance structures increasingly link returns to verified outcomes rather than promises. A notable example is the Amazon Impact Bond in Brazil, which channels private capital through a special purpose vehicle to support forest conservation and resilience for rural producers.

Investor returns in the structure are tied to satellite-verified metrics such as hectares conserved and reductions in fire incidence. This pay-for-performance model aligns ecological protection with financial incentives and governance mechanisms, demonstrating how capital can be mobilised when impact is measurable and independently verified.

Such structures illustrate the future direction of climate finance. When legal protection, taxonomy alignment, and performance-based returns converge, capital can move at scale without sacrificing integrity.

Building the Infrastructure for Trillions, Not Billions

Unlocking climate finance at the scale required for the transition will require two parallel evolutions. Investment law must evolve to protect climate-aligned capital without constraining governments’ ability to regulate in line with science. At the same time, green taxonomies must mature into interoperable, science-based systems that reward real outcomes and penalise misrepresentation.

Together, these reforms form the legal and evaluative infrastructure of the climate transition. Without them, capital will continue to flow inefficiently, credibility will erode, and the gap between climate ambition and delivery will widen. With them, investment protection can become a catalyst for climate action rather than an obstacle, enabling private finance to move from rhetoric to results at the speed and scale the transition demands.

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