Since the signing of the landmark Paris Agreement in 2015, the world has inched toward a secure and more sustainable energy system. That progress, however, now risks losing altitude amid mounting financing constraints, raising fresh doubts about our capacity to scale transition efforts in the years ahead.

The good news is the energy sector can draw on an increasingly diverse mix of public and private capital. Yet, money alone will not suffice. Only concerted action by energy executives, policymakers and financiers can create an investment landscape able to deliver an equitable energy future.

Why green finance matters for the global energy transition

 A coordinated transformation of the entire energy value chain is indispensable to pivot away from fossil fuels. However, connecting new renewable power generation to national grids and supporting system-wide electrification across sectors demands vast outlays of capital. Existing, often ageing energy infrastructure will also require wholesale upgrades.

In fact, global investment in clean energy and infrastructure reached record levels last year at an estimated US$2 trillion, almost twice the total spending on oil, gas, and coal value chains. While this looks promising, it’s still not enough: the International Energy Agency (IEA) says annual investment must increase to $4.5 trillion per year to reach net zero by 2050.

 The gap between current investment and required financing is even more pronounced in emerging markets and developing countries (EMDEs), especially in Asia. The region needs investments of at least US$1.1 trillion annually to meet climate mitigation and adaptation needs, but it is only getting US$333 billion, leaving a shortfall of at least US$815 billion.

Here in Malaysia, the situation is no different. The nation alone requires over US$143 billion (~RM1.2 trillion) to meet its renewable energy targets under the National Energy Transition Roadmap (NETR). This reflects a similar need across ASEAN states, with cumulative regional investments estimated at over US$3 trillion by 2050.

These figures lay bare a simple truth: public coffers alone cannot finance clean-energy shift. Public and private actors must co-create an ecosystem that channels green capital through smart policy and inventive instruments.

 De-risking the energy transition with catalytic policies

 Attracting long-term capital for the energy transition requires more than ambition. Policy frameworks must grant clarity to investors yet remain supple enough to reflect local realities and technological leaps. The most effective frameworks balance long-term certainty and short-term flexibility, allowing for transparent and structured policy evolution.

Critically, the public sector must lead from the front by absorbing early risk, co-investing in infrastructure and signaling enduring commitment to private investors. India’s green industrial strategy and Nigeria’s market-oriented reforms show that, even without perfect frameworks, targeted incentives and policy reforms can effectively mobilise private capital.

These successes reflect key lessons. Public investment must be catalytic, especially in infrastructure, clean hydrogen and industrial decarbonisation. Tools such as government-backed credit guarantees, concessional finance and transparent bidding processes can help to de-risk investment and accelerate private sector participation.

Malaysia’s Green Technology Financing Scheme (GTFS) for instance has effectively catalysed financing for green projects across key sectors including energy, manufacturing and transportation. Now in its fourth phase, GTFS 4.0 offers up to 80% government-backed guarantee, which greatly reduces the financial risks associated with high upfront costs.

As a result, the Scheme has encouraged investment into green projects from over 29 commercial banks, development financiers, and other participating financial institutions (PFIs). Total projects approved under the GTFS are expected to contribute to the avoidance of over 3.7 million tonnes of CO2 equivalent every year.

Beyond government guarantees or incentives, well-calibrated tax regimes and improved regulatory coordination also enhance investor confidence. Stable, transparent and well-governed frameworks send a powerful signal to investors demonstrating that the enabling environment is credible, and that the energy transition is not only possible, but investable.

Innovative financing models to diversify funding channels

 Government policies and incentives are only one part of the equation. Channeling sufficient capital into clean energy projects also requires more innovative sustainability-linked financial instruments that can drive down costs through an efficient, effective, and timely combination of de-risking mechanisms.

Malaysia already made headlines in this space back in 2017, when local solar energy firm, Tadau Energy issued the first green Islamic bond or sukuk in the world which successfully raised US$59 million to finance a solar power plant in Sabah. A sukuk is an interest-free bond that generates returns to investors without infringing the principles of Shari’ah (Islamic law).

A key demonstration of the success of this project was that another issuer, Quantum Solar, followed quickly with a larger (RM 1 billion) issuance. Many other companies soon followed suit, with green sukuk issuances in Malaysia reaching RM11.9 billion in 2023, an almost ninefold increase since its introduction in 2017.

More recently, national energy utility Tenaga Nasional Berhad (TNB) marked a significant milestone with its inaugural Transition Finance Framework, the first utility in ASEAN to do so. Under the Framework, TNB will be able to issue sustainability-linked debt instruments including sukuks to fund its investments in emissions-reduction projects.

Globally, blended finance solutions have also emerged as an important catalytic lever to mobilise private capital for de-risking innovation and accelerating scale. These mechanisms allow diverse financing organisations – from philanthropic funds to insurance companies – to invest and lend alongside each other while achieving different objectives.

Together, de-risking instruments and innovative finance mechanisms can significantly reduce the cost of capital, making the clean energy transition both possible and affordable. Detailed analysis by Deloitte suggests that these strategies could ultimately save US$50 trillion globally through 2050.  

Working together to reshape the green finance ecosystem

The window to bring the world on course for net zero targets for an affordable and just energy transition is closing fast. Policymakers, energy companies, investors, lenders, and international organisations must all work together to reshape the current project finance environment into a functional green finance ecosystem.

The scale of investment required may seem daunting, but the tools and mechanisms already exist to close the green finance gap and what’s needed now is the collective will to act. By combining catalytic public investment with innovative financing models, we can mobilise the capital needed to accelerate an affordable, inclusive, and sustainable energy transition.