Among the blunt lessons of 2024 is that the gap continues to widen between available multilateral finance and needs on-the-ground to address climate and nature. The climate finance pledges of COP 29 and nature financing pledges of COP 16 were predictably underwhelming.  2025 promises to be worse, with another U.S. exit from the Paris Climate Agreement and apparent freezing of all U.S. overseas development aid compounding wider pressures on overseas development budgets. 

Such challenges magnify the importance of private financing. The good news is that in 2024 total climate finance reached nearly US$1.6 trillion, a remarkable increase since the Paris Climate Agreement. The bad news for 2025 is that the vast bulk of climate investments remain concentrated in OECD countries and China, and contributions from within the U.S. are uncertain.  

Fortunately, two channels of prospective international financing intended to unlock carbon markets and protect intact tropical forests offer among the most promising opportunities in years to leverage private investment in green priorities in developing countries. The first international carbon deals under Article 6.4 of the Paris Climate Agreement are expected in late 2025, around the same time that details of Brazil’s new Tropical Forest Financing Facility (TFFF) are likely to be announced at COP 30. 

While neither channel will close the annual developing country financing deficit of US$1.3 trillion, their early success can create momentum towards other new, scalable private sector sources of financing.

International carbon markets: In November 2024, countries finally adopted new rules needed for the international buying and selling of carbon credits (known as ITMOs) under Article 6 of the Paris Climate Agreement.  Both governments and markets are hopeful that these new rules will work; a recent forecast (issued prior to the US announcing its withdrawal from the Paris Agreement) estimates a rebound in carbon credit markets this year, growing to as much as US$35 billion by 2030, and reaching US$250 billion by mid-century.  

Dozens of high-profile analyses have exposed significant flaws in current voluntary carbon markets as well as the UN’s previous foray into carbon markets via the Clean Development Mechanism (CDM). A long-waited scientific review by Science Based Targets (SBTi) concludes that a large majority of fungible corporate carbon offset credits were “inadvisable, illogical or damaging to global mitigation goals.” One could almost hear Leonard Cohen lament “Everybody rolls with their fingers crossed.”

The new Article 6.4 rules hope to restore market confidence by a complex project approval due-diligence process anchored as discussed in mandatory environmental, social, and human rights standards and procedures. Interest in new deals continues to grow, with 760 prospective project notifications to date.  However, for these projects, the Board has chosen an arguably simpler, principled-based approach as opposed to spelling out detailed rules, methods and assurance standards.  Concern about vagueness has been noted.  As a result, expect intense scrutiny regarding exactly how early deals will apply baselines, additionality, permanence and leakage.

Beyond the technical questions is a political and financial one: can Article 6 or indeed any carbon market work given U.S. withdrawal from the Paris Accord?  History offers some guidance. While the U.S. effectively announced it would not implement the Kyoto Protocol in 2000, U.S. firms operating in California and Northeastern U.S. states were among the largest investors in CDM-issued carbon credits towards state-level climate compliance targets. 

However, this time may be different, whereby firms wishing to invest in any Article 6.4 deals might be hesitant given the way a number of U.S. States have taken action against entities who supported ESG. Indeed, early reports suggest that U.S. firms will be prohibited from any Article 6 financing, while leaving voluntary carbon markets as an option. 

Streamlining tropical forest conservation payments: In contrast to Article 6, the Tropical Forest Financing Facility (TFFF) proposes an even more streamlined approach, focusing on results-based payments to reward protection of standing or intact tropical forests, in essence avoiding requirements such as additionality which have undermined the reputation of both carbon markets as well as the world’s largest forestry conservation fund (known as REDD+).

For those in the development community that have been averse to the commercial aspects of the heavily brokered “market” elements of the carbon markets, where carbon units are traded as fungible commodities, TFFF also marks a new kind of global financing initiative, originating from and focusing exclusively on developing countries endowed with tropical forests. 

As of early 2025, TFFF has set a financing goal of US$125 billion - halved from the initial target - of which seed capital financing of US$25 billion would potentially come from six sovereigns - Norway, the U.K., Germany, UAE, France, the U.S, and possibly private philanthropies - and the remaining $100 billion from private investors. 

TFFF does not depend on grant contributions (though grants, presumably, are welcome). Instead, the proposal is to create an investment fund with initial seed capital coming from sponsors in the form of loans led by sovereigns, and then leveraged by liquid, highly-rated bond issues in global capital markets. The fund will be invested in a diversified portfolio, with a majority of its investment in higher-yielding public and private debt, including emerging- market bonds, high-yield corporate debt in developed countries and, potentially, private credit. Returns earned in excess of what the fund will owe bondholders and sponsors in interest and principal, net of expenses, will be used to make forest payments to participating tropical forest countries that succeed in protecting their intact forest resource. 

Rate of investment returns of course will vary annually.  Over multiple long- term periods, annual returns on diversified investment portfolios structured as contemplated for TFFF have been approximately 3.5% higher than the funding cost. TFFF's organizers believe that this margin could support, on average, an annual payment of around US$4 billion, or $4 per tropical forest hectare to countries that have joined the TFFF.  To date, these include Brazil, Colombia, the Democratic Republic of Congo, Ghana, Indonesia and Malaysia.

The bottom line is that the proposed TFFF investment model can work, and should be able to provide the average annual per-hectare returns it contemplates, while assuring its funders that their investments in TFFF are fully secured.  

Before the TFFF is launched, additional research and agreement will be needed with sponsors, as well as the blessing of credit rating agencies on the allowable risk-related ranges for investments, given that the fund aims to be a triple- A rated issuer. 

Measuring results: Since TFFF proposes as its key performance indicator the size of standing tropical forests, it can rely on existing remote sensing platforms such as Global Forest Watch, the EU’s Copernicus, and others capable of tracking real time on-the-ground changes in tropical forest areas at granular levels. Over time, the TFFF may draw on other forest monitoring platforms. 

This simplified conservation target of the total amount of standing forests echoes other types of keystone species conservation initiatives, from whales and black rhinos to monarch butterflies and elephants. There are also examples of single issue, “pure play” public-purpose bonds, most notably the International Financing Facility for Immunization’s (IFFim) bonds, and the recent Climate Investment Fund Market Mechanism (CCMM) issue.

Eventually, TFFF investors may look for additional indicators, including biodiversity and ecosystem health.  Ideally, TFFF should identify a wider suite of measurement indicators that could be used before projects begin, without bringing a degree of complexity that could undermine the incentive value of the TFFF model. 

Social safeguards: Perhaps the biggest question facing TFFF involves social safeguards. A recent op-ed co-authored by Brazil’s Minister of the Environment, Minister of Finance and the World Bank President may signal a future World Bank role in the initiative, which suggests the potential need to clarify safeguard standards before operations.  Certainly, there will be some sovereign funders and philanthropy that could look towards social safeguards before any project funding. 

One option is for TFF to reference the Article 6.4 Sustainable Development Tool, which sets a new benchmark by insisting on rigorous environmental and social requirements that are based on fundamental principles of transparency, public participation and equitable benefit sharing, accountability, and enhanced due diligence.  

Another option is a more streamlined safeguard approach.  Unlike the bulk of conservation funding based on additionality, the focus of TFFF on intact, standing forests opens a case for a streamlined safeguards mechanism.  

The case for convergence: The late Thomas Lovejoy often said that the climate crisis was part of a wider nature and ecosystem crisis. Article 6 and TFFF embody both sides of nature-based climate solutions – the former proposing the financing of carbon removals via forests, other ecosystems as well as nascent engineered-systems such as CCUS; the latter proposing the financing to maintain carbon stocks or reservoirs embedded in tropical forests.

Of course, protecting tropical forests delivers multiple ecosystem benefits. The President of Singapore recently made exactly that point in advocating for greater convergence among carbon, biodiversity and freshwater markets. 

There has been a marked increase in attention around the financial risks of biodiversity loss, with emerging biodiversity, ecosystems and ecosystem standards (BEES), standards led by the IFRS Foundation’s International Sustainability Standards Body (ISSB) likely to further catalyze private sector attention to nature financing risks and investor opportunities.  

Such efforts open convergence opportunities between nature and carbon markets.  In January 2025, a new US$1.5 billion “Race to Belem” fund is one example of leveraging carbon markets to protect Amazonian tropical forests.  The World Bank’s Initiative for Sustainable Forest Landscapes (ISFL) is another, combining carbon credits with results payments also linked to landscape management, sustainable forests, and community involvement.

Global public-goods oriented bonds are also starting to recognize the synergies between climate and biodiversity goals.  For example, the Inter-American Development Bank has launched an innovative Biodiversity and Climate-Linked Mechanism (CLIMA) that links climate and biodiversity goals in a results-based payment format.  The World Bank’s innovative Amazon Reforestation-Linked Bond issuance had strong private sector participation as investors funds support activities that will issue carbon removal units (CRUs) while also reforesting native plant species in the Amazon.  

It would be a mistake to suggest any operational convergence between Article 6 and the TFFF at this early stage.  Each needs early success. Yet this is the time to start thinking of common, comparable and interoperable measurement and reporting metrics, as well comparable ways of engaging local and indigenous communities.