UN Development Programme calls for global financial system reform to support climate-vulnerable countries

By United Nations Development Programme

UN Development Programme calls for global financial system reform to support climate-vulnerable countries

Ahead of the 4th International Conference on SIDS (SIDS4), held in Antigua and Barbuda on May 27-30th, a new policy brief by the UN Development Programme (UNDP) highlights a pressing need to massively invest in climate change adaptation in Small Island Developing States (SIDS) to break costly cycles of disaster and recovery. The paper also calls for a more equitable and effective global financial system to support climate-vulnerable economies.

The problem of ‘disaster-response’ cycles, in which countries are continuously playing fiscal and financial catch-up to recover from new climate change-related crises, is particularly acute in SIDS because of their extreme vulnerability to floods, sea level rise, hurricanes, and other climate emergencies. SIDS faces the critical task of breaking these cycles by ramping up investment in climate change adaptation, which provide long term resilience to the effects of global warming.

However, securing the necessary funds for projects such as seawalls and climate-resilient agriculture is challenging due to high costs and significant debt vulnerabilities. SIDS requires an estimated US$4.7-US$7.3 billion annually for adaptation, yet many struggle with high debt, complicating efforts to finance these essential measures.

“Most SIDS are unable to mobilize the upfront funding they need to adapt to the climate crisis and are forced to divert a growing share of public funding to rebuild after disasters. On average, the annual economic toll on SIDS from such disasters is estimated at 2% of GDP, a figure that is quadruple the losses experienced by larger nations, and with some countries at risk of losing more than 10% annually. SIDS exemplifies the challenge for the international financial architecture to become more responsive to and supportive of developing country needs in addressing the climate crisis,” noted Achim Steiner, UNDP Administrator.

In its policy brief “Breaking through the disaster-response cycle in SIDS: aligning financing to urgent climate action”, UNDP presents some of the key changes needed to address these challenges effectively. These include better access to effective and climate-sensitive debt treatments for countries in need, deployment and improvement of innovative financial instruments, and access to more long-term affordable funding from the official development sector.

The brief supports greater integration of climate considerations into debt sustainability assessments and argues that innovative debt instruments, such as state-contingent bonds, thematic bonds, and debt-for-development swaps when designed and applied appropriately, can help countries cope better with the impacts of climate change by providing liquidity in times of need and by enabling long-term investments in resilience. Additionally, the policy brief argues that the official development sector must significantly scale up its lending capacity to deliver long-term and affordable financing for the climate transition, including adaptation investments that are harder to fund via private capital.

“For Small Island Developing States (SIDS), which are mostly middle-income countries with minimal contributions to global emissions, adaptation investment at scale is a vital issue. They require greater access to affordable finance on affordable terms, improved liquidity support during climate-related shocks, and more straightforward pathways to debt relief,” said George Gray Molina, UNDP chief economist.

The policy brief concludes that investing in adaptation pays off many times over with cost-benefit ratios ranging between 1:2-1:10 depending on country and resilience measure. Additionally, investing in adaptation will not only save on costly recovery spending and reduce development tradeoffs but will also help keep borrowing costs down as financial markets are increasingly pricing in countries’ climate-change exposure and preparedness.