Scaling Up Climate Adaptation Finance in Times of Growing Public Debt, Inflation and Natural Disasters

In 2021, economic losses from natural catastrophes totaled $270 billion. Poor climate physical risk assessment limits adaptation finance, which is still lagging behind mitigation finance in emerging markets and developing economies (EMDEs), but also high-income countries.

A new policy brief  published by the European Capital Markets Institute and authored by Irene Monasterolo, Kevin P. Gallagher, Marie Briere, Charlotte Gardes-Landolfini and Nicola Ranger examines climate adaptation finance in times of sovereign crisis, following a side event discussion of the same topic at the 27^th UN Climate Change Conference (COP27) in November 2022. The authors discuss sovereign financial challenges for climate vulnerable countries and a way forward for mobilizing finance for climate adaptation.

The policy brief explains that climate physical risk pricing and portfolio risk assessment are still at an early stage; most analyses neglect the asset-level dimension of risks, leading to a severe underestimation of losses. Furthermore, adapting to climate physical risks will require massive investments. High level of debt can prevent climate vulnerable countries from committing the funds necessary to adapting to climate change. 

The authors argue that financing could consist of multiple layers, with public finance playing a central role. Private finance is also key, with blended financial arrangements by development finance institutions and multilateral development banks. Finally, they argue climate-aligned debt restructuring must be accompanied by substantial debt relief in some countries, as well as countercyclical financing instruments to allow EMDEs to have systems in place for quick release of finance when a climate disaster strikes.