Long read: Finance for climate adaptation in the most vulnerable places… Time for a major rethink?

This piece was originally published by Tom Mitchell on the IIED website.

Least developed countries, Small Island Developing States and other vulnerable countries are experiencing spiralling climate impacts and wrestling with debt distress that leaves them unable to build the resilience they need. The current system of financing climate adaptation was designed 20 years ago and is not delivering results for the communities who need most help. A new, more effective system must now emerge.

Fundamental flaws with the current system

Many articles on climate adaptation finance start with the scale of the money needed in the face of growing climate impacts, noting this amounts to hundreds of billions of US dollars per year and quoting the UNEP Adaptation Gap reports. They might comment on the lack of ‘ambition’ of rich polluters to provide funding to the most vulnerable countries and communities, and then argue that new sources are imperative, mentioning more international private investment.

More comprehensive articles might then cover how access to international adaptation finance or private investment is difficult for least developed countries (LDCs) or Small Island Developing States (SIDS) and how ‘quality’ of finance should be a goal. This often means more grants, fewer loans, more programmatic approaches and fewer isolated projects. I’ve written that introduction many times myself, and it certainly helps to foreground climate injustice, shortcomings of the current system, and the scale of the challenge in LDCs and SIDS.

But this narrative also now traps everyone in feelings of failure and frustration without easy paths forward, especially when so little international adaptation finance reaches the places and communities that need it most and as impacts increase.

There are other major flaws in the current system. The traditional international adaptation finance system often completely ignores the biggest sources of finance for adaptation and loss and damage in LDCs and SIDS, namely personal savings, spending by local micro and small businesses, and remittance flows.

International adaptation finance fails to acknowledge that private foreign direct investmentin most LDCs and SIDS is negligible, with tiny amounts allocated for climate adaptation, yet places unfounded optimism in blended finance. It relies on a handful of international climate funds or multilateral development banks to solve the problem, but these organisations still tend to struggle to get quick, flexible help to the most vulnerable communities, with single project-based approaches still being the norm.

The ingenuity, agency and entrepreneurial capability of people and communities to lead and shape adaptation are overlooked, and standard systems barely address sovereign debt and the enormous fiscal constraints and hidden handbrakes that LDC and SIDS governments face in financing adaptation. The current system often treats countries and communities as homogenous from the perspective of vulnerability, climate impact and capability. It requires the same access modalities for all, and it places undue emphasis on hard infrastructure solutions that are attractive to international private capital or development banks.

It has rarely considered climate resilience as a fundamental part of core development or economic growth strategies, as so desperately needed, nor does it consider the evidence of what it actually takes to build climate resilience. It also artificially separates action on development, mitigation, adaptation, and loss and damage – in a way that might serve an international audience but is barely divisible for people at risk and unhelpful for national comprehensive risk management systems.

Four key building blocks

So, what are the main building blocks of an emergent, more effective system for supporting climate adaptation and resilience in SIDS and LDCs?

1. Enhance existing local climate resilience systems

Most of the money, capacity and capability for adapting to the impacts of climate change is already coming from domestic – and often local – sources in LDCs and SIDS. Any international or national help should enhance these: let them define success and follow their lead.

Local civil society, savings groups and credit unions, mutuals, domestic philanthropy, micro-insurance and micro-finance institutions, community social environmental funds and cooperatives are the fundamental fabric of facilitating climate adaptation and addressing loss and damage in communities. But traditional adaptation finance mechanisms tend to ignore these or exclude them by requiring formal and complex accreditation, proposal development and reporting processes.

It is up to national governments, national and local development banks, philanthropies and bilateral donors to show the way by forging new, flexible and efficient partnerships with these structures. For some funding agencies, enabling this will require a much-needed change in strategy, accountability and diligence.

Furthermore, with design tweaks or enhancements, social protection schemes can be instrumental in strengthening adaptive capacity. This is because they do often reach more vulnerable populations and can help restore or protect nature and ecosystem services. Working through these systems can be even more effective if they have an anticipatory component, where early-warning triggers enable additional resources to be distributed to vulnerable people at risk before a potential impact.

Evidence shows this can greatly reduce the scale of humanitarian needs in the wake of a disaster. Anticipatory pulses of finance to potentially impacted communities can be drawn from parametric insurance, for example, reducing the burden on the public purse. Creating a virtuous resilience and mitigation circle is possible too; public works-based social protectioncan even generate carbon or biodiversity credits through landscape restoration or improving soil organic carbon, enabling a refinancing model.

But for climate adaptation to even be possible and sustainable, the basic enabling conditions are vital: access to healthcare (including mental healthcare), safe shelter, water and nutrition, including for displaced people. Adaptation and climate-compatible development go hand in hand, with comprehensive risk management and basic service delivery to all being central to maintaining and strengthening adaptive capacity.

2. Invest in soft infrastructure and adaptation leadership capability

Smart, foresighted governance and visionary, effective local and national leadership have proved to be some of the biggest differentiators of adaptation success, especially in harnessing ‘whole-of-government and whole-of-society approaches’, now being emphasised as a feature of country platforms. Yet, there is a paucity of comprehensive programmes to support leadership capability building and anticipatory governance for adaptation in LDCs and SIDS that go beyond piecemeal training and time-bound capacity building.

There appear to be no schools of government for climate resilience and adaptation, for example, or investments in longstanding pools of highly capable, experienced people to partner with and backstop national and local leaders. The European Union’s (EU) Adaptation Mission and its Pathways2Resilience programme are likely the most relevant examples, but this is only open to EU regions.

International funding sources often specifically exclude direct payments to cover costs of government employees or make organisational strengthening impossible (by squeezing overheads or indirect costs, for example). This funding culture must change, focusing on upgrading adaptation and resilience capability rather than counting beneficiary numbers or only supporting projects.

Frameworks like the Resilience Maturity Curve focus on assessing progressive improvements in capability as part of an evaluative framework and should be adopted more widely. There are many great local organisations and groups within and close to national and local government that can be the bedrock of climate resilience-building, but they are starved of support and mired in complex reporting requirements, which drain away what capacity and capability there is. This must change.

3. Nurture adaptation as local business opportunity

The economies of LDCs and SIDS rely on local, often informal, small and micro-businesses. Evidence points to growing demand for goods and services that bring climate-resilience benefits, creating business opportunities and jobs. Improving support to help local businesses adapt to climate change and exploit the adaptation economy must be a priority for economic development.

There is potential to strengthen local innovation and enterprise support hubs for climate adaptation-related businesses (such as innovation ecosystem building, incubators, and accelerators), with programmes rolling out now in several countries. The target here is to build a dense network of local businesses helping to strengthen adaptation and the domestic economy, but in some cases, there may be an opportunity for businesses to grow and scale up with help from domestic and international impact capital as the number of adaptation impact investors and interested development banks and development finance institutions increases.

While larger international businesses are investing more in strengthening the climate resilience of their own supply chains, there are limited benefits for most communities in SIDS and LDCs. The footprint of such businesses tends to be modest in these countries; meanwhile, the cost of big businesses and the impact of businesses keeping their prices low, while meeting international environmental standards, often falls on local producers.

4. Expand fiscal space and remove the handbrakes on climate-resilient development

As countries experience greater climate impacts, and as sovereign debt burdens and debt service payments increase, the fiscal space to support basic services, let alone finance climate adaptation, is squeezed. The challenge is compounded by the negative impact of credit ratings, high currency/exchange rate risks, high interest rates, prohibitive banking regulations, and the lack of capacity in many countries to proactively engage in renegotiating debt or accessing positive support (for example, specialist legal advice).

Domestic resource mobilisation often only meets a small fraction of the income needed to cover the country’s spending needs, and trade imbalances and debt service payments mean many LDCs and SIDS transfer many times more to rich countries and other creditors than they receive in climate finance. Further, for a country to reduce its debt repayments, it often needs to achieve economic growth at a faster rate than the interest on its debt, while also hoping it is not hit by another disaster. Interventions, then, must take a comprehensive approach to creating more fiscal space while increasing the climate resilience of future economic development. This rarely happens now.

The Antigua and Barbuda Agenda for SIDS, agreed in May 2024, includes the announcement of a comprehensive Global SIDS Debt Sustainability Support Service (DSSS) that puts climate resilience at its heart, but it is not yet operational and lacks financial support. The DSSS has four components that need to be applied simultaneously in countries to be effective:

1. Comprehensive action on debt sustainability
2. Future financial protection against shocks
3. Investment in climate-resilient economic development, and
4. Access to legal support, technical advice and wider advocacy to eliminate hidden handbrakes and create a more level playing field.

Even more broadly, all finance flows must contribute to achieving the Paris Agreement, as agreed under Article 2.1(c), including ensuring they do not exacerbate climate risks. Insurers have a key role to play here in derisking investments, creating market incentives and using technical expertise in risk modelling, pricing and reduction to drive change. Given the threat climate change poses to insurance markets, underwriter credit ratings risk, and their investment portfolios (often still in climate-damaging sectors), there is an urgent opportunity to align interests behind building short and long-term climate resilience.

How do we make the change?

What action should those involved in international adaptation and development finance take now to bring about change and create a more effective system?

Even with Official Development Assistance (ODA) budgets being slashed, climate adaptation and resilience for the most vulnerable communities must be a priority. Without it, economic instability will be the status quo, security risks will be amplified, and development gains will be eliminated.

Anything else is myopic and an act of self-harm. But the funding modalities and mindsets cannot be the same. We need new rules, channels, success criteria, flexible partnerships and patience. Traditional bilateral donors and big philanthropies still have a critical role in reform (including of themselves).

International climate funds can also play a role, but only if there is large-scale and urgent change. In the face of criticism, some have made adjustments to make it easier for SIDS, LDCs and fragile states to access support. Measures include enhancing direct access of national entities, changing accreditation processes, simplifying and harmonising procedures, and introducing funding windows for locally led adaptation. 

But these fall far short of the quick, flexible, programmatic and capability-based support needed and outlined above. It is currently difficult to see how the governing bodies of the funds, with their tendency towards control and accountability exacted through cumbersome processes and bureaucracy, will be able to deliver the scale of change needed.

As international public finance for adaptation comes under greater pressure, it will be more tempting to rely on the private sector for investment, explore more blending instruments or hand money to multilateral development banks (MDBs) based on a ‘leverage’ and ‘our money will go further’ argument. While it may be the legitimate path for middle- and upper-middle-income countries, this approach will only have limited success for LDCs, SIDS and fragile states at present and cannot be the primary strategy.

Talk of country platforms and JET-P models for adaptation, increasingly being proposed by MDBs, are heavily skewed towards middle-income countries where the enabling conditions are more favourable. But with a major rethink of the model, country platform approaches might offer options for LDCs and SIDS, too.

This would involve key roles for international and local philanthropies, embedding locally led adaptation principles throughout, dialling up support for capability and cooperation across relevant organisations, developing systemic intervention points, and working with and through the types of local community funding, enterprise and cooperative structures detailed in the first building block.

Seizing the opportunity

While some of these transitions to a new system might seem hard to effect, we have a key opportunity. Brazil’s COP30 Presidency is focused on implementation and action and is taking steps to improve the finance system for climate adaptation. Brazil also has a rich history of community fund structures and local philanthropy. 

ODA cuts are creating a moment for reflection, not just on where cuts fall but also on whether there is a more efficient way to deliver results.

SIDS and LDCs are bolder in designing and owning solutions (such as DSSS or LIFE-AR), and philanthropy is increasingly recognising the importance of climate adaptation and resilience, as evidenced by the recent launch of the Adaptation and Resilience Collaborative for Fundersand through grassroots philanthropy and social funds.

Finance, whether institutional investors, finance ministers, central banks, regulators, commercial banks, development finance institutions, impact investors and many others, are quickly waking up to climate change adaptation as a necessity and an opportunity, and even credit rating agencies are starting to appreciate climate resilience as a key measure of being investible. This growing awareness is illustrated by the level of interest in the new Climate Resilience Finance Summit, being held as part of London Climate Action Week 2025. 

We not only face a climate crisis and a tidal wave of climate impacts on communities around the world; we also have a crisis of effectiveness and legitimacy in the first-generation system that countries built to support climate change adaptation and greater resilience. Now is the time for a new, second generation system.