Debt crisis is among key issues that many developing countries are facing and debt management in developing countries is among key areas of economic policy which require careful consideration and strategic planning. 

This includes looking at development efforts and economic capacity required for such activities, as well as climate finance and climate risk management and transfer which also build on accessibility and availability of financial support and resources. 

Climate finance

Climate finance encompasses a range of financial instruments and funding mechanisms, including grants, loans, and investments, aimed at reducing emissions and enhancing resilience against climate change impacts. It is important to recognise that the global financial system, traditionally and historically, could be described as not being structured to facilitate the substantial investment needed to combat climate change. 

This includes limited access to the capital needed for much-needed actions which include but are not limited to green infrastructure, renewable energy projects, and climate adaptation strategies that developing countries have, which result in them resorting to borrowing, increasing their debt burden. This traps vulnerable countries in a cycle of further risk and vulnerabilities, undermining their economies. 

Further, it is important to note that most developing countries that are vulnerable to climate impacts and in need of climate finance are also in a state of needing the ability to manage their debts and access further resources for economic empowerment and development, in turn making debt service a significant part of their national budgets, which are already burdened due to climate-induced losses and damages, as well as resource needs for building resilience. 

This scenario exacerbates the vulnerability of these countries to climate impacts, creating a vicious cycle where climate disasters further strain their economies, leading to more borrowing and increased debt.

Financing sustainable development

Addressing the interplay between debt and climate finance is essential for sustainable development. There is a need for substantial investment in achieving Sustainable Development Goals (SDGs), of which climate action is a core component. Climate finance can be a powerful tool in this regard, providing the necessary resources for low-carbon development and climate adaptation.

Merging development needs, innovation, and climate finance needs for addressing climate impacts, debt-for-climate swaps are introduced as a solution for many developing countries. This includes an arrangement where a portion of a country’s debt is forgiven or restructured in exchange for commitments to invest in climate-related projects and actions. 

In addition to this, there remain other forms of innovative financing mechanisms such as green bonds and climate investment funds which could provide opportunities for raising capital for climate projects. Green bonds, for instance, allow investors to fund environmentally-friendly projects, while climate investment funds provide targeted financing for specific climate-related initiatives.

However, it is important that countries affected and presented with these options identify the most suitable option, taking into consideration the country’s context, the strengths of the economy, as well as the long-term impact of the choices adopted. 

International cooperation and policy integration

International cooperation is key to addressing the dual challenges of debt and climate finance. Developed countries have a crucial role to play in providing financial and technical support to developing countries. It is important to identify avenues for investment and climate action, which could provide opportunities for addressing the climate risks, as well as debt that countries are facing, taking into consideration the much-needed economic empowerment for long-term resilience building. 

In this, policies have a key role to play and integration of relevant policies and laws to ensure synergies between financial and economic processes and climate initiatives is pivotal. This highlights the need for integrating climate-related activities into broader economic and development policies, ensuring that climate finance contributes to sustainable growth and debt sustainability. 

This requires intersectoral actions and multi-stakeholder drives allowing us to gain all resources available to ensure that the long-term objectives of both climate-related and economic-related initiatives are achieved. 

Looking ahead, the global community needs to strengthen its commitment to climate finance. This involves not only increasing the amount of funding available but also improving access to these funds for developing countries. Efforts to support access and scaling up of climate finance through different processes, where multiple stakeholders could actively contribute to the process, could contribute through investment in climate action. 

(The writer is an Attorney-at-Law specialising in public international law. She leads the work of SLYCAN Trust, a non-profit think tank working on climate change, sustainable development, biodiversity and ecosystem conservation, social justice, and animal welfare. She has worked over a decade on climate change at local, national, and international levels with a focus on climate change-related law and policy, UN climate change policy and actions, UNFCCC negotiations, climate adaptation and loss and damage-related action, climate-friendly entrepreneurship, multi-stakeholder engagement in policy and climate action including youth engagement and gender)