Climate Emergency in Adaptation Finance in LDCs: Quest for Transformative Actions

By ​M. Zakir Hossain Khan* and Shadman Khalili**

The escalating climate crisis poses an existential threat to Least Developed Countries (LDCs), exacerbating existing vulnerabilities and jeopardizing their development progress. A recent temperature spike of 38.5°C in Antarctica, the coldest place on Earth, raises fears of catastrophe and serves as a harbinger of disaster for humans and the local ecosystem. Article 9.4 of the Paris Agreement states that financial resources should aim to achieve a balance between adaptation and mitigation. The Green Climate Fund (GCF) reflects this aim with its 50:50 provision for both activities.

Considering country-driven strategies and prioritizing the needs of developing country parties, especially those that are climate-vulnerable (e.g., CVF) and have significant capacity constraints, such as Least Developed Countries (LDCs) and Small Island Developing States (SIDS). Public and grant-based resources are crucial for adaptation in these countries. While a universal definition of climate finance remains elusive, there is no doubt that adaptation is crucial for the survival and sustainable development of LDCs. However, they face a significant financing gap that hinders their ability to implement effective climate resilience strategies.

The Widening Adaptation Finance Gap: A Stark Reality

​The adaptation finance gap is a staggering 10–18 times larger than current international adaptation finance flows – a significant increase of at least 50% from previous estimates. The UNEP's Adaptation Finance Gap Report 2023 highlights this critical issue. It estimates annual adaptation costs for developing countries to be between US$215 billion (roughly $660 per person in the US) and US$387 billion (around $1,200 per person in US dollars). This stands in stark contrast to the meager US$21 billion (approximately $65 per person in the US) received in international public adaptation finance flows in 2021, representing only 5% of the estimated needs. National Determined Contributions (NDCs) and National Adaptation Plans (NAPs) suggest a per capita adaptation finance need of US$55.3 (based on the US$387 billion estimate) per year for 2021 to 2030. However, international public adaptation finance flows only reached US$3.08 (based on the US$21 billion in 2021) – a concerning 15% decrease from 2020's allocation.

Unfortunately, over the last decade, climate finance (see more details in questions 3 – 5) has mostly been provided through debt creating instruments. Continued use of loans to fulfil climate finance obligations sharply reduces a country’s ability to achieve fiscal stability and debt sustainability and helps to fuel the debt crisis in the global south. This is the opposite scenario to climate justice and sustainability of nature. 

Despite pledges made under the Paris Agreement to mobilize new and additional to ODA (mostly grant), including the goal of doubling adaptation finance by 2025, progress remains woefully inadequate. Even achieving this target would only make a modest dent in the adaptation finance gap. Concerns are amplified as the V20 group of highly climate-vulnerable countries struggles with a crippling debt burden, further limiting their ability to invest in adaptation. Climate change exacerbates this challenge, with climate-related losses between 2000 and 2019 estimated at US$525 billion – equivalent to 76% of the V20's debt stock. This creates a vicious cycle: debt hinders climate action, while climate impacts further worsen debt burdens. However, a significant hurdle for LDCs in accessing grant-based adaptation finance remains the complexity of application procedures, stringent eligibility criteria, and bureaucratic processes.

This system disproportionately disadvantages smaller nations and local organizations, exacerbating the marginalization of those most in need. Furthermore, the current emphasis on project-specific grants often neglects the critical need for long-term resilience, institutional strengthening, and holistic adaptation strategies that address systemic vulnerabilities. Additionally, existing financial mechanisms fail to adequately incentivize private sector investment in adaptation, leaving a vast untapped resource for climate action. Moreover, the lack of comprehensive data on adaptation finance flows and needs hinders effective planning, resource allocation, and impact assessment. 

A Call for Transformative Actions

Dominant Sources and Needed Reforms:

• International public adaptation finance remains the primary source, including philanthropy, corporate social responsibility (CSR), and private donations. However, a significant portion of public funds still subsidizes fossil fuels in G20 countries. Those funds must be diverted to adaptation finance including grant based loss and damages finances for the LDCs.
• Initiatives like the Bridgetown Proposal offer great potential to support developing countries' resilience by managing their debt burden including debt swaps for climate action and concessional loans for adaptation projects and aligning financial flows with low-carbon development (as per Paris Agreement Article 2.1(c)).
• Exploring debt relief options like climate action swaps and concessional loans for adaptation projects can further ease the burden on vulnerable countries. Integrating climate considerations into debt management strategies is also crucial for long-term sustainability.

Unlocking Private Sector Investment:

• Resilience bonds leveraging migrant remittances (a significant contributor to GDP in many developing countries) can be explored.
• Increasing financing for both individual as well as community-led green entrepreneurship (Greenprenuership) and Micro, Small, and Medium Enterprises (MSMEs) holds promise as they represent a sizable portion of the private sector in many developing countries.

Scaling Up Public Funds and Streamlining Access:

• Developed countries must fulfill their commitments and significantly increase grant-based adaptation finance for LDCs. This includes boosting contributions to the Green Climate Fund (GCF), Least Developed Countries Fund (LDCF), and Adaptation Fund, alongside scaling up bilateral assistance. Innovative financing mechanisms like climate taxes or levies can be explored.
• Streamlining direct access mechanisms is crucial. Simplifying application procedures, relaxing eligibility criteria, and promoting direct access modalities can empower LDCs and local organizations to manage adaptation funding. Dedicated funding windows and capacity-building support for proposal development can further enhance access.

Building Long-Term Resilience:

• Providing comprehensive technical and financial support for LDCs to develop and implement National Adaptation Plans (NAPs) is essential. These NAPs should be fully integrated into national development strategies and aligned with the Paris Agreement goals. Support for vulnerability assessments, cost-benefit analyses, and stakeholder engagement is necessary.
• Developing innovative financial instruments like green bonds, resilience bonds, guarantee schemes, and blended finance models can attract private sector investment in adaptation projects. Creating an enabling environment with clear policies, predictable regulations, and risk-sharing mechanisms is critical.
• Investing in data collection and monitoring systems allows us to track adaptation finance flows, measure progress, and assess project effectiveness. Standardized methodologies, transparent reporting, and capacity building for data management are needed.

Knowledge Sharing and Local Ownership:

• Fostering South-South cooperation and knowledge exchange on adaptation best practices, technologies, and solutions can be achieved through regional platforms, knowledge-sharing networks, and technical assistance programs.
• Improving access procedures, promoting local ownership of projects, and exploring innovative financing mechanisms are crucial for ensuring effective utilization of grants and building long-term resilience in LDCs.

A Collective Responsibility for a Sustainable Future 

​Addressing the adaptation finance gap is not just a financial challenge; it's a moral imperative and a critical investment in our shared future. Least Developed Countries (LDCs) bear the brunt of the climate crisis, despite lacking the resources to adapt and build resilience. Grant-based climate finance plays a significant role in supporting LDCs' adaptation efforts, but its current scale needs a significant increase to meet growing challenges.

The international community must act urgently and decisively to scale up adaptation finance, equip LDCs with the tools they need, and foster a global partnership for climate action. By investing in adaptation today, we can build a more just, equitable, and sustainable future for all. The cost of inaction will be far greater, leaving a legacy of devastation for LDCs and the entire planet. Let us rise to the challenge and ensure that adaptation finance becomes a cornerstone of global climate action, securing a resilient future for LDCs and the world.

* Chief Executive of Change Initiative and International Climate Finance Expert; email: [email protected]

** Manager, Change Initiative