For emerging markets and developing economies ( EMDEs ), investing in resilience is not a luxury; it is an imperative. Climate disasters and ecological degradation are impeding their economic prospects and straining their finances. Perhaps more importantly, these shocks are exacerbating unsustainable debt burdens at a time when donor countries are slashing development aid, making it harder for EMDEs to finance investments in climate adaptation.

Over the past two decades, the 74 economies comprising the Climate Vulnerable Forum and the Vulnerable Group of Twenty have suffered more than US$525 billion in losses – equivalent to roughly 20% of their collective GDP – due to climate shocks. This includes acute disasters like floods, hurricanes, and droughts, as well as slower-moving events such as desertification and coastal erosion.

Meanwhile, the degradation of natural ecosystems through deforestation and biodiversity loss has aggravated food and water insecurity and increased climate risks by eliminating natural carbon sinks. These dynamics create formidable obstacles – namely, limited fiscal space and high capital costs – that trap countries in a vicious cycle of vulnerability. Breaking free requires a significant scaling-up in financing for climate-adaptation efforts.

To that end, the Sharm El-Sheikh Adaptation Agenda, launched in 2022, proposes 30 adaptation targets in key sectors such as agriculture, public health and infrastructure with the goal of spurring inclusive, effective and equitable action by 2030. The proposed outcomes are not merely defensive; they create jobs, boost productivity, and improve creditworthiness. Unfortunately, these benefits are not reflected in current macroeconomic frameworks.

The problem is structural. Existing macro-fiscal tools – such as the debt sustainability frameworks used by the International Monetary Fund, the World Bank, and, by extension, sovereign credit ratings – account for climate- and nature-related risks but do not sufficiently recognize the economic benefits of reducing those risks.

Natural disasters – climate-related or otherwise – are ( rightly ) treated as threats to fiscal stability. But the investments required to mitigate their effects are seen only as adding to the debt burden, rather than as critical for reducing losses or as driving the development of growth-enhancing strategic assets.

For example, investments in flood-resilient infrastructure in Vietnam have not only reduced damage costs but also boosted land values, improved public health, and increased worker productivity. And investments in nature-based solutions such as restoring mangroves or wetlands can simultaneously address climate, food and water challenges, and boost infrastructure performance.

As a result, high-impact interventions, such as coastal defences, underground power lines and mangrove restoration, are sidelined in favour of more conventional infrastructure projects like roads, bridges, and ports.

These perverse incentives are reflected in EMDEs’ planning and budgeting processes. The environment ministries that oversee Nationally Determined Contributions ( NDCs ) and National Adaptation Plans ( NAPs ) under the Paris climate agreement tend not to engage systematically with finance ministries, meaning that these resilience strategies are not fully integrated into medium- and long-term national financial planning. That leaves NDCs and NAPs at risk of being aspirational, rather than actionable.

With critical adaptation investments overlooked in budgets, and with insufficient volumes of grant or concessional finance to plug ensuing gaps, many are calling for changes in how debt is treated, including reforms of fiscal frameworks so that investments in climate and nature resilience are treated as productive. A recent paper by the Bridgetown Initiative outlines four steps that governments can take to achieve this goal.

First, EMDEs must quantify acute and chronic climate and nature risks. A better understanding of the potential macroeconomic effects can help guide assessments of the financing required to reduce those risks. The paper offers a new typology to help categorize investments by risk type and sector, which would streamline the process.

Once policymakers have identified which investments are needed, they must assess their impact on the economy’s growth trajectory. Spending on resilience measures can reduce future losses from climate disasters, boost productivity, and raise incomes. These benefits must be incorporated into forecasting models, as is already done for traditional infrastructure investments.

The long-term growth benefits of resilience-focused capital projects could then be factored into debt-sustainability analyses. This would show that such investments are, in fact, fiscally prudent with the right financing conditions, thus strengthening the case for more concessional and longer-term borrowing.

Lastly, with a more comprehensive understanding of the macroeconomic effects of resilience-based interventions, EMDEs can devise credible investment plans and financing strategies that align with fiscal and budgetary policy.

Factoring climate resilience into macroeconomic planning should strengthen, not diminish, a country’s growth narrative. When done well, this empowers finance ministries to engage more effectively with donors, credit-rating agencies, markets and international financial institutions, all of which play a critical direct or indirect role in supporting resilience and adaptation efforts.

With the International Monetary Fund and the World Bank reviewing their Debt Sustainability Framework for Low-Income Countries, this is an opportune time for EMDEs to update their methodologies to reflect the benefits of adaptation measures. Climate and nature shocks are now an economic reality, not a distant threat. Building resilience to these shocks will form the foundation of sustainable development and fiscal stability for years to come.

Pepukaye Bardouille is the director of the Bridgetown Initiative, a special adviser on climate resilience to the Barbados Prime Minister’s Office and founding chief executive officer of the Climate Resilience Execution Agency for Dominica.

Mahmoud Mohieldin is a UN special envoy on Financing the 2030 Sustainable Development Agenda and co-chair of the Expert Group on Debt, a visiting senior research scholar at Columbia Business School, a fellow at the World Academy of Art and Science, a senior non-resident fellow at the Brookings Institution and a former minister of investment of Egypt, senior vice-president of the World Bank Group and executive director of the International Monetary Fund..

Copyright: Project Syndicate