Action on climate change necessitates alleviating debt burdens

The world's poorest countries, particularly small island developing states, are facing a critical challenge: they are highly vulnerable to climate change and biodiversity loss. This vulnerability is especially acute for highly indebted economies, which are now grappling with weaker growth prospects and reduced financial support from the United States and other donor countries.

Over the past year, a report titled "Healthy Debt on a Healthy Planet" has offered a potential solution. Co-chaired by the governments of Colombia, Kenya, France, and Germany, the report outlines steps for emerging and developing economies to break free from the debt-climate trap and move toward a virtuous cycle of low-carbon, climate-resilient, and nature-positive growth.

The Expert Review on Debt, Nature, and Climate is at the forefront of these proposals. The group is involved in proposing new mechanisms for debt restructuring and refinancing in exchange for investments in climate adaptation and conservation projects. Moreover, they call for the development of new financing instruments aimed at mobilising private capital for climate mitigation and adaptation.

One such instrument is the Finance Facility against Climate Change (F2C2), while a new kind of equity-like instrument is proposed to finance climate-resilient infrastructure. These proposals, when combined with technical assistance and policy support, could significantly improve the growth prospects of developing countries.

Vera Songwe, the Founder and Chair of the Liquidity and Sustainability Facility, and Moritz Kraemer, the Chief Economist at LBBW Bank and a Co-Chair of the Expert Review on Debt, Nature, and Climate, are key figures in this initiative.

Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), has also voiced her concerns. She has warned that growing economic uncertainty and financial market stress pose serious threats to developing countries. In February, an IMF estimate revealed that nearly half of the lowest-income countries are at risk of debt distress.

Extreme weather events like hurricanes, droughts, and floods can wipe out critical infrastructure and cripple agricultural production in an instant. Making debt management both fiscally and environmentally sustainable is essential to safeguarding global growth. The Expert Review on Debt, Nature, and Climate is a step in the right direction towards achieving this goal.