Our Take: Financing Climate Adaptation in Developing Nations and the Role of International Institutions

Introduction

Last week, while on a train from Madrid to Guadalajara for a quick day trip, I tuned into one of my favorite climate podcasts – Zero: The Climate Race, produced by Bloomberg. The episode, titled These ‘Beautiful’ Banks are Expected to Save Climate Finance, featured a compelling conversation between host Akshat Rathi and Avinash Persaud, the special advisor on climate risks to the president of the Inter-American Development Bank.[1]

They discussed the staggering financial requirements that developing countries face. These are not just for the transition to clean energy, but also to build the climate-resilient infrastructure needed to withstand the impacts of a warming world. We’re talking trillions of dollars annually.

This naturally led to the question – where will that money come from?

Persaud argued for channeling more funding through Multilateral Development Banks (MDBs), which are institutions that already deliver hundreds of billions of dollars each year to the world’s poorest countries, with much of it earmarked for climate-related projects. But his call comes at a challenging time. The United States is scaling back its international climate finance commitments, and many European countries are diverting aid budgets toward defense in response to geopolitical tensions.

That conversation stuck with me as I strolled the lovely streets and parks of Guadalajara, and it sparked this month’s white paper.

As climate disasters grow more frequent and severe, adaptation has become not just a climate strategy but a development imperative. And yet, the countries most in need of support receive only a fraction of global climate finance.[2] Currently, just 10–20% of total climate finance goes toward adaptation in developing nations, a figure far below the level required to build meaningful resilience.[3]

This gap in funding is not simply a matter of insufficient resources. It reflects deeper systemic barriers such as complex funding mechanisms, data challenges, risk-averse markets, and governance issues that disproportionately disadvantage developing nations. If global leaders are serious about equitable climate action, then adaptation finance must be redesigned from the ground up, with a focus on accessibility, transparency, and long-term resilience.

This paper explores those barriers, the role of international financial institutions, and the emerging tools and policies that can help us close the gap between intention and impact.

Unique Challenges in Accessing Climate Finance

Developing countries face a set of interlocking barriers that limit their access to climate adaptation finance. Structurally, many lack the fiscal space to prioritize adaptation spending, as they are heavily burdened by debt and must address other pressing development goals. This challenge is especially acute in low-income countries where adaptation competes with needs such as healthcare, education, and infrastructure investment.[4]

Moreover, data gaps persist across the adaptation finance landscape. A lack of standardized metrics makes it difficult to measure project outcomes, track funding flows, and evaluate impact.[5] This weakens accountability and undermines trust in international climate finance systems.

Another major obstacle is the complexity of accessing funds from mechanisms like the Green Climate Fund (GCF). Although GCF and similar groups are extremely well-intentioned, the application procedures are often lengthy, resource-intensive, and require technical expertise that many countries lack.[6] This has led to low approval rates and significant disbursement delays.

Market failures further hinder adaptation finance. Private investors are reluctant to fund adaptation due to its long-term horizons and unclear revenue streams. Unlike mitigation efforts, which often yield measurable cost savings, adaptation measures like coastal defenses or drought-resistant crops offer lower tangible returns.

Additionally, adaptation funding suffers from “greenwashing,” which in this context is the mislabeling of projects that do not effectively meet local needs or are genuinely climate-related. For instance, water infrastructure projects are often overfunded, while sectors like climate-resilient agriculture remain neglected.[7]

Equity concerns also loom large. Sub-Saharan Africa, despite being one of the most climate-vulnerable regions, receives less than 25% of adaptation funding.[8] Indigenous communities and women-led initiatives are often excluded from design and governance, resulting in projects that fail to reflect lived realities.

Role of International Financial Institutions

International Financial Institutions (IFIs) are central to the delivery of adaptation finance, offering grants, loans, and technical assistance. Multilateral Development Banks (MDBs) like the World Bank and the African Development Bank administer major climate finance mechanisms such as the Climate Investment Funds (CIFs), which blend concessional loans with grants to reduce project costs.[9]

However, MDBs have historically emphasized mitigation. As of 2021, nearly 60% of MDB climate finance went toward mitigation, despite widespread recognition of adaptation needs in developing countries.

The Green Climate Fund (GCF) was established to balance this, prioritizing adaptation and LDCs.[10] While it supports National Adaptation Plans (NAPs), critics note that its administrative processes are slow and complex, discouraging timely access and limiting reach.

Innovative finance mechanisms offer promising pathways. Blended finance models, such as the Global Climate Partnership Fund, use public capital to de-risk private investment, catalyzing support for sustainable infrastructure and agriculture.[11] Sovereign adaptation bonds – piloted in Fiji and Kenya – raise capital for climate-resilient infrastructure, while also signaling fiscal commitment to resilience.

Index-based climate insurance schemes have also gained traction. The African Risk Capacity helps countries like Malawi provide drought insurance to smallholder farmers, reducing vulnerability and enabling recovery without deepening debt.[12]

Case Studies in Improving Financial Flows

While challenges in financing adaptation are well documented, there are notable success stories that offer valuable lessons. These cases show that with the right institutional frameworks, strategic planning, and community involvement, it is possible to improve the flow and effectiveness of adaptation finance in developing countries.

Bangladesh’s Climate Fiscal Framework is a model of integrating climate adaptation into national fiscal policy. Rather than treating adaptation as a siloed or donor-driven initiative, Bangladesh embedded resilience into its public financial management system. By doing so, it aligned domestic budgeting with climate objectives, improved inter-ministerial coordination, and enhanced transparency. As a result, the country attracted over $2.1 billion in adaptation finance from international financial institutions between 2016 and 2020.[13] This approach not only increased funding but also improved national ownership and accountability.

In the Caribbean, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) has emerged as a model of regional cooperation.[14] Established as a pooled insurance mechanism, CCRIF provides quick-disbursing payouts to member states following extreme weather events. This reduces the need for emergency loans and enables governments to respond more swiftly to disasters. Studies indicate that CCRIF payouts have cut post-disaster liquidity crises by up to 50% in some countries, providing a vital buffer during recovery periods.

Of course, not all efforts succeed. Kenya’s National Climate Change Action Plan, while ambitious on paper, suffered from weak inter-ministerial coordination and a disconnect between government agencies and donor priorities. The result was fragmented implementation and chronic underfunding, despite strong initial interest from international partners.[15] The case illustrates how even well-designed strategies can falter without cohesive governance and sustained political commitment.

Together, these examples underscore a key point: adaptation finance is not only about securing funds but about designing systems that enable those funds to be used effectively, equitably, and sustainably.

Current Global Efforts and Gaps

In recent years, the global community has made increasingly vocal commitments to closing the adaptation finance gap, recognizing the urgent need to protect vulnerable populations and economies from the accelerating impacts of climate change. However, despite high-level pledges and institutional momentum, progress on the ground remains uneven and, in many cases, insufficient.

One of the most high-profile commitments came in the form of the Glasgow Climate Pact, adopted at COP26 in 2021.[16] Among its key outcomes was a promise by developed nations to at least double adaptation finance by 2025, relative to 2019 levels. This was seen as a critical corrective measure, addressing the long-standing imbalance between funding for mitigation and adaptation. Yet, more than three years later, the outlook remains mixed. While several countries have increased their adaptation-related pledges, actual disbursements lag behind, and there is little clarity on how the promised funds are being tracked or distributed.

Efforts to mobilize private sector involvement have also fallen short of expectations. While mitigation projects, such as renewable energy and energy efficiency, have successfully attracted private capital, adaptation continues to be perceived as too risky or unprofitable. This perception is reinforced by limited data, long investment horizons, and the diffuse nature of adaptation benefits. For example, a seawall or reforestation project may protect thousands of people, but it does not generate a direct financial return. As a result, adaptation financing remains overwhelmingly public-sector-driven.

Institutions like the Green Climate Fund (GCF) have tried to address this by introducing readiness programs and support for National Adaptation Plans (NAPs), but the complexity of application processes and the slow pace of fund disbursement continue to frustrate developing countries.[17] According to the GCF’s own performance reports, a significant portion of approved funds remain undisbursed, tied up in procedural bottlenecks or capacity shortfalls in recipient countries.

In parallel, several donor countries have started to mainstream adaptation into their broader development strategies. The OECD’s 2023 report on scaling adaptation finance urges donor agencies to improve coordination, align funding with national development goals, and invest in project “bankability” – the readiness of adaptation projects to attract funding based on clearly defined risks, outcomes, and benefits.[18] These are important steps, but often remain limited to pilot programs or short funding cycles, lacking the scale or durability required for long-term transformation.

Efforts by regional development banks and South-South cooperation networks are also gaining ground. The African Development Bank’s Africa Adaptation Acceleration Program (AAAP) is working to scale up climate-smart agriculture, resilient infrastructure, and weather-indexed insurance across the continent. However, the initiative still faces a funding gap of nearly $20 billion, highlighting the broader global shortfall.

In terms of global tracking, significant gaps persist in the transparency and comparability of data. The UNFCCC’s Biennial Update Reports and the Enhanced Transparency Framework are designed to harmonize how countries report climate finance, but adoption is still uneven. Many developing nations lack the institutional capacity or technical tools to report in a standardized format, further complicating international assessments of progress.

Furthermore, political will in key donor countries appears to be waning. The United States has rolled back several international climate commitments in recent years, and several European countries are now reallocating official development assistance to fund domestic defense priorities amid global instability. This geopolitical realignment threatens to erode the already fragile foundation of adaptation finance and risks undermining years of multilateral progress.

Despite these challenges, some promising signs are emerging. The Global Center on Adaptation’s 2024 State and Trends report identifies a rise in nature-based solutions, community-led initiatives, and regional adaptation hubs that are generating strong local ownership and policy alignment.[19] However, without meaningful scaling and systemic reforms to how adaptation is financed and delivered, these efforts will not match the scale of the crisis.

In short, while global awareness of the adaptation finance gap is growing – and some frameworks are evolving in the right direction – there is a growing disconnect between ambition and implementation. To close this gap, the focus should now shift from pledges to performance, safeguarding that adaptation funding is not only promised but delivered efficiently, inclusively, and at the scale the moment demands.

Recommendations

Ok, so at this point the question is “so what?”

To address these challenges, a few actions could be put into play.

First, adaptation finance metrics should be standardized and aligned with international frameworks such as the UNFCCC’s Enhanced Transparency Framework.[20] Transparent reporting builds trust and facilitates accountability.

Second, concessional financing should be expanded, particularly for Least Developed Countries (LDCs), where climate vulnerability is greatest.[21] MDBs must rebalance their portfolios to prioritize adaptation without increasing sovereign debt burdens.

Third, local capacity must be strengthened. Establishing technical assistance hubs can support project design, proposal writing, and implementation, bridging the gap between local actors and global financiers.

Finally, alternative financing tools such as diaspora bonds and debt-for-adaptation swaps could unlock new funding streams.[22] The Seychelles’ blue bond, for instance, mobilized capital for ocean conservation while easing external debt pressures.

Conclusion

The global adaptation finance gap – estimated between $194 and $366 billion per year – represents a critical obstacle to climate justice and sustainable development.[23] While developing countries face the gravest risks, they continue to receive only a fraction of the support needed to build resilience.

Current financial systems are not keeping pace. Bureaucratic hurdles, misaligned priorities within international institutions, and limited private sector engagement continue to restrict progress. Yet, success stories from countries like Bangladesh, Colombia, and regional initiatives in the Caribbean show that with the right frameworks, adaptation finance can be effective, equitable, and scalable.

To move forward, multilateral institutions must prioritize adaptation on equal footing with mitigation. Donors must fulfill pledges with accessible, transparent funding. And local capacity, especially in the most vulnerable countries, must be strengthened to lead these efforts.

Closing the adaptation finance gap is not just about funding. It is also about fairness, resilience, and shared responsibility in the face of a changing climate.

[1] https://podcasts.apple.com/us/podcast/these-beautiful-banks-are-expected-to-save-climate/id1621556928?i=1000703816883

[2] https://climatepolicyinitiative.org/wp-content/uploads/2018/12/Understanding-and-Increasing-Finance-for-Climate-Adaptation-in-Developing-Countries-1.pdf

[3] https://www.oecd.org/content/dam/oecd/en/publications/reports/2023/11/scaling-up-adaptation-finance-in-developing-countries_4f4b0a0a/b0878862-en.pdf

[4] https://gca.org/wp-content/uploads/2021/10/GCA-CPI-Financial-Innovation-for-Climate-Adaptation-in-Africa.pdf

[5] https://www.oecd.org/content/dam/oecd/en/publications/reports/2023/11/scaling-up-adaptation-finance-in-developing-countries_4f4b0a0a/b0878862-en.pdf

[6] https://www.iisd.org/system/files/2022-08/financing-strategies-for-adaptation-developing-countries.pdf

[7] https://climatepolicyinitiative.org/wp-content/uploads/2018/12/Understanding-and-Increasing-Finance-for-Climate-Adaptation-in-Developing-Countries-1.pdf

[8] https://www.ngfs.net/system/files/import/ngfs/medias/documents/ngfs_conceptual_note_on_adaptation.pdf

[9] https://www.iisd.org/system/files/2022-08/financing-strategies-for-adaptation-developing-countries.pdf

[10] https://www.greenclimate.fund/

[11] https://gcpf.lu/

[12] https://www.ngfs.net/system/files/import/ngfs/medias/documents/ngfs_conceptual_note_on_adaptation.pdf