Paying the Price for Climate Change: Financing Resilience in Small Island States 

There is an urgent need to increase adaptation finance to SIDS to close the annual approximately USD 10 billion financing gap and to enable SIDS to build their adaptive capacities and resilience to climate change. The urgency of increasing climate finance to SIDS continues to grow as the impacts of climate change intensify. The costs of losses from extreme climate events are already substantial: currently ranging between 50-100% of annual GDP in SIDS. By 2050, these losses could grow by 10-15% due to climate change, or an increase of 0.5% per year.  

Adaptation finance to SIDS represents a very small fraction of global climate finance, despite SIDS’ unique vulnerabilities and limited contributions to global greenhouse gas emissions. The 39 SIDS (and the 18 associate overseas island territories) received just over $2 billion annually on average in international public climate finance for adaptation in 2021-2022, accounting for only 0.2% of all global climate finance on average.  

Adaptation finance needs in SIDS are high for their economic size. Between 2023 and 2035, SIDS will collectively require at least $11.7 billion in average annual finance flows for adaptation activities. Their assessed needs are approximately 6 times higher than the $2 billion in tracked adaptation finance flows to SIDS in 2021-2022. In the global context, the adaptation finance needs of SIDS are not large and can be met with sufficient international political will and action. The annual $11.7 billion need is very large for SIDS economies but represents only 1.2% of all global climate finance and 4% of all global ODA. While the adaptation finance gap in SIDS is sizeable, needs assessment related to SIDS are likely to substantially underestimate the true cost of adaptation measures, as many countries’ estimation of their adaptation finance costs as reported in their National Adaptation Plans (NAPs) and Nationally Determined Contributions (NDCs).  

Institution analysis 
Multilateral development finance institutions (DFIs) were the largest source of international public adaptation finance for SIDS, providing 60% of all tracked finance in 2021–2022, followed by international governments at 31%. The remaining finance came from multilateral climate funds (7%), and export credit agencies (2%). 

DFIs and bilateral donors have varied geographic and sectoral priorities in SIDS for adaptation finance, while international governments often take a more targeted approach to specific sectors or regions. Some international governments, such as Australia, take a regional approach – with aid to Pacific Islands accounting for more than 40% of Australia’s aid budget and making it the single largest donor to the region. 

Reported adaptation finance from the private sector and from domestic public sources to SIDS is negligible and tracking this finance poses substantial methodological challenges. Despite this, there are cases where the private sector is contributing to adaptation. Corporations, for example, are investing in their own climate resilience and in adaptation products and services: many hotels in SIDS are seeking to invest to protect their coastlines and natural resources due to their high tourism value and companies like Reefscapers in the Maldives provide services to resorts to reduce beach erosion and restore coral, which enhances adaptation and serves the interest of hotel chains in preserving the value of their properties. Meanwhile, several investment funds have launched a focus on SIDS, with resilience as a key investment theme. For example, Matanaki is a Fijian business development and investment management company that works to support Pacific companies in waste, fisheries, tourism, agriculture, and marine management.  

Instruments analysis 
Close to half of all public international adaptation finance to SIDS in 2021–2022 was debt, totaling on average $891 million in 2021–2022. Traditional instruments including debt are likely to be pivotal for future delivery, especially given the need to scale adaptation finance. However, it is crucial to diversify and increase the utilization of a variety of financial tools, due to the risk of debt towards further macroeconomic instability in these countries, many of which face high debt burdens. In particular, there is room to scale up grants from OECD countries and multilateral development funds. 
 
Adaptation finance flows to SIDS are highly concessional. Around 80% of international adaptation finance flows were concessional in 2021-2022, with the majority of that concessional finance coming from grants, followed by low-cost project debt. Concessional finance is essential for enabling investments in SIDS where high financial risks and structural economic barriers disincentivize market rate capital investments. 

Sector analysis 
SIDS’ adaptation projects deliver multiple benefits across sectors, aligning with SIDS’ developmental priorities. The sector category receiving the most public international adaptation finance flows in SIDS was ‘other and cross-sectoral’ with $1 billion (51%). Other and cross-sector is a category which spans support for national-level policy and capacity building, disaster management activities, urban issues, biodiversity, and social security. Within the $1 billion tracked to other and cross-sectoral activities, $287 million was committed to disaster-risk management, $236 million to policy and national budget support and capacity building, $25 million to biodiversity, land, and marine conservation, and $486 million to unspecified activities.  

Regional analysis 
Of the three SIDS regions, the Caribbean received the most public international adaptation finance on aggregate, amounting to $987 million on average in 2021–2022, the Pacific received $875 million, and the AIS region received $178 million. On a per capita basis, the Pacific received the most finance per capita, at $59/capita, followed by AIS at $32/capita, and the Caribbean at $21/capita.  

Across all SIDS, adaptation finance was concentrated in a handful of countries with 67% of tracked adaptation finance in SIDS flowing to just 10 countries. Furthermore, international public adaptation finance flows to SIDS have no significant correlation to climate vulnerability, as assessed by the ND-GAIN climate vulnerability scores.  

Most of the international adaptation finance flowing to SIDS goes to ODA-eligible countries, despite all SIDS suffering from the impacts of climate change. On average, SIDS that are eligible for official development assistance (ODA) collectively received $1.9 billion in international public adaptation finance on average per year in 2021–2022, while ODA-ineligible SIDS received just $181 million. Because of this disparity, SIDS are calling to replace the ODA eligibility criteria with a multidimensional vulnerability index (MVI), now adopted by the UN General Assembly. 

Recommendations  

• Invest in improvements to SIDS climate budget tagging: Improved and standardized methodologies for domestic climate budget tagging is a key area of support where international donors can be instrumental in advancing climate finance data on flows and needs in SIDS.  
• Increase support for the development of SIDS NAPs and NDCs: The quality of costed adaptation needs in SIDS NAPs and NDCs can be improved via more comprehensive information by thematic area, sector and sub-sector, and by provider of climate finance. 
• Integrate climate finance data into the SIDS Centre for Excellence: SIDS’ climate finance data should be integrated into the SIDS Global Data Hub, as part of the SIDS Centre for Excellence established at SIDS4.  
• Advance tracking of climate finance in overseas island territories: Developed countries with overseas island territories should improve their tracking and reporting of climate finance at the subnational level to better capture the adaptation finance needs of these territories.  
• Support enhanced disclosure and reporting of climate risk: Private financial institutions and corporations in SIDS should support enhanced disclosure and reporting of critical information related to physical climate risks and opportunities. 

The ideas presented in this article aim to inspire adaptation action – they are the views of the author and do not necessarily reflect those of the Global Center on Adaptation.

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