A new report, “Breaking the cycle of risk: Addressing resilience and debt for a new global financial architecture”, shows that we have the opportunity to move climate vulnerable countries out of debt by reforming the financial architecture.

The report, by E3G and Mistra Geopolitics, explores the relationship between climate, debt and resilience and the influence of geopolitics. It concludes that, as we consider how to reform the international financial architecture to fund the climate transition, we can map the journey out of the debt and resilience crisis for climate vulnerable countries.

A new financial architecture is needed. Photo: Cloris Ying / Unsplash.

Key findings:

• Resilience is essential to the success of economies and societies and the smart economic option, but the vicious cycle between the debt and climate crises, intertwines a lack of economic resilience with a lack of climate resilience, creating fragility.
• The availability of financial aid remains inadequate, while vulnerability itself leads to higher interest rates, making debt harder to pay off.
• Clear roadmaps, and transition plans, will help frame the roles, and actions, of debtor countries, their donors and creditors in emerging from the present crises.
• The debt products, the institutions, and the whole social contract between these parties must move to a more just, mutually engaged and supportive one, if the world as a whole is to move to a more resilient future.

Ronan Palmer, Chief Economist, E3G, said:

“In the run up to COP29’s focus on reforming financial systems to fund the transition we must not forget that countries burdened by both economic and climate vulnerability need transition finance that will not push them further into debt as they seek to build more resilience and adapt to the impacts of the changing climate.”

André Månberger, Senior Lecturer at Lund University and Lead of Mistra Geopolitics Decarbonization theme, said:

“As we consider human security and environmental change, we must consider the role of finance in building or destabilising economic and climate security at the same time. As we move our societies towards a decarbonized economy, we must not leave countries burdened by expensive debt.”

Dileimy Orozco, Senior Policy Advisor, Global Macro and Resilience, E3G, said “We cannot expect countries to escape debt only to be ensnared again as risks increase and intensify. It is crucial to acknowledge the dual challenges of climate and debt risks. Many economies will remain highly vulnerable to climate impacts without investing in resilience and responsibly taking on strategic debt. These countries need a robust safety net and a new contract with International Financial Institutions, including Multilateral Development Banks (MDBs) the IMF, and the private sector to ensure they thrive and have access to finance, particularly in the hardest times.”

The report explores the critical challenge of investing in resilience, financing investment in resilience, debt as a constraint on resilience investment, the geopolitics of investing in resilience, and how to get out of the vicious cycle.