Key Takeaways:
Small Island Developing States (SIDS) face a unique set of challenges that set them apart from larger nations, both developed and developing. These challenges include rising sea levels, extreme weather events, limited financial resources and dwindling human capacities.
Rapidly reoccurring natural disasters demonstrate the urgency for SIDS to build fiscal resilience against future emergencies. Therefore, accessing and leveraging finance from external sources is critically important to SIDS.
Most of the climate finance in SIDS is sourced from bilateral agreements between individual countries or through multilateral agreements involving multiple nations and organizations. These agreements typically provide direct financial aid, capacity building and technical assistance (TA) to support SIDS in their climate-related efforts. However, maximizing finance from external resources while managing domestic resources for climate action has become a key topic in climate finance.
Climate finance in SIDS is deployed through a wide range of financial instruments such as grants, concessional loans, insurance and equity investments, among others. These mechanisms can be complemented by carbon markets. Nevertheless, it is time to reinvent the climate finance ecosystem and explore new funding and finance opportunities for these sui generis countries.
Small Island Developing States (SIDS) represent a unique and intricate tapestry of natural resources, cultural diversity and economic fragility.
There are 57 SIDS worldwide: 39 sovereign states and 18 dependent territories scattered across the world’s oceans. These nations face a unique and complex array of challenges that set them apart from larger, developed countries.
Susceptibility to Climate Change Impacts
SIDS are defined not just by their small size but also by their low elevation and heavy dependence on natural resources. Nestled amidst vast oceans, these islands and atolls are often exposed to the full forces of nature. Their susceptibility to extreme weather events, rising sea levels and natural disasters such as hurricanes and tsunamis pose a major risk to the well-being and development of these island nations. For Caribbean SIDS, an estimated $12.6 billion worth of damage is caused by climate-related events per year.
Many SIDS consist of islands with low-lying coastlines and low-lying atolls that put them at risk of coastal erosion and flooding, both of which can negatively impact certain sectors. For example, coral reefs, which are essential for marine biodiversity and coastal protection, are under severe stress due to ocean acidification and warming waters caused by climate change. The loss and damage of these reefs not only threaten the economic sector of local fisheries but also increase public health risks from citizens eating shellfish contaminated by ocean acidification.
From the Caribbean to the Pacific, these nations face a perilous future characterized by coastal erosion, loss of biodiversity and disruption to cultural traditions. Climate finance, therefore, becomes an essential component in helping SIDS safeguard their communities and navigate these challenges.
Increasing Demand for Climate Finance
The small size of SIDS translates into limited resources, both in terms of land and human capital, as well as small economies, which poses significant challenges to economic diversification. For example, the Caribbean SIDS are on average 50% commodity dependent on sectors such as agriculture, minerals, energy and tourism. This leaves them at the mercy of external shocks such as sanitary, food or energy crises which would drastically impact their countries’ fiscal balance, as many have previously experienced over the past three years.
In most cases, SIDS are limited in their abilities to internally generate resources for long-term climate change mitigation and adaptation investments—even worse for long-term planning. The levels of external debt have become increasingly concerning for SIDS, with a debt-to-GDP ratio that ranges from 25-96% in 2020, and an average of 48% across the board. As a result of large-scale borrowing from public and private foreign creditors, SIDS have become vulnerable to debt distress from sudden changes in exchange and interest rates in the international financial markets.
In the case of Caribbean SIDS, the average debt-to-GDP ratio was just under 88 percent in 2020, with Barbados, Belize, Dominica and Suriname now carrying debt burdens in excess of 100% of GDP. The Caribbean also generated an average fiscal balance of -6.4% of its GDP, suggesting an emerging liquidity challenge.
For Pacific SIDS, the World Bank’s IMF Debt Sustainability Analysis (DSA) framework has been used to assess risks of debt distress from 2015 - 2021, revealing moderate-to-high risks for each country. Fiji’s public debt in percent of GDP has increased from 43% (2015) to approximately 86.7% (2021) in a span of six years. Additionally, Kiribati’s debt in percent of GDP went from 20% to 35%, and Papua New Guinea from 33.8% to 51.2%. The majority of external public debt in Pacific SIDS is in the hands of multilateral creditors.
Because of the recurrent nature of natural disasters, it is critical for SIDS to take measures towards building the appropriate fiscal space for addressing future emergencies. Therefore, leveraging finance from external resources while managing domestic resources for climate action has become a topic of existential importance for SIDS.
Climate Finance Landscape in SIDS
Developing a pipeline of actions for climate finance mobilization that reflects national priorities and international objectives is critical for strengthening and building climate resilience within SIDS. In addition, a pipeline of projects will help set the stage for additional channeling of climate finance both domestically and internationally. Between 2003 – 2021, SIDS have had 437 project approvals, totaling $2.3 billion from multilateral climate funds alone. For SIDS, a large portion of these projects from donor funding is allocated for disaster risk and recovery measures, which will only exacerbate with climate change.
Although there are multitudes of actors involved in mobilizing climate finance, it is also important to note the major sources of climate finance and where it is essentially derived from. In a broad scope, there are 12 multilateral climate funds that are active in SIDS across the Pacific, Indo-Pacific and Caribbean regions, the most major being the Green Climate Fund (GCF), which is the largest provider of climate funding to SIDS, with 44% of the total amount approved, followed by the Least Developed Countries Fund (LDCF).
Development financial institutions (DFIs) such as the Inter-American Development Bank (IDB)and Asian Development Bank (ADB)are also important sources of climate finance for SIDS, as are bilateral partners such as JICA and the UK Development Fund among many others. Developed countries, international organizations, development agencies and private sector actors all play a vital role in supporting SIDS.
As mentioned before, SIDS have to overcome significant hurdles to bolster their resilience amid the climate emergency. Climate finance, as an enabler for project development, currently lacks the appropriate policy environment to truly be transformative in SIDS countries. The mobilization of these climate finance resources “requires enabling conditions that reflect links, synergies and trade-offs among mitigation, adaptation and sustainable development,” according to the International Monetary Fund.
Climate Finance Instruments and Mechanisms
To accommodate the emerging markets and developing economies of SIDS, various financial tools have been established to facilitate both mitigation and adaptation efforts. While the GCF and other climate funds do provide a wide variety of instruments and mechanisms that help channel climate finance into SIDS, the reality for SIDS is that public debt management capacity is currently inadequate for long-term sustainability and development.
Climate finance is usually distributed to SIDS in the form of grants, concessional loans, and equity investments. Grants make up the majority of climate finance present in SIDS. Over three-quarters of climate finance from multilateral climate funds is grant-based, with the remaining portion being divided between concessional loans and guarantees. However, the effectiveness of concessional loans is being reconsidered as SIDS continue to face eligibility issues in receiving concessional finance. Most SIDS are classified as middle or high-income countries, making it difficult to justify their eligibility for concessional financing. Pairing the limited access to concessional finance and the high debt burden of SIDS reveals an urgent need for additional finance mechanisms and instruments.
Despite the bulk of climate finance being funneled from public sources, private sector participation and funding are needed to maintain and accelerate climate adaptation and mitigation efforts in SIDS. For many private investors, risk perception is a major concern, given the fiscal vulnerability and macroeconomic instability of these countries. To overcome this perception, the use of blended finance mechanisms is encouraged. Blended finance models are designed to de-risk investments, increase return and strengthen transparency to attract international investors, leveraging access to private finance. The transition from concessional financing and grants to including more robust mechanisms like blended finance is necessary to alleviate the high levels of public debt that SIDS face.
Additionally, a few SIDS are exploring opportunities in carbon markets, in which the private sector is more active. The carbon markets are yet another avenue that allows SIDS to attract investment through emissions trading and carbon offset projects.
Conclusion
Understanding the unique context of SIDS and the ecosystem that is needed for climate finance to flourish is the first step toward creating a meaningful impact. The ongoing debt crisis is rising at an alarming rate in SIDS, resulting in a reassessment of current climate finance mechanisms and instruments. For SIDS to achieve debt sustainability, appropriate fiscal measures such as improvements in expenditure and revenue management are necessary. With all the limited resources and financial barriers that SIDS face, it is crucial that a sound process for accessing and catalyzing climate finance continues to be established in conjunction with more robust climate finance solutions.
The role of climate finance in SIDS is not merely financial—it encompasses the ongoing efforts to safeguard cultures, traditions and the very existence of communities. These nations, often disproportionately impacted by climate change, require collective support to thrive in the face of adversity. By channeling resources into adaptation, mitigation, technology transfer, capacity building and risk reduction, climate finance becomes a beacon of hope for SIDS, enabling them to navigate the uncertain waters of a changing climate while fostering sustainable development and a resilient community.
CCAP stands committed to bolstering the resilience of SIDS in the face of the daunting climate challenges they confront.
The Recycle Organics Program in the Caribbean (4) and Pacific (2) funded by Environment and Climate Change Canada (ECCC)
Supporting waste management and GHG quantification in the Maldives, funded by the Climate and Clean Air Coalition (CCAC)
Support provided to the government of Seychelles for tracking climate finance in the energy sector funded by IRENA and the NDC Partnership
Recognizing the urgency and gravity of the situation, CCAP is committed to supporting SIDS. Our goal is to collaborate in close association with SIDS, leveraging our expertise in climate action and policy—specifically climate finance, carbon markets and methane mitigation—to catalyze tangible change. Through strategic partnerships, capacity-building initiatives and innovative solutions, CCAP seeks to foster a more equitable and sustainable future for SIDS, where their unique cultures, environments and aspirations can flourish despite the array of unique challenges faced.
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CCAP’s mission is to support every step of climate action, from ambition to implementation. A recognized world leader in climate policy and action, CCAP creates innovative, replicable climate solutions, strengthens capacities, and promotes best practices across the local, national, and international levels to accelerate the transition to a net-zero, climate resilient future. CCAP was founded in 1985 and is based in Washington, DC.