Climate change, sovereign debt, and the global financial system

The intricate relationship between sovereign debt and climate finance underscores the critical role that financial frameworks play in national development and environmental sustainability. Sovereign borrowing serves as a vital tool for nations to fuel economic growth, promote sustainable development, and address pressing challenges such as climate change. However, the confluence of mounting debt levels and the increasing impacts of climate change raises concerns about the ability of governments to navigate these challenges effectively.

In 2023, several emerging initiatives, such as the Bridgetown Initiative 2.0, the New Financing Pact, the Ubuntu Initiative, or the Climate Justice Forum, emphasised the climate-debt nexus and the need for innovative solutions. These initiatives are aimed at fostering cooperation, knowledge sharing, and financial commitments to bolster resilience against climate-induced loss and damage. Including pause clauses in debt agreements and implementing the largest-ever environmental debt swap underscore a growing awareness of the need to balance economic development with environmental sustainability.

Agreements on debt restructuring processes signal a commitment to finding equitable and sustainable solutions to debt-related challenges, ensuring that fiscal constraints do not impede climate action. The decisions made at COP28 further emphasise the global recognition of the need for robust financial mechanisms. The call for scaling up grant-based, highly concessional finance and non-debt instruments underscores the acknowledgement that traditional debt-based financing may not be sufficient or sustainable in the face of climate change impacts. The recognition that macroeconomic circumstances can compound the impacts of climate change underscores the need for a holistic approach that integrates economic, environmental, and social considerations.

This work programme delves into the intricate connections between climate change, sovereign debt, vulnerability, and climate justice. To forge effective solutions, it is imperative to understand the far-reaching implications of these interlinkages and work towards a financial framework that fosters sustainable development while mitigating the impacts of climate change. The initiatives and actions taken in 2023 suggest a growing global commitment to addressing these challenges through innovative financial mechanisms and collaborative efforts.




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