Abstract

The escalating debt sustainability crisis driven by climate change disproportionately impacts Small Island Developing States (SIDS), Least Developed Countries (LDCs and other vulnerable developing nations. Climate-induced disasters, coupled with constrained fiscal capacity, have led to increased borrowing for recovery and adaptation, compounding debt burdens and limiting investments in resilience. These challenges are further exacerbated by systemic shortcomings in global financial systems, including constrained climate finance, limited Official Development Assistance (ODA), insufficient development finance, and inadequate private sector investment in resilience and adaptation. This financial stagnation undermines critical areas such as social protection, anticipatory action, disaster risk reduction, food security, and broader development goals, further entrenching vulnerabilities like poverty, inequality, and environmental degradation.

The Global SIDS Debt Sustainability Support Service (DSSS) offers a comprehensive framework to address these challenges by focusing on debt sustainability, insurance, resilience investment, and advisory support. This side event will explore innovative mechanisms to create fiscal space and attract private sector investment, including the structure and potential of resilience bonds, tailored insurance products, and aggregate country platforms. By fostering dialogue among stakeholders, the event aims to expand the transformative potential of the DSSS to LDCs and other vulnerable developing countries, advocate for financial reforms, and identify pathways to sustainable and equitable development.

Context

The intertwined crises of climate change, economic instability, and development challenges have exacerbated debt sustainability issues in vulnerable nations, particularly in Small Island Developing States (SIDS), Least Developed Countries (LDCs), and other vulnerable developing countries like Landlocked Developing Countries (LLDCs). Despite contributing minimally to global greenhouse gas emissions, these countries are disproportionately affected by climate-induced disasters such as hurricanes, floods, and prolonged droughts. These events not only destroy livelihoods and infrastructure but also force countries into a cycle of borrowing for recovery and adaptation. The result is an alarming rise in debt-to-GDP ratios, which restricts fiscal space for critical investments in social protection, disaster risk reduction, and development initiatives. For instance, over 70% of SIDS already exceed the debt-to-GDP sustainability threshold, creating a financial landscape where even incremental climate shocks can trigger profound economic instability.

The SIDS Debt Sustainability Support Service (DSSS) was conceptualised as a transformative framework to address the unique vulnerabilities of SIDS, leveraging a layered approach to debt management. The DSSS combines debt restructuring, concessional financing, parametric insurance, and resilience investments to reduce debt burdens and create fiscal space for sustainable development. By integrating tailored advisory services and legal support, the DSSS also strengthens the capacity of SIDS to negotiate favourable financial terms and navigate the complexities of international financial ecosystems. However, the principles and strategies of the DSSS are equally relevant to LDCs, LLDCs, and other vulnerable developing nations facing similar challenges.

One of the core challenges highlighted by the DSSS is the inadequacy of global financial systems in addressing the multidimensional nature of climate risks. Limited access to concessional finance, non-transparent credit rating methodologies, and fragmented funding streams for climate, nature, and development exacerbate inequities. For instance, traditional credit ratings often fail to account for resilience investments, treating climate vulnerabilities as liabilities rather than opportunities for sustainable growth. This increases borrowing costs for vulnerable nations and restricts access to financing mechanisms essential for adaptation and resilience-building.

Expanding the DSSS framework can provide a holistic solution to these interconnected challenges. This includes integrating innovative financial instruments, such as resilience bonds, to attract private sector investment. Resilience bonds can support large-scale infrastructure projects and community-level adaptation initiatives, addressing climate vulnerabilities while generating sustainable financing streams. Similarly, insurance products can provide vulnerable nations with financial protection against extreme weather events and other climate impacts, offering immediate liquidity and reducing long-term economic losses.

Moreover, aggregate country platforms, as exemplified by the DSSS, offer a model for streamlining diverse funding sources and aligning resources with local priorities. These platforms ensure that financing for climate resilience, disaster risk reduction, and sustainable development is coordinated and delivered efficiently, reducing transaction costs and maximizing impact. By advocating for international financial reforms and building partnerships across stakeholders, the DSSS framework not only addresses immediate challenges but also paves the way for long-term resilience and equitable development.

Through the DSSS this side event aims to foster dialogue, build consensus on reforms, and catalyse actionable solutions that can empower vulnerable nations to navigate the dual crises of climate change and economic fragility.

Key Objectives of the Event

• Expanding the SIDS Debt Sustainability Support Service (DSSS):
  Building on the principles of the DSSS, this event aims to explore its potential to address debt sustainability and resilience challenges faced by SIDS, while also adapting and expanding the framework to include LDCs and other vulnerable developing nations. The event will discuss innovative financial mechanisms, including aggregate platforms, debt sustainability, resilience bonds, and tailored insurance products. These approaches aim to create fiscal space for vulnerable nations, reduce debt burdens, and unlock private sector investment to address specific climate vulnerabilities. Such mechanisms will enable critical investments in DRR, infrastructure development, and community-level adaptation while providing financial protection against extreme weather events and reducing long-term economic impacts.
• Advocating for financial reforms, including credit rating mechanisms:
  Recognizing the limitations of existing financial systems, the event will advocate for reforms that integrate resilience metrics into credit rating methodologies. This includes proposing a multidimensional framework that accounts for climate resilience, natural capital, human capital, and social development to ensure fairer financing terms for vulnerable nations.
• Overcoming constraints in accessing climate finance:
  Recognising the barriers faced by vulnerable countries in accessing climate finance, the event will explore innovative financing models that build on existing investments in social protection. These models will address emerging challenges such as climate resilience, food security, and disaster response, demonstrating how integrated solutions can leverage existing systems to achieve greater impact.
• Fostering investments in anticipatory action and advancing the SDGs:
  The event will highlight the critical importance of early action and pre-arranged finance to reduce the impacts of disasters before they occur. By aligning investments with anticipatory action, resilience-building, and development priorities, the progress on resilience building and SDGs can also be progressed.
• Fostering multistakeholder collaboration:
  The event will convene diverse stakeholders, including governments, international financial institutions, credit rating agencies, private sector investors, and civil society representatives, to build consensus and develop actionable strategies for creating resilient and sustainable financial systems.