Intro: Climate finance has entered a decisive decade, yet trillions remain out of reach while climate risks continue to rise. In this exclusive conversation with Mahima Sharma of Indiastat, former IMF’s Climate Finance Policy Chief Dr. Prasad Ananthakrishnan explains why the world's financing model is failing to achieve its goals. He also gives insights on what governments and investors are getting wrong. To solve the puzzle, he shares reforms that can fundamentally reshape resilience, sovereign debt, carbon markets and global climate investment before 2030. Read further on Socio-economic Voices.
MS: Developed countries provided and mobilised $136.7 billion in climate finance for developing countries in 2024. That's already above the old $100-billion goal, which expired in 2025. COP29 has since set a $300-billion annual goal by 2035 and called for scaling total finance to $1.3 trillion. How should success now be measured towards resilience outcomes—and why?
A Prasad: Official public financing—such as the $300 billion annual target—represents only a fraction of the multi-trillion-dollar climate financing gap. Bridging this shortfall requires a holistic macro-financial architecture that mobilizes private investment, foreign direct investment (FDI) and institutional capital, accompanied by technology transfer, structural market reforms and domestic capacity building. Consequently, success cannot be evaluated solely by official donor mobilization metrics ($136.7 billion or $300 billion targets), which measure financial inputs rather than outcomes.
The global financial architecture must measure success through resilience outcomes that evaluate how effectively capital deployment lowers a country’s baseline risk profile. Meaningful success metrics should track reductions in expected economic losses (such as loss-to-GDP ratios as in the case of The Philippines, Jamaica and Fiji), improvements in domestic financial stability margins (bank capital buffers and foreign exchange buffers against climate shocks) and sovereign credit rating preservation following major climate events. International financial institutions (IFIs) and multilateral development banks (MDBs) must embed these outcome metrics into sovereign surveillance, measuring success by how effectively reforms and financing preserve fiscal and financial stability while reducing structural vulnerability.
MS: IMF research (June 2026) finds that a 1-percentage-point rise in disaster losses relative to GDP raises sovereign-default risk by 2–3%, while newer IMF research shows climate vulnerability also increases sovereign borrowing costs. Should climate-resilience spending therefore be treated as debt-risk reduction? Should the IMF and MDBs reflect this in sovereign lending assessments?
A Prasad: Climate-resilience spending must be explicitly reclassified in sovereign risk frameworks as debt-risk reduction rather than discretionary fiscal expenditure. Treating resilience expenditure as standard fiscal outlay penalizes vulnerable nations through higher debt-to-GDP metrics, triggering credit downgrades and compounding fiscal distress. This is no longer a one-sided argument. Everyone, including the IMF and the World Bank, agrees that climate vulnerability must be factored into debt sustainability assessments and sovereign risk profiles.
When countries face a “double jeopardy” of high debt service and high climate vulnerability, standard austerity-focused fiscal consolidation undermines long-term resilience. The 2023 evaluation of the Low-Income Countries’ Debt Sustainability Framework (LIC-DSF) by the World Bank Independent Evaluation Group underscores this: “DSAs need to better incorporate the long-term macroeconomic consequences of climate change. That, including both the growth implications of physical climate risks and the fiscal requirements of adaptation and mitigation investments.”
Looking ahead, I feel encouraged that the ongoing IMF-World Bank 2026 review of the LIC-DSF aims to move beyond short-term natural disaster stress tests. The LIC-DSF must transition from a static, austerity-focused accounting model to a dynamic, climate-consistent macro financial framework.
MS: The IMF’s June 2026 report finds that every additional US$1 billion in cumulative ODA improves adaptive capacity by 0.13 points. How should climate finance be redesigned so adaptation reduces sovereign risk instead of increasing debt? What financing mechanism would you introduce?
A Prasad: Key takeaways from the June 2026 IMF research confirm that concessional flows matter for adaptation. Because ODA is concessional, deploying it for adaptation directly builds resilience, reduces disaster losses, lowers sovereign default probabilities and preserves debt sustainability.
However, adaptation has long depended on shrinking grants and philanthropy rather than being treated as a core pillar of investable growth. We must move away from treating resilience as a "defensive cost"—an extra bill to pay or a technical fix to protect a bridge—to viewing it as a value driver that safeguards sovereign stability. If a country builds resiliently, it avoids spiraling into massive debt every time a hurricane hits. Without climate-resilient infrastructure and credible macro-financial frameworks, sovereign risk premiums across emerging markets and developing countries (EMDEs) will continue rising. This will be making the broader energy transition far more expensive.
Because private investors cannot hold catastrophic climate risk alone, MDBs must act as a first-loss buffer, right-sizing risk-return profiles for institutional capital. MDBs should champion resilience-linked instruments (where debt costs drop as resilience milestones are met) like World Bank Outcome Bonds or Inter-American Development Bank (IDB) guarantees. Ultimately, institutional investors need long-term regulatory certainty to deploy capital at scale.
MS: The global Loss and Damage Fund had only $768.4 million in pledges from 27 contributors by April 2025. What financing model could make loss-and-damage funding predictable enough to matter? And how, without creating another permanent aid-dependent mechanism?
A Prasad: While current pledges to the Fund for Responding to Loss and Damage (FRLD) stand at a little over $800 million, actual paid-in capital sits at just ~$350 million. That's a minuscule amount against climate losses.
In the initial pilot phase, allocations are capped ($5 million–$20 million per project) and access remains constrained by accreditation and administrative bottlenecks. Furthermore, while grants are prioritized for vulnerable nations, the governing framework permits highly concessional debt. It’s critical that the L & D Fund does not provide debt-creating flows.
The FRLD is an ex-post mechanism — it responds only after devastation occurs. As much as initiatives like the FRLD strengthen the climate financial architecture toolkit, it is critical that countries build ex-ante buffers against climate shocks.
Jamaica’s multi-layered approach offers a good example for similar countries vulnerable to physical climate shocks. Before Hurricane Beryl, it had pre-arranged a contingent credit facility of about $185 million with IDB. They topped it with a $150 million World Bank Catastrophe Bond designed to provide immediate liquidity to Jamaica following a severe natural disaster. This dwarfs anything a country could currently receive from the FRLD.
To bridge this financing gap, scale is paramount to building resilience. Relying solely on donor grants will never be enough. Achieving true macro-financial scale requires public-private partnerships, credit enhancements and de-risking mechanisms to leverage institutional private capital into pre-disaster resilience.
MS: Global cross-border bank claims reached $46 trillion at end-2025, while cross-border bank credit to emerging Asia actually fell 6% year-on-year. What financial-market reform could redirect a meaningful share of global liquidity toward climate investment in emerging economies?
A Prasad: The diagnosis is clear: this is not a global liquidity shortage. Rather, it is a global risk allocation failure. The situation is the same across other regions.
As the Independent High Level Expert Group (IHLEG) on Climate Finance highlighted, EMDEs (excluding China) require $2.4 trillion annually by 2030, with $1.4 trillion mobilized domestically and $1 trillion from external sources. To tap domestic capital at that scale, climate finance instruments cannot operate in isolation. They must be embedded directly within broader sovereign debt management and domestic capital market development frameworks.
Developing deep, local-currency bond markets is essential because it shields sovereign debt from foreign exchange risk. By deploying tools like the IMF-World Bank Local Currency Bond Market Framework, governments can identify market constraints and build yield curves. Strengthening local green bond frameworks, clarifying taxonomies and deepening local-currency yield curves allows EMDEs to crowd in domestic institutional capital such as local pension funds and insurance balance sheets.
Ultimately, by building strong domestic market plumbing, developing economies can reduce reliance on volatile external hard-currency flows. They can also hedge foreign exchange risk and create a predictable, self-sustaining foundation for sovereign climate finance.
MS: Global public debt rose to just under 94% of GDP in 2025 and is projected to reach 100% by 2029. With emerging economies already facing tight fiscal space, how can climate finance be scaled without worsening sovereign debt risks? Which instrument should be scaled first—and why?
MS: Global public debt rose to just under 94% of GDP in 2025 and is projected to reach 100% by 2029. With emerging economies already facing tight fiscal space, how can climate finance be scaled without worsening sovereign debt risks? Which instrument should be scaled first—and why?
A Prasad: Climate resilience and fiscal sustainability must be mutually reinforcing, not a trade-off. Scaling climate finance without adversely affecting debt sustainability requires transitioning from traditional, debt-creating instruments to targeted risk-sharing architectures. That too suited to each country’s macro-fiscal reality. This includes debt -for-nature and debt for climate swaps. In Barbados, the government bought back and refinanced debt at lower rates. That created long-term savings for marine conservation and climate adaptation.
However, there is no one-size-fits-all solution. For low-income and debt-vulnerable nations, non-debt-creating grant funding and highly concessional finance from instruments like the IMF’s Resilience and Sustainability Trust (RST) creates fiscal space. Government can use the fiscal space creatively to leverage additional public and private sector funding.
For middle-income emerging markets, blended finance mechanisms and MDB guarantees should be scaled first. Rather than acting as primary lenders, MDBs and institutions like the Multilateral Guarantee Agency (MIGA) must aim at creating leverage by providing first-loss equity, political risk insurance and credit enhancements.
Ultimately, deploying innovative structures—such as Outcome Bonds, guarantees and resilience-linked debt instruments allows commercial capital to step in at scale.
MS: The sustainable debt market crossed $7 trillion of cumulative aligned issuance in 2026, yet climate investment gaps remain enormous. Has sustainable debt become too focused on expanding labelled capital rather than proving additional real-world climate impact? How should investors measure that impact?
A Prasad: While cumulative labelled sustainable bond issuance reached $7.5 trillion in mid-2026, annual sustainable debt issuance is stabilizing in the $800–$900 billion range. This signifies a transition from rapid expansion to measured growth, as investors demand greater transparency, stricter verification and strong taxonomy alignment to curb greenwashing.
However, despite the large cumulative issuance, severe geographic imbalance remains. Advanced economies, particularly in Europe, dominate global issuance, whereas EMDEs, which face the highest climate vulnerability, account for a small fraction due to high capital costs and foreign exchange risks.
The market is not focused on expanding labeled capital for its own sake. In fact, the recent stabilization points to the opposite: a deliberate shift toward credibility over pure volume.
To measure real-world impact, investors must look beyond 'use of proceeds' and focus on additionality. Result-based instruments like Sustainability-Linked Bonds that tie financing directly to third-party-verified KPIs (such as avoided emissions or gigawatts of clean grid capacity added) against baseline counterfactuals, can act as good incentives for investors.
MS: India's adaptation and resilience spending increased from 3.7% of GDP in FY16 to 5.6% in FY22, yet the Economic Survey 2025-26 says global climate finance remains inadequate and mitigation-biased. With India still relying mainly on domestic public funds, should it adopt a climate-risk budget that prioritises spending by economic losses avoided? What global financing model could scale this without adding fiscal stress?
A Prasad: The world should acknowledge that India has demonstrated strong climate leadership by achieving its original Paris Agreement targets well ahead of schedule. Did you know that non-fossil sources reached 52.57 percent of total power capacity as of February 2026, surpassing its 2030 goal five years early? Simultaneously, the nation reduced its GDP emission intensity by 36 percent (2005–2020) and expanded its forest carbon sink by 2.29 billion tonnes (2005–2021). In short this kept it firmly on track for its 2030 commitments.
The Economic Survey 2025–26 underscores that for developing economies like India, adaptation is a ‘developmental imperative. India has achieved all these without resorting to external financing. India’s domestic spending on climate adaptation and resilience surged from 3.7 percent of GDP in FY16 to 5.6 percent in FY22. Over 95 percent of adaptation expenditure is funded directly through domestic budgets because of non-revenue-generating projects. This leaves the burden on public balance sheets. The Economic Survey also reiterates India’s standing position under the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC), calling for scalable, low-cost, long-term concessional capital and technology transfer from developed nations.
Alongside public funding, India has progressively built climate resilience into its fiscal architecture through
Several ministries and state governments (e.g., Odisha, Bihar, Kerala) have experimented with Climate Budget Tagging (CBT), auditing state and central expenditures to identify climate-relevant capital and revenue allocations.
While India does not yet have a single unified "Central Climate Budget" line item, Union Ministries (such as Environment, New & Renewable Energy, Agriculture and Jal Shakti) tag spending through internal Expenditure Budget statements and the Output-Outcome Monitoring Framework (OOMF) managed by NITI Aayog's Development Monitoring and Evaluation Office (DMEO).
Establishing a formal Climate-Risk Budget that ranks spending by "avoided loss-to-GDP" is a vital next step. Operationalizing this requires downscaled local hazard modeling, granular spatial data and accounting for non-monetizable social co-benefits. Its complexity should not be underestimated.
MS: While carbon markets are widely viewed as a crucial market-based mechanism for mobilizing private transition capital, why have voluntary and compliance markets struggled with sluggish buyer demand and integrity concerns? How can India’s Carbon Credit Trading Scheme (CCTS) be designed to ensure sustained demand rather than just expanding credit supply?
A Prasad: Global carbon markets struggle with sluggish buyer demand and integrity concerns due to low-quality credits, vague methodologies and reputational risks like "greenhushing." In compliance systems, these challenges are exacerbated by structural oversupply.
The CCTS is a pioneering step to establish a national carbon market designed to reduce industrial pollution by placing a price on greenhouse gas emission. To be effective, CCTS should be designed with the lessons of the Perform, Achieve and Trade (PAT) scheme in mind. Although PAT contributed to improvements in industrial energy efficiency, trading activity remained limited. That's because targets were often lenient, certificates were oversupplied and buyer demand was weak. These issues are similar to the challenges seen in global voluntary carbon markets. Here concerns are around credit integrity, inconsistent methodologies and reputational risks have made buyers cautious.
For CCTS to succeed, it must focus not only on generating credits but also on creating credible and sustained demand. In the initial phase, the scheme should emphasize regulatory certainty through predictable compliance obligations, robust Monitoring, Reporting and Verification (MRV) systems, high-quality credit issuance and transparent price discovery. As the market develops, India can gradually move toward tighter caps, stronger price signals and a more auction-based allocation mechanism. This phased approach would reduce disruption while building confidence among market participants.
At the same time, carbon credits should complement, not replace, internal emissions abatement. Firms should prioritize reducing their own emissions and use credits only as an additional flexibility mechanism. This needs to be consistent with the broader integrity principles reflected in initiatives such as the Integrity Council For the Voluntary Carbon Credit (ICVCM).
Ultimately, a carbon market built on stringent targets, credible governance, powerful MRV and clear long-term policy signals will be far better placed to mobilize private transition capital than one that simply produces an oversupply of low-value credits.
MS: If you were given the authority to redesign the global climate-finance architecture by 2030 - (a) which three rules would you abolish (b) which three would you introduce and why?
A Prasad: I would refrain from identifying specific rules to 'abolish.'
Tackling climate change is an unprecedented, existential journey defined by profound political, economic and physical complexity. Treating existing frameworks as mere administrative hurdles to be dismantled ignores the deeply political nature of international architecture. There is no 'silver bullet' or single rule whose removal will unlock the trillions of dollars that are needed. Progress requires building upon, adapting and reforming current institutions through international coordination, derisking mechanisms and capacity development.
My 2030 architecture will emphasize three rules of accountability and technology sharing.
Outcome-based financial accountability. Global climate finance should be directly aligned with containing global warming. This means a shift from measuring financial inputs to evaluating verified results.
Systemic emitter accountability. International architecture must enforce accountability among major emitters. This would help prevent carbon leakage, level the playing field and ensure policy alignment across top global emitters.
Technology transfers accountability. A modern architecture must establish formal multilateral frameworks for IP-sharing, concessional technology licensing and capacity building to ensure advanced clean technology moves rapidly from developed economies to the Global South.
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About Dr. A Prasad
Prasad Ananthakrishnan is a global expert in climate finance policy, financial markets & instruments and macroprudential frameworks. He has over four decades of professional experience, including 20 years at the International Monetary Fund (2004-March 2026). As Advisor and Chief of Climate Finance Policy Unit, he led the design of climate finance and climate risk reform measures in the IMF’s Resilience and Sustainability Facility. He also co-convened climate finance roundtables across Africa, Asia, the Caribbean, Central America and the Pacific. He has extensive experience in collaboration with international financial institutions, development partners and financial standards setting organizations to advance critical global agendas and mobilize capital at scale. At the IMF, he played a leading role in global policy platforms such as the G20 Sustainable Finance Working Group, the Network for Greening the Financial System, the International Platform on Sustainable Finance, the Coalition of Finance Ministers for Climate Action and international climate forums & COPs. He is credited with several publications in the area of climate finance. He holds a PhD and a Master of Commerce from the University of Bombay, India. He is also an MBA from the University of Pittsburgh, USA.
About the Interviewer
Mahima Sharma is an Independent Senior Journalist based in Delhi NCR with a career spanning TV, Print, and Online Journalism since 2005. She has played key roles at several media houses including roles at CNN-News18, ANI, Voice of India, and Hindustan Times.
Founder & Editor of The Think Pot, she is also a recipient of the REX Karmaveer Chakra (Gold & Silver) by iCONGO in association with the United Nations. Since March 2022, she has served as an Entrepreneurship Education Mentor at Women Will, a Google-backed program in collaboration with SHEROES. Mahima can be reached at media@indiastat.com
Disclaimer : The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.
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