Climate finance has historically focused on mitigation, with most funding directed towards renewable energy, energy efficiency, industrial decarbonisation and other efforts to reduce greenhouse gas (GHG) emissions. In contrast, adaptation finance has received far less attention and investment. Southeast Asia faces recurring floods and storms that impose significant fiscal burdens, strain public infrastructure and disrupt livelihoods. Asia is warming at twice the global average due to its extensive land mass. Despite mounting climate risks, adaptation investment in the region remains far below what is needed.
Why adaptation projects have struggled for capital
A critical barrier to scaling up adaptation projects is the lack of clear and consistent revenue streams. Unlike mitigation initiatives, most adaptation measures focus on reducing vulnerability and preventing future climate-related losses. While adaptation benefits can be significant, they are often indirect, taking the form of avoided losses or societal benefits that are difficult to quantify and realised only over the long term.
Adaptation projects are often fragmented and small scale, reflecting localised climate risks and community-level needs. This
fragmentation limits efficiency, increases transaction costs and makes it challenging to develop investment pipelines large enough to attract institutional capital. In Asia, regional and subregional efforts are under way to scale up adaptation finance. Key initiatives include the Asian Development Bank’s (ADB) Community Resilience Financing Partnership Facility, which provides $189 million in grants and technical assistance for community-led adaptation projects, and the ASEAN Catalytic Green Finance Facility, which, with commitments of $2.4 billion, helps de-risk investment by covering upfront costs and mobilising private capital.
Key barriers to scaling adaptation finance
National adaptation planning provides countries with a structured approach to assess climate risks, determine priorities and integrate adaptation measures into national development and sectoral policies. Recognising the importance of adaptation planning, the National Adaptation Plan (NAP) process was established at COP16 in 2010. As of September 2025, 144 countries had initiated the NAP process and 67 developing countries had formally submitted their plans. In Southeast Asia, progress on NAPs remains uneven, despite most countries facing significant challenges from floods and storms.
Most adaptation projects struggle to secure funding and timely disbursement due to complex application procedures, stringent criteria and limited institutional capacity. These challenges are reflected in international public adaptation finance, which recorded a relatively low disbursement ratio of approximately 66 per cent between 2017 and 2021, compared with a 98 per cent disbursement ratio for overall development finance. Key reasons were low grant-to-loan ratios and limited understanding of adaptation policies among decision-makers.
Blended finance is a key mechanism to align commercial investment with adaptation and resilience outcomes. Blended climate finance in the region remains heavily dependent on external capital. Between 2018 and 2023, international and regional investors accounted for 66 per cent and 28 per cent of investment commitments respectively, with only around 6 per cent on average contributed domestically. This highlights the insubstantial role of local capital markets.
The limited role of domestic capital is largely structural. Dedicated finance institutions, multilateral development banks and multi-donor funds account for the largest share of blended climate finance transactions. Their role is essential for de-risking projects and scaling activity, but continued dominance has entrenched reliance on international financing rather than catalysing sustained domestic capital mobilisation. The region faces heightened vulnerability if international public finance does not scale up at the required pace. Without stronger mobilisation of domestic capital, climate investment will slow, project pipelines will shrink and progress towards national climate targets will stagnate.
Avenues and opportunities
Tapping the bond market: There has been increased interest in adaptation and resilience bonds as tools to channel capital explicitly towards climate resilience. These instruments ring-fence proceeds for adaptation projects, helping issuers make these needs more visible and investable. The Tokyo Metropolitan Government issued the Tokyo Resilience Bond, the first bond to be certified under the Climate Bonds Standard. The Standard enables investors and intermediaries to assess the climate credentials and environmental integrity of bonds, incorporating the Climate Bonds Resilience Taxonomy to define what constitutes a resilient investment. The Euro 300 million issuance, expected to carry an A+ rating in accordance with Japan’s sovereign rating, was oversubscribed seven times, signalling strong investor demand for credible resilience-focused instruments.
Integrating adaptation in taxonomies: A sustainability taxonomy establishes a common language and classification for defining sustainable investments aligned with a jurisdiction’s goals. It provides a clear and consistent framework for identifying environmentally sustainable economic activities, reducing ambiguity and ensuring a shared understanding among stakeholders. Standardised criteria enable comparability across entities and over time, strengthen credibility by limiting mislabelling and support more informed decision-making.
Exploring innovative financing tools such as debt (for nature) swaps: Debt swaps are increasingly used to help heavily indebted countries raise funds for climate-related projects. In Southeast Asia, Indonesia and the Philippines have implemented several debt-for-nature transactions, with financing reaching up to $30 million for Indonesia and $40 million for the Philippines. Through several agreements with the US under the 1998 Tropical Forest Conservation Act (TFCA), Indonesia has reduced debt service obligations to the US while funding climate projects. Previous swaps saved nearly $70 million, primarily for rainforest conservation, with a more recent $35 million transaction to support coral reef protection and preservation. The Philippines has also executed several debt-for-nature swaps, redirecting tens of millions of dollars in debt payments towards various conservation programmes.
Recommendations and conclusion
In SEA, many NAPs remain high level or under development and are not consistently integrated with fiscal frameworks. This undermines coordination and weakens the pipeline of well-prioritised projects. All countries in the region need to upgrade NAPs into comprehensively valued, implementation-oriented documents that explicitly guide sectoral policies and public investment decisions. Adaptation measures should be systematically embedded in new projects rather than treated as optional enhancements vulnerable to fiscal pressures. Dedicated and predictable budget allocations are essential. Anchoring adaptation spending in national budgets signals government commitment, strengthens accountability and reduces the risk of deferral under fiscal pressure.
Low disbursement ratios for adaptation funds relative to overall development finance and the small share of proposals approved point to weaknesses in adaptation project preparation, especially municipalities and sectoral agencies most likely to be adversely affected by climate change that often lack technical and institutional capacity. Resilience planning, therefore, should be assisted by dedicated, well-resourced project preparation and implementation support facilities focused on adaptation.
Chronic underinvestment in adaptation stems from a narrow financial valuation of benefits, which focuses mainly on avoided losses and ignores wider economic, social and environment gains. Including avoided damages and economic disruptions, induced economic development and co-benefits such as improved health, ecosystem services and connections with environmental mitigation would more accurately reflect the real financial and societal returns. These returns are highly valued by investors and financiers, as evidenced by the performance and valuations of businesses involved in adaptation.
International public finance and external concessional flows cannot meet Southeast Asia’s adaptation needs on their own, particularly given constrained fiscal space and looming reductions in official development assistance. Blended finance is widely promoted as a solution, but remains skewed towards mitigation, with adaptation receiving a smaller share of transactions and mobilising less private capital per unit of concessional funding. Consequently, there is a strong case for reorienting blended finance to directly target adaptation and resilience outcomes rather than treating them as secondary components within climate portfolios. Concessional windows, guarantees and first-loss tranches should be calibrated to the risk and revenue characteristics of adaptation projects, with dedicated provision for grant-funded technical assistance, safeguards and monitoring. Even modest allocations can substantially improve climate impact and financial performance. Development banks and DFIs can play a pivotal role by structuring facilities that bundle smaller, localised adaptation measures into larger portfolios aligned with national priorities and crowd in commercial lenders. The strategic use of capital markets is also crucial to systemically integrate adaptation into bond issuance, including through emerging instruments such as adaptation and resilience bonds. While still nascent in Southeast Asia, these instruments have gained traction in developed markets and demonstrate evidence of strong investor demand when supported by clear use-of-proceeds frameworks and credible impact reporting. Implementing these measures at scale offers countries a credible way to address climate change impacts, minimising losses while enhancing economic and social opportunities.
This is an extract from a recent report “Scaling Adaptation Finance in Southeast Asia” published by IEEFA. This extract provides an overview of why adaptation activities have struggled to secure financing, identifies key barriers in Southeast Asia, and explores avenues and opportunities to help scale investment.
