Southeast Asia must urgently scale up adaptation financing or risk deepening economic and social losses from intensifying climate shocks, according to a new report by the Institute for Energy Economics and Financial Analysis.
The report highlights that while Asia remains one of the regions most vulnerable to climate impacts, adaptation finance continues to lag far behind growing needs. Direct economic losses from climate-related events across Asia averaged 75.7 billion United States dollars annually between 2000 and 2023, accounting for nearly 40 percent of global losses during that period.
Despite this, global adaptation finance reached only 65 billion United States dollars in 2023, representing just four percent of total climate finance flows of 1.9 trillion United States dollars. The share directed to Asia was even lower. Between 2018 and 2019, Southeast Asia received 27.8 billion United States dollars in total climate finance, but only 12 percent was allocated to adaptation.
The report argues that closing the adaptation finance gap requires governments to treat resilience as a core development priority rather than an afterthought.
“Closing the adaptation financing gap requires treating it as a core national development and economic priority, integrated into long-term planning, budgeting and policy frameworks,” said Ramnath N. Iyer, Sustainable Finance Lead for Asia at the Institute for Energy Economics and Financial Analysis and co-author of the report.
He added that investors must move beyond viewing adaptation as merely a cost and instead factor forward-looking resilience risks and benefits into financial appraisals and investment strategies.
Institutional and project-level barriers
According to the study, adaptation projects in Asia face persistent structural barriers. These include weak institutional capacity, insufficient project preparation and challenges in measuring outcomes.
Shu Xuan Tan, Sustainable Finance Analyst for Asia at the institute and co-author of the report, noted that adaptation risks and preparedness levels vary widely across the region.
Adaptation projects also struggle with a disbursement ratio of just 66 percent, compared with 98 percent for overall development finance. Many projects fail to secure approval because of insufficient baseline data, unclear impact frameworks and poorly articulated theories of change.
The report stresses the need for robust national adaptation plans, dedicated budgets and stronger institutional frameworks capable of identifying and implementing credible, bankable projects.
Mobilising domestic and private capital
Adaptation initiatives in Southeast Asia continue to rely heavily on grants and concessional financing, which fall far short of requirements. While developed countries have pledged to increase adaptation finance for developing nations to 40 billion United States dollars by 2025 and to triple that amount to 120 billion United States dollars by 2035, global funding priorities are shifting and development aid is declining.
As a result, domestic financing will need to play a far greater role.
Between 2018 and 2023, international and regional investors accounted for 66 percent and 28 percent of blended climate finance commitments in Southeast Asia, respectively. Domestic sources contributed only six percent.
The report identifies a widespread perception that adaptation benefits are difficult to measure, despite evidence that investments in resilience deliver substantial economic and social returns by preventing losses and supporting long-term growth.
To address this, the authors call for the development of practical and interoperable adaptation criteria and outcome indicators. Sustainable finance taxonomies that clearly define and credit adaptation measures could help direct capital toward resilience projects.
Although adaptation is recognised as an environmental objective in most Asian taxonomies, the classification criteria remain underdeveloped. The Association of Southeast Asian Nations taxonomy is currently being updated to address these gaps, and if designed comprehensively, it could streamline and accelerate adaptation finance flows across the region.
Reorienting financial instruments
The report also recommends reorienting financial instruments to directly target adaptation and resilience outcomes instead of treating them as secondary components within broader climate portfolios.
Iyer suggested that concessional funding windows, guarantees and first-loss tranches should be tailored to the risk and revenue characteristics of adaptation projects, with dedicated grant support for technical assistance, safeguards and monitoring.
Development banks and financial institutions, the report says, can play a central role by bundling smaller, localised adaptation projects into larger portfolios aligned with national priorities, thereby attracting commercial lenders.
Emerging instruments such as adaptation and resilience bonds offer additional opportunities. Between 2015 and 2024, adaptation received only six to ten percent of total proceeds from both corporate and sovereign green bond issuances.
One example cited in the report is the Tokyo Resilience Bond, certified under the Climate Bonds Standard. The 300 million euro bond was oversubscribed seven times, demonstrating strong investor appetite and offering a model that could be replicated in Southeast Asia.
The authors also suggest exploring debt restructuring and debt-for-resilience swaps for financially vulnerable countries. Such mechanisms could ease fiscal pressures while creating dedicated funding streams for priority adaptation programmes aligned with national plans.
With climate risks intensifying across Asia, the report concludes that unlocking adaptation finance is not only an environmental imperative but also an economic necessity. Strengthening national plans, improving institutional capacity and deploying innovative financial instruments could help shield Southeast Asia from mounting climate shocks and safeguard long-term development.