Key takeaways
- Prevention is cheaper than recovery: Governments need to invest in resilience before climate shocks hit, rather than relying on costly emergency responses afterwards.
- Public finance is central: Climate resilience depends on long-term public investment in infrastructure, early warning systems, health services and social protection.
- Budgeting must change: Climate risks should be embedded across national planning, public investment decisions, procurement and debt management.
- Government leadership unlocks finance: Private capital has an important role, but it works best when supported by credible public institutions and long-term policy certainty.
Climate change is no longer simply an environmental challenge; it is a fiscal one. Governments are increasingly forced to divert scarce public resources from development priorities towards emergency relief, reconstruction and recovery. In an era of escalating climate risks, resilience has become as much a public finance imperative as an environmental objective.
Government response remains largely reactive
Despite mounting evidence that prevention is more cost-effective than recovery, governments continue to spend far more rebuilding after disasters than preparing for them. This approach is fiscally unsustainable, particularly for developing countries already constrained by high debt, limited fiscal space and competing development priorities.
The scale of the challenge is staggering. The United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2023 estimates that developing countries face an annual investment gap of more than US$4 trillion to achieve the Sustainable Development Goals (SDGs). At the same time, the United Nations Environment Programme (UNEP) Adaptation Gap Report 2023 projects that climate adaptation costs alone could reach US$215–387 billion annually by 2030, while current adaptation finance remains far below what is needed. These figures point to an uncomfortable reality: climate resilience cannot be financed through emergency budgets alone. It requires long-term public investment supported by sound fiscal institutions.
Much of today's climate finance debate focuses on mobilising private capital. While private investment is indispensable for accelerating clean energy, green infrastructure and technological innovation, it cannot substitute for government leadership. Climate resilience depends on public goods that markets have little incentive to provide on their own, flood protection systems, resilient transport networks, watershed restoration, early warning systems, climate-resilient public health services and social protection programmes. These investments generate substantial social and economic returns but often lack immediate commercial profitability.
Redesign public finances to improve resilience – historical examples
The question, therefore, is not whether governments should invest in resilience, but how they should redesign public finance to make resilience an integral part of development planning.
History offers a compelling lesson. In 1624, after devastating floods threatened the Dutch city of Utrecht, local authorities issued one of the earliest known public bonds to finance flood defences. Rather than relying solely on emergency taxation or post-disaster assistance, they recognized that resilience was a long-term public investment. This approach, often described as the Utrecht Model, established a principle that remains remarkably relevant today: finance prevention before paying for recovery. Four centuries later, that philosophy continues to underpin the Netherlands' approach to climate adaptation through the Delta Programme and the Delta Fund, which provide dedicated, long-term financing for flood protection and freshwater security.
The Dutch experience is not unique. Bangladesh has transformed disaster management through sustained public investment in cyclone shelters, coastal embankments and community-based early warning systems. Since the devastating Bhola Cyclone of 1970, which claimed hundreds of thousands of lives, successive investments in public infrastructure and preparedness have dramatically reduced cyclone mortality despite increasingly severe weather events. These outcomes were achieved not through markets alone, but through consistent government commitment supported by development partners, as documented by the World Bank's Bangladesh Climate and Disaster Risk programme.
Rwanda offers another instructive example. Over the past decade, the government has integrated climate considerations into national budgeting and public financial management. Ministries are required to align expenditure with climate priorities, while public investment decisions increasingly account for long-term environmental risks. This climate-responsive budgeting framework has strengthened fiscal planning while improving access to international climate finance. The OECD's work on Green Public Financial Management highlights Rwanda as one of several countries embedding climate objectives into fiscal governance.
Similarly, New Zealand has demonstrated how fiscal policy can incorporate long-term societal resilience through its Wellbeing Budget, which evaluates public expenditure not solely on economic returns but also on environmental sustainability, social outcomes and intergenerational wellbeing. Although designed within a broader public policy framework, it illustrates how budgeting can move beyond short-term economic indicators towards long-term resilience.
These examples reveal a common principle: successful climate resilience is rarely market-led; it is government-enabled.
Embed climate risks across the entire budget cycle
This requires a fundamental shift in public financial management. Climate risk should no longer be treated as a specialized environmental issue managed by environment ministries alone. It should be embedded across the entire budget cycle, from national planning and fiscal strategy to infrastructure appraisal, procurement, debt management and public investment decisions.
The International Monetary Fund's Climate Public Investment Management Assessment (Climate-PIMA) provides a practical roadmap for achieving this transition. It encourages governments to systematically integrate climate risks into public investment planning, ensuring that infrastructure built today remains resilient under future climate conditions rather than becoming tomorrow's fiscal liability. Likewise, the IMF's framework on Green Public Financial Management advocates incorporating climate considerations throughout budgeting, fiscal transparency, expenditure management and public investment governance.
For countries such as Pakistan, the implications are profound. The catastrophic floods of 2022 affected more than 33 million people and caused economic losses exceeding US$30 billion. The Pakistan Floods 2022 Post-Disaster Needs Assessment, prepared jointly by the Government of Pakistan, the World Bank, the Asian Development Bank and the European Union, revealed vulnerabilities not only in infrastructure but also in fiscal preparedness. Reconstruction required emergency budget reallocations, increased public borrowing and substantial international assistance. While these measures were essential, they also illustrated the high cost of underinvesting in resilience before disaster strikes.
The lesson extends far beyond Pakistan. Across Africa, Asia, Latin America and Small Island Developing States, governments face a similar dilemma. As climate shocks intensify, public finances will increasingly determine whether countries merely recover from disasters or build resilience against future ones.
Climate resilience must be part of the public sector financial architecture
This does not diminish the importance of private finance. On the contrary, governments should actively leverage sovereign green bonds, resilience bonds, blended finance and public-private partnerships. However, these instruments should reinforce, not replace the public investment. Markets perform best where governments provide policy certainty, transparent institutions and credible long-term strategies.
Ultimately, climate resilience is not simply about mobilizing more money; it is about governing public investment more effectively. The countries that will navigate the climate transition most successfully will not necessarily be those with the largest climate finance portfolios. They will be those that embed resilience into the architecture of public finance, invest before crises unfold and recognize that prevention is among the most productive investments a government can make.
The defining question of our time is therefore not whether governments can afford to invest in resilience. It is whether they can afford the escalating fiscal costs of failing to do so.
Alishba Khan is an investment expert and policy strategist specialising in climate risk finance, parametric insurance and carbon markets. She works with multiple governments and international organisations. Get in touch.
Henning Diederichs, ICAEW’s Director for public and not-for-profit sectors, would like to thank the author, Alishba Khan, for drawing attention to this important topic. ‘At ICAEW, we have consistently emphasised the need for long-term, sustainable public finances supported by robust strategies that extend beyond budgetary and political cycles. Resilience to external shocks, whether economic, geopolitical or environmental, is vital for people in every jurisdiction. While governments cannot always control external events, they can shape how effectively they respond and build resilience to their impacts.’