Climate Finance Debate Shifts Toward Action As COP31 Approaches Amid Deep Divisions Over Funding

A new climate-finance dialogue has exposed growing disagreements over debt, investment and development priorities as governments prepare for crucial discussions ahead of COP31.

As the road to COP31 enters its final stretch, a new climate-finance process launched alongside the International Monetary Fund and World Bank Annual Meetings in Bangkok has revealed both growing urgency and deep divisions over how developing countries should fund climate action.

The first Xingu Finance Talks, convened by the COP30 Presidency on October 11 and 13, brought together finance officials, development banks, negotiators, researchers and civil society representatives to examine one of the most contentious questions in global climate policy: how to align financial systems with climate goals while addressing mounting debt burdens in vulnerable economies.

The discussions built on the Veredas Dialogue linked to Article 2.1(c) of the Paris Agreement, which calls for financial flows to support low-emissions and climate-resilient development pathways. However, participants repeatedly emphasised that efforts related to Article 2.1(c) should not replace obligations under Article 9, which requires developed countries to provide climate finance to poorer nations.

The Bangkok meetings focused on two interconnected challenges. The first involved expanding fiscal space so governments can invest in climate action despite rising debt pressures. The second centred on lowering borrowing costs through guarantees, risk-sharing arrangements and other financial instruments.

Throughout the discussions, climate vulnerability and debt were described as increasingly inseparable problems. Participants highlighted how climate impacts worsen fiscal stress, while debt burdens simultaneously restrict investment needed to strengthen resilience.

Research presented during the workshop pointed to a significant gap between recognising climate risks and incorporating them into financial decision-making. While finance ministries broadly acknowledge climate challenges, only a small proportion currently integrate climate-related risks into macroeconomic planning and budgeting.

Participants also examined why developing countries continue to face high borrowing costs even when economic fundamentals fail to fully explain those premiums.

Developing Countries Question Existing Financial Solutions

Breakout discussions revealed widespread scepticism toward several of the financial tools commonly promoted in international climate-finance debates.

Participants argued that debt-pause clauses may provide temporary relief but do not fundamentally create new fiscal capacity. Others questioned whether climate-adjusted debt sustainability analyses would meaningfully reduce financing costs without broader systemic reforms.

A recurring theme was the need to distinguish between countries facing short-term liquidity pressures and those confronting deeper insolvency challenges. Several participants suggested that debt relief could be necessary in some cases, while temporary financing instruments may be more appropriate elsewhere.

Discussions around guarantees generated similar concerns. Representatives from least developed countries noted that blended-finance mechanisms often fail to reach nations lacking investment-grade credit ratings, limiting access for countries most in need of lower-cost capital.

At the subsequent high-level roundtable, finance ministers, multilateral development banks and negotiating groups debated how climate finance should evolve.

African representatives highlighted the continuing burden of high financing costs, debt-servicing obligations and limited access to affordable capital. They warned that climate-finance reforms should not create additional debt burdens or new conditions for vulnerable countries.

Development banks, meanwhile, focused heavily on mobilising private investment. Officials argued that public resources alone would never be sufficient to meet global climate-investment needs and called for greater use of guarantees, risk-sharing arrangements and climate-resilient financing mechanisms.

Several institutions also presented evidence suggesting that investor perceptions of risk in developing countries frequently exceed actual default experience, contributing to unnecessarily high borrowing costs.

Civil society organisations maintained that grants, debt cancellation and fulfilment of existing climate-finance commitments remain central to achieving climate justice.

The conversations unfolded against a difficult geopolitical backdrop. Climate issues received limited attention during the broader IMF-World Bank meetings, where economic growth, jobs and fiscal pressures dominated discussions.