Adaptation finance has been lagging in Southeast Asia, despite the region being disproportionately vulnerable to climate shocks. However, countries can address the gap by strengthening national plans and taxonomies, as well as using financial instruments strategically, found a new report.
One of several pathways to unlock more adaptation finance is by accessing sustainable bond markets, which has seen strong investor appetite for issuances that target climate resilience, according to the Institute for Energy Economics and Financial Analysis (IEEFA), a think tank.
In its Scaling adaptation finance in Southeast Asia report published on Monday, IEEFA highlighted how the €300 million (US$357 million) Tokyo Resilience Bond, issued in October 2025 and the first to be certified under the Climate Bonds Standard, was oversubscribed seven times.
“From 2015 to 2024, climate change adaptation received only around 6-10 per cent of total proceeds across both corporate and sovereign issuances, indicating significant untapped potential,” said IEEFA.
Globally, adaptation finance is on the backfoot, despite rising costs from extreme weather and other physical disasters fuelled by climate change, the report showed. In 2023, global adaptation stood at just US$65 billion – approximately 4 per cent of the US$1.9 trillion in total climate finance – and lower than the US$75.7 billion in annual economic losses Asia suffered from climate-related events between 2000 and 2023.
Although countries agreed to triple adaptation finance at last year’s COP30 climate conference in Brazil, the target was delayed by five years and still falls short of developing countries’ adaptation needs.
A September 2025 report by non-profit Climate Policy Initiative found that Southeast Asia faces an annual adaptation financing gap of US$17.5 billion, or 88 per cent of the total it needs.
However, multiple structural barriers continue to hinder the scaling up of adaptation finance in this region, IEEFA said.
Climate adaptation readiness varies widely across Asia, with Singapore, South Korea and Japan ranking relatively high, while Thailand and Cambodia lag, according to Bloomberg New Energy Finance (BNEF) assessments. Image: Institute for Energy Economics and Financial Analysis
“Unlike mitigation investments, adaptation projects rarely generate predictable revenue streams, as their value is primarily derived from avoided losses and public benefits rather than direct cash flows,” IEEFA said.
On top of that, returns are typically only realised over long periods of time, while project fragmentation and relatively small transaction sizes further increase costs and deter institutional investors.
This means that adaptation projects have been less likely to attract private investors, which typically rely on measurable returns within defined payback periods, the report said. Instead, they have been reliant on grants and concessional funding, which fall far short of needs.
“Efforts should focus on mobilising private investors to unlock greater finance flows,” IEEFA said.
One way Southeast Asia is addressing this issue is through a complementary guide to the Asean Taxonomy for Sustainable Finance. Titled the Mitigation Co-benefit and Adaptation for Resilience guide, it is expected to clarify what constitutes adaptation finance and how resilience outcomes should be assessed.
IEEFA analysts also recommended that financial instruments be reorientated to directly target adaptation and resilience outcomes.
For instance, details such as interest rates, timelines and who should absorb the initial losses of adaptaion projects should be adjusted depending on the adaptation outcomes targeted, suggested Ramnath N Iyer, IEEFA’s sustainable finance lead for Asia.
Shu Xuan Tan, IEEFA’s sustainable finance analyst for Asia and co-author of the report, added, “Development banks and finance institutions 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.”
Look locally for funding
Southeast Asian countries should also seek to rely less on developed countries for adaptation finance, IEEFA said, given shifting global priorities and a decline in international development aid.
Both the United States and Europe cut financial support for developing countries last year, with the US having slashed funding for the US Agency for International Development (USAID) in early 2025 and countries including Germany and Sweden recently announcing that they would redirect budgets towards defence spending, The Guardian reported.
“Amid uncertainty in international development finance, mobilising domestic capital through tailored financial instruments, better capital market access, and innovative tools is essential for Southeast Asia to meet the adaptation challenge,” said Iyer and Tan.
However, gaps in planning and institutional capacity exacerbate financial constraints across Southeast Asia, the report added.
“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 Iyer.
In the meantime, investors move beyond seeing adaptation solely as a cost and incorporate forward-looking resilience risks and benefits into financial appraisal, investment strategies, and project evaluations, he added.
