Financing the ecological transition through public debt: a viable strategy?

The fight against climate change is now the subject of a shared observation: the ecological transition is both urgent and extremely costly. According to McKinsey, several trillion dollars would need to be invested each year to reach carbon neutrality by mid-century, a level far above current commitments. Faced with insufficient private financing, many governments are considering resorting to public debt to accelerate the green transition, even as global sovereign debt hovers at historic levels.

Since its inception, climate finance has largely favored mitigation, emphasizing the decarbonization of energy systems and the decoupling of economic growth from greenhouse gas emissions. However, recent work by the Network for Greening the Financial System (NGFS) highlights the imperative to integrate climate-related physical risks into the assessment of portfolio resilience.

It should be noted that the Phase V scenarios foresee that GDP losses related to chronic physical risks could be two to four times higher by 2050 than estimated in previous models.

Climate-related damages could trigger a financial crisis comparable to that of 2008.

Turning to public debt

The "Financial Times" reports that central banks are now pressuring financial institutions to broaden their climate planning beyond mitigation alone. They are requiring the development of formal adaptation strategies — such as investments in coastal defenses or more resilient agriculture — to be integrated into transition plans. This shift aligns with the NGFS's latest recommendations, which encourage institutions to move from mitigation-focused reporting to comprehensive planning for climate change adaptation.

Given that adaptation investments rarely match the immediate return profiles sought by private capital, resorting to public debt appears to be a pragmatic way to strengthen long-term resilience.

Borrowing to finance green infrastructure — whether it be dikes, climate-adapted transport, or resilient energy networks — can be a budget-responsible option, particularly when the cost of climate inaction threatens to reduce global GDP by nearly 15% by 2050 (according to some policy scenarios). Central banks warn that, through mechanisms such as mortgage defaults or the collapse of housing markets, climate-related damages could indeed trigger a financial crisis comparable to that of 2008.

Is climate risk systemic?

Furthermore, in many advanced economies, real interest rates remain low. When the returns on green investments — whether from reduced economic losses, productivity gains, or the creation of public value — exceed borrowing costs, using debt to finance the climate transition is not only affordable: it also helps strengthen fiscal sustainability.

The Swiss Confederation has embarked on this path by mobilizing public instruments such as the Swiss Climate Fund, as well as initiatives led by the State Secretariat for International Financial Matters (SFI), which aims to position Switzerland as a global hub for sustainable finance.

Central banks increasingly view climate risk as a systemic risk. Thus, the ECB plans to introduce in 2026 a "climate factor" that will penalize collateral highly exposed to climate risks. Meanwhile, regulators at the Bank of England are now urging financial institutions to incorporate weather-related risk into their capital planning and governance, rather than treating it as a mere disclosure requirement.

These signals suggest that ambitious green public borrowing could strengthen market confidence, provided it is accompanied by a credible strategy, rather than provoke a negative reaction from investors.

An international financial reform appears indispensable, whether it involves expanding climate financing, reallocating special drawing rights (SDRs), or establishing debt-for-climate swap mechanisms.

Governance and equity at the heart of the transition

Beyond ambition, a debt-financed climate strategy requires strong governance. Transparency is an essential pillar: governments must clearly define the projects financed by green bonds, establish independent evaluation criteria, and ensure rigorous monitoring of outcomes over time, in order to avoid any misallocation of capital.

Equity is also paramount. Financing adaptation investments — such as heat-resistant housing or dikes — must incorporate a just transition approach that protects both workers and vulnerable populations from climate shocks as well as social disruptions.

Globally, many low- and middle-income countries face the most severe real dangers while having limited access to affordable debt markets. As the NGFS scenarios highlight, emerging markets could suffer even heavier losses as climate impacts intensify. An international financial reform therefore appears indispensable, whether it involves expanding climate financing, reallocating special drawing rights (SDRs), or implementing debt-for-climate swap mechanisms.

At the macro-fiscal level, modern fiscal rules could distinguish "green" debt from "brown" debt: borrowings intended to subsidize fossil fuels should be treated differently from those aimed at strengthening climate resilience. Some economists therefore advocate for climate-adjusted budgetary frameworks that allow financing public investments without compromising debt sustainability.

Ultimately, green investments financed by public debt are not a panacea, and fiscal, political, and operational risks remain real. However, as NGFS models and central bank guidance emphasize, insufficient planning for adaptation and mitigation could lead to economic damages far greater than those of a measured use of borrowing today.

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