Function 1 — Reforming economic strategy through shaping national development and climate plans

Introduction: Why climate action is central to macroeconomic strategy and decision-making

In brief: Climate-related issues touch almost every responsibility of a Ministry of Finance and are reflected across the policies, processes, and analytical tools used to manage the economy and public finances. Function 1 explores how Ministries of Finance can integrate climate considerations into the core functions through which they shape economic development.  

Climate risk and the growth and development effects of the transition to a low-carbon, climate-resilient, and nature-positive economy impact the core macroeconomic and fiscal variables Ministries of Finance (MoFs) manage, namely output, revenue, expenditure, and debt. In the short term, climate-related disasters and energy price shocks strain annual budgets, fiscal performance, and macroeconomic stability. Over the medium term, adaptation and decarbonization investments, shifting tax bases, and transition risks reshape fiscal planning and development priorities. Over the longer term, climate change, biodiversity loss, and ecosystem degradation shape the structural drivers of economic growth, productivity, inflation, fiscal sustainability, and debt dynamics. 

Climate-related issues touch almost every responsibility of an MoF

They are reflected across the policies, processes, and analytical tools used to manage the economy and public finances. As laid out in Part A, The role of Ministries of Finance in navigating the transition to a low-carbon, climate-resilient, and nature-positive economy, these risks also extend to food and water security, investment, and employment. Where extreme weather and slow-onset climate change can disrupt economic activity and damage infrastructure, well-designed climate policies and resilience investments can instead strengthen competitiveness and unlock private investment. Not every unit works on climate: MoFs assess the risks and opportunities they face and prioritize action according to mandate, competencies, and expected effectiveness. One global modeling study estimates that investments in nature can deliver returns comparable to, and sometimes exceeding, those of conventional infrastructure while supporting more inclusive development outcomes (Johnson et al., 2023). 

The challenge for MoFs is maximizing climate ambition while managing difficult economic choices 

Climate action is an essential ingredient of long-term fiscal sustainability, yet it often requires upfront public and private investment when fiscal space is constrained. Governments also face many competing priorities. Decisions about adaption, mitigation, and nature restoration therefore involve trade-offs between short-term fiscal pressures and long-term economic resilience. Macroeconomic analysis helps governments understand the costs, financing needs, and fiscal risks of alternative pathways so they can sequence investments and determine which approaches are fiscally feasible (see Capability 3, Enhancing economic decision-making tools and data-driven analysis). Conversely, delayed or insufficient action can create substantial long-term fiscal liabilities through higher disaster recovery costs, weaker growth, increased social spending pressures, and heightened sovereign risk (NEF, 2026). 

Climate and development policies also affect employment, household incomes, regional development, and income distribution  

MoFs need to look beyond aggregate economic impacts to see who benefits, who bears the costs, and what complementary measures a just transition requires (see the Just Transition thematic overview page). Analysis of these considerations is most useful inside routine economic and fiscal decision-making rather than as a standalone environmental exercise (CFMCA, 2025a).

MoFs are well positioned to take climate action 

They manage countries’ macroeconomic policy, fiscal policy, budgeting, and public investment, and have the standing to assess economy-wide trade-offs and coordinate across government. MoFs are among the actors whose engagement determines whether Long-Term Low Emission Development Strategies (LT-LEDS), Nationally Determined Contributions (NDCs), National Adaptation Plans (NAPs), and National Biodiversity Strategies and Action Plans (NBSAPs) are financially credible, economically sound, and implementable (CFMCA, 2025b; IMF, 2021; OECD, 2025a). MoFs face questions about the macroeconomic and fiscal consequences of different policy choices such as:  

• How will climate change affect long-term economic growth, fiscal sustainability, and investment needs?  

• What are the economic, fiscal, and distributional impacts and trade-offs of different transition pathways?  

• How can macroeconomic analysis help governments develop credible, financeable, and implementable climate and development strategies? 

The following Action Areas explore how MoFs can integrate climate and nature considerations into the core functions through which they shape economic development. They examine the MoF’s role in Participating in the development and implementation of climate and related strategies; Greening national development and sector strategies; Shaping 21st industrial and innovation strategies; Developing investment strategies; and Identifying and developing bankable projects and programs. Sound macroeconomic analysis underpins all these Action Areas: it is treated here as the evidence base for developing and assessing national climate and development strategies rather than as an end in and of itself (see Capability 3, Enhancing economic decision-making tools and data-driven analysis). 

Substantive contributions: New Economics Foundation (Jaya Sood); Andy King; the Introduction also draws on the Coalition of Finance Ministers for Climate Action initiative on economic analysis for green and resilient transitions.

References: 

Coalition of Finance Ministers for Climate Action [CFMCA] (2025a) A global survey of Ministries of Finance: The pressing policy questions Ministries of Finance face in driving green and resilient transitions and their use of analytical tools to address them. Report for the initiative “Economic Analysis for Green and Resilient Transitions.”

Coalition of Finance Ministers for Climate Action [CFMCA] (2025b) Fiscal challenges and opportunities report. Coalition of Finance Ministers for Climate Action/Helsinki Principle 4 Initiative.

International Monetary Fund [IMF] (2021) Climate-sensitive management of public finances: Green PFM. IMF Staff Climate Note 2021/002. Washington, DC: International Monetary Fund.

Johnson J et al. (2023) Investing in nature can improve equity and economic returns. Proceedings of the National Academy of Sciences 120(17): e2220401120. https://doi.org/10.1073/pnas.2220401120

New Economics Foundation (2026) The climate-fiscal timebomb: How climate change will impact public budgets. London: New Economics Foundation.

Organisation for Economic Co-operation and Development [OECD] (2025a) Governing for the green transition. OECD Net Zero+ Policy Papers 13. Paris: OECD Publishing.