Adapting to climate change: innovative tools in development and climate finance

The rise of the "pause clause", and financing resilience

Bilateral development agencies, multilateral financial institutions and, increasingly, export credit agencies are expanding the use of "pause clauses" in their direct lending to sovereign borrowers in emerging and frontier markets.  Also referred to as climate-resilient debt clauses (CRDCs) or natural disaster clauses (NatDCs), these provisions are specifically designed for the most climate-vulnerable sovereigns, including least developed countries (LDCs) and small island developing states (SIDSs). They allow sovereign borrowers to request a temporary deferral of debt repayments following a pre-defined, severe climate shock or natural disaster, preserving liquidity for essential disaster relief expenditure. 

While "pause clauses" are becoming more common in government-to-government lending and loans from some of the leading multilaterals, their adoption in commercial lending — even where that bank debt is guaranteed or credit-enhanced by a multilateral or export credit agency — remains unclear, and is essentially unprecedented at the time of writing. Similarly, their use in sovereign bonds has been extremely limited and highly case-specific.  However, moves are afoot in the market to change this.

Development finance institutions and bilateral government creditors, who lend based on policy mandates, have so far been successful in integrating these clauses into their lending frameworks. However, commercial bank creditors will face greater challenges in doing so (including for pricing, credit and regulatory reasons). The key question is whether this will change, and if so, how the commercial bank market can be encouraged to embrace pause clauses more broadly.  For pause clauses to be truly effective, they must be adopted by a significant portion of a country’s creditors, setting the groundwork for comprehensive relief in times of crisis.

Understanding the pause clause

The concept of pause clauses has evolved from earlier innovations such as the "hurricane clauses" introduced in 2018 and the Debt Service Suspension Initiative (DSSI) implemented during the Covid-19 pandemic. Generally, the aspiration is that they are structured to be net present value (NPV)-neutral for creditors, helping to avoid debt restructuring or default and preserving liquidity for disaster response and recovery.

Recent efforts to standardise these clauses have gained momentum. The UK government’s launch of the Private Sector Working Group (PSWG) in 2022, followed by the International Capital Market Association’s (ICMA) publication of standard clauses, has laid the groundwork for broader adoption. In 2024, the Sustainable Sovereign Debt Hub established a technical working group on climate resilience debt clauses (CRDC WG), with its work now being continued by the London Coalition on Sustainable Sovereign Debt, launched in February 2025.

Key features and challenges of pause clauses

Pause clauses can take various forms, but their core objective is to provide liquidity relief to borrowers with an element of "automaticity", without triggering cross-defaults across their debt stock, or requiring amendments or consents from their creditor group.  

A significant challenge arises from the "commencement of negotiations" Event of Default, commonly found in emerging market debt documents. This provision could inadvertently trigger cross-defaults if a sovereign seeks relief after a climate disaster, including by negotiating with creditors. A typical Event of Default on this (recognising that a limitless number of variants is possible) might be something like the following:

"The Borrower, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to a rescheduling of any of its External Indebtedness."

From a creditor’s perspective, the intention behind such default clauses is not necessarily to accelerate repayment in a sovereign debt distress scenario (even if they have the right to do so), but rather to secure a "seat at the table" in restructuring discussions. This is particularly pertinent for official bilateral and commercial creditors, who are expected to share the burden in restructuring scenarios, unlike their multilateral financial institution counterparts, who typically engage in long-term, concessional lending and who are not expected to participate in sovereign debt restructurings given the preferred creditor status they enjoy.

While some efforts have been made to create alternative rights through information covenants or other undertakings, these have generally been unsuccessful in the sovereign debt context : only through the teeth of an Event of Default do commercial banks have the effective remedy to create this seat at the table. Multilaterals and official creditors are therefore better positioned to absorb the impact of pause clauses, whereas commercial banks and bondholders — especially those without credit enhancement — face greater challenges, including potential pricing implications and difficulties in securing private insurance for their debt.

How pause clauses operate

Many variants are possible. In broad terms, and without getting into the drafting, a "pause clause" might allow for (for example):

• an extension of loan tenor
• interest holidays, with subsequent catch-up and capitalisation
• reprofiling of principal repayments following a natural disaster, with subsequent catch-up or equalisation of payments

They can be structured in various ways; for example, tenor extension is not mandatory, and different approaches can be tailored to specific circumstances. The design of the clause — whether the trigger is parametric, at the borrower’s discretion, or subject to negotiation with the creditor — must be carefully considered to avoid unintended cross-defaults (including under a "commencement of negotiations" Event of Default).

Creating new market norms

For commercial bank debt, leading export credit agencies can help mobilise private capital and encourage commercial banks to follow their lead, by providing guarantee coverage in line with original payment terms, making banks whole during the "pause" period. To achieve widespread adoption and to achieve the aspirations of the clause however, several considerations must be addressed:

• Comprehensive adoption: Pause clauses are only effective in achieving their aspirations if adopted by a broad base of creditors.  Isolated use in a small portion of a country’s overall debt stock limits their impact.
• Technical support: Borrowers will likely require technical and legal assistance in integrating pause clauses into their debt documentation, particularly in navigating the complexities of "commencement of negotiations" events of default and similar restrictions.
• Assurances on use of proceeds: Creditors may seek assurances that the cash flow savings from the deferred debt service are used for emergency response and resilience-building, rather than having the effect of subordinating their debt to other creditors who have not offered the same relief. Monitoring and supervision will be subjects to be considered by some creditors (increasingly topical in climate finance), and the level of assurance that can be provided by sovereigns on use of proceeds.
• Maintaining preferred creditor status: Multilateral financial institutions may wish to consider whether and how  granting pause clauses might compromise their preferred creditor status or equate to participation in a restructuring.

Ultimately, a "pause clause" will not fulfil its purpose if its activation triggers a default under a borrower’s other debt documentation. The fundamental premise of the clause is to enable liquidity relief without requiring the borrower to seek consents from its creditor group as a whole, or triggering defaults, termination events or similar consequences. 

Challenges for commercial bank creditors in integrating pause clauses

Commercial bank creditors – even where the underlying payment risk is covered by an ECA or multilateral financial institution – face a distinct set of challenges when considering the integration of pause clauses into sovereign lending agreements, especially when compared to development finance institutions and bilateral government agencies. These challenges stem from differences in regulatory requirements, risk appetite and mandate:

• Regulatory capital: Commercial banks are subject to stringent regulatory frameworks, including capital adequacy requirements (such as EU or UK CRR and Basel III), loan classification, and provisioning rules. The exercise of a pause clause — resulting in deferred payments — may trigger a reclassification of the loan as non-performing or impaired, requiring higher capital reserves and provisions.
• Accounting standards: Under international accounting standards (such as IFRS 9 or US GAAP), a modification of loan terms, even if pre-agreed, may require the bank to assess whether the change constitutes a significant increase in credit risk or a derecognition event. This can lead to increased expected credit loss (ECL) provisions and affect reported earnings.
• Fear of subordination: If pause clauses are not universally (or at least broadly) adopted across all creditor classes, commercial banks may fear being disadvantaged relative to other creditors who do not offer such flexibility.  This will be a key issue in roll-out of the programme more generally.
• Developmental vs. commercial objectives: DFIs and bilateral creditors often have explicit mandates to support countries in times of crisis, including through concessional financing or payment relief.  Commercial banks, by contrast, lack such mandates and, while they are responsible lenders with an interest in debt sustainability, they may face internal or external resistance to measures that could be seen as prioritising public policy objectives over shareholder value.

The road ahead for pause clauses

Pause clauses represent a powerful tool for building climate resilience and supporting vulnerable sovereigns in times of crisis. However, their transformative potential will only be realised if the entire creditor community — including commercial banks, and bondholders — can be brought on board. Overcoming the structural, regulatory, and commercial barriers faced by banks will require creative legal and technical solutions as well as a shift in market norms.  

The leading export credit agencies and multilateral financial institutions have the financial firepower, and technical skill, to move the market in mobilising commercial bank support for pause clauses, as "break-out" tools from multilateral or G2G lending and into commercial bank financing. 

As the climate crisis intensifies, the question is not whether pause clauses will become mainstream, but how quickly the market can adapt to ensure that no creditor — and no country — is left behind when disaster strikes.