Adaptation finance needs to adapt too
Financial institutions need to focus on the results of adaptation finance and not solely on the volume writes Sarah Duff, climate adaptation finance expert, European Bank for Reconstruction and Development.
There is an obvious and growing urgency to scale up climate adaptation finance for developing markets. The physical impacts of climate change are seen daily as extreme weather events unfold across the world. Nowhere are these impacts felt more than in emerging economies. While developing countries – which have historically contributed the least to global greenhouse gas emissions – face the worst of climate change, they simultaneously have the least resources to prepare and adapt.
Calls to scale up adaptation finance volumes have been heard for decades. Since the 2009 COP15 in Copenhagen, where world leaders committed to a goal of mobilising $100bn a year by 2020, the messages have been the same. The 2015 Paris Agreement highlighted that significant capital is needed to adapt. In 2019, multilateral development banks jointly released a high-level statement at the United Nations Climate Action Summit, with an expectation of doubling the total level of collective adaptation finance by 2025. Then, in 2021, one of the key outcomes of COP26 was the need to significantly increase the scale of adaptation finance to address the climate finance needs of developing countries.
Despite the collective urgency, the $100bn target was missed and the 2023 UN Adaptation Gap Report was damningly subtitled ‘Underfinanced. Underprepared.’ But what has been done to move towards these goals? What are the barriers to increasing climate adaptation finance and what can be done now to turn the tide?
What has been achieved so far
Progress has been made in some areas. In 2022, MDBs jointly committed a total of $25.2bn for climate change adaptation finance – surpassing their doubling target that was set in 2019.
Yet, there are many known barriers to increasing adaptation finance. A lack of knowledge, capacity and data on climate risks are often cited as reasons for lower investment volumes, as well as uncertainty around investment returns. It may also be that both the finance world and the understanding of adaptation have changed since these commitments were set.
Climate adaptation is no longer viewed as an add-on to investments, but rather as an imperative for putting finance on the path to resilience. With this holistic approach, delivering and capturing systemic adaptation becomes more complex.
In the past, financial institutions focused on providing project finance. In a typical capital expenditure investment, it is relatively easy to see the additional adaptations that make a project more resilient to climate change. With Covid-19 and subsequent emergencies – including the war on Ukraine – MDBs and others had to change quickly to respond appropriately. Large capex projects faced delays and the focus turned to providing working capital and liquidity support to companies. For these different types of financial instruments, the adaptation components are less evident and trackable, which in turn reduces adaptation finance numbers.
At the European Bank for Reconstruction and Development, we still provide project loans. Our support to the Moroccan national port operator is a great example of how we invest in adaptation for infrastructure. We have also diversified how we deliver adaptation finance through the private sector by investing in a sustainability-linked Eurobond issued by Turkey’s Coca-Cola Icecek A.S.. This sustainability-linked bond includes a key performance indicator tied to increased water efficiency. We also work with partner banks, like the National Bank of Egypt, to support small businesses introducing adaptation technologies.
Scaling up adaptation finance
Adaptation finance also needs to adapt. Flexible thinking is needed to ensure all types of finance are contributing to adaptation goals. As finance continues to be provided in more innovative ways, adaptation finance can be delivered through private equity, guarantees or mortgages.
That also means tracking adaptation finance needs to be simpler. The joint work of the MDBs to update the adaptation finance tracking methodology and the development of taxonomies are steps in the right direction, but wider adoption of a clear and consistent tracking approach is needed.
Financial institutions need to focus more on the results of the finance and not just the volume. The work needed to develop clear metrics and align finance with a global goal on adaptation will be crucial. After all, we are aiming for increased resilience to climate change. The finance is how we get there; it is not the end goal.