Climate adaptation finance must double by 2025. How will that happen?

The financing need for adaptation to climate change in low- and middle-income countries is at least 50% higher than previously estimated. To plug that gap, climate-vulnerable countries are calling for more easily accessible public financing and more investment from the private sector. The adaptation finance needs of vulnerable countries now stand at $194 billion to $366 billion per year, according to the United Nations Environment Programme’s latest Adaptation Gap Report. Yet between 2016 and 2021, adaptation finance averaged $19 billion per year, or just 25% of overall climate finance, according to a 2023 report on adaptation finance from the Organisation for Economic Co-operation and Development. Despite increasing needs, public adaptation finance has declined since 2020, in contrast to mitigation finance which increased over the same period. In a country such as Malawi, where 80% of the population makes a living from small-scale farming, adapting to climate impacts such as changing rainfall patterns and degraded soil health is especially urgent. “Each and every time we experience new impacts … it’s affecting a lot of lives — so there’s really a need for support in this sector to ensure that people can adapt,” Clement Kandodo, CEO of biofuel social enterprise EcoGen, said. Currently, the small amount of international public financing available comes mostly from bilateral donors, multilateral development banks such as the World Bank, as well as specialized climate funds such as the Green Climate Fund. The majority of funding is allocated on a project basis, making it difficult for smaller governments to plan and finance long-term adaptation plans and strategies. “We need more donors to collaborate to bring funding together into the kind of support that can provide transformative impact rather than these little pots of money scattered across different portfolios and different indicators that just fragment our delivery,” Daniel Lund, a special adviser on climate action to the Fijian government, told Devex. The climate adaptation finance landscape In 2021, almost 200 countries adopted the Glasgow Climate Pact that came out of 26th United Nations Climate Change Conference, or COP 26, which called for high-income countries to at least double their collective climate finance for adaptation to vulnerable countries compared to 2019 levels by 2025. It also aimed to achieve a better balance between financing for adaptation and mitigation, as the latter currently receives the majority of climate dollars. There’s also the Global Goal on Adaptation established in 2015, a collective commitment under the Paris Agreement aimed at strengthening countries’ resilience and reducing vulnerability to climate change. During COP 28 in Dubai, the United Arab Emirates, in December 2023, countries finally agreed on an overarching framework to help guide the goal’s implementation. However, many low-income countries argue that it lacks specific, measurable, and time-bound quantitative and qualitative targets, as well as accountability for high-income countries to provide the needed finance. “This year is particularly critical for climate finance in general and adaptation finance in particular as many of the finance-related details for implementing the Global Goal on Adaptation were left unresolved at COP 28,” said Mikko Ollikainen, the head of the Adaptation Fund, which provides grants for adaptation projects to vulnerable countries. A new collective quantified goal for all climate finance — a previous target of $100 billion per year by 2020 was never achieved — is also due to be agreed upon at this year’s COP 29 in Baku, Azerbaijan. The U.N. Conference on Trade and Development has called for the new goal to start at $500 billion per year until reaching $1.55 trillion by 2030. It would like to see $100 billion of that going to adaptation, and progressively rising to $250 billion by 2030. Increasing — and improving — public adaptation finance To ramp up adaptation finance as fast as possible, donor countries need to increase their public spending for climate finance as a whole and adaptation in particular, Chiara Falduto, an OECD climate finance policy analyst, explained. For small island developing states like Fiji, the need to adapt to climate impacts is deeply interlinked with national development needs. Separating out funds for development projects and funds for adaptation purposes is therefore difficult. “The only reason why we divided up and categorize it is for the purpose of global financing … but on the ground, mitigation, adaptation, sustainable development, addressing loss and damage — it's all part of the same range of challenges,” Lund, of the Fijian government, said. Fiji receives its lion’s share of climate finance from bilateral donors rather than climate funds, “because we tend not to have the capacity to continue to access it through the GCF [Green Climate Fund] process,” Lund explained. “The whole architecture of donors is very fragmented,” explained Falduto, and she urged donors to work on removing barriers to accessing funds by simplifying application processes and improving coordination across different institutions. For example, donors could ensure that the documentation requested during the application process is the same or at least similar across donors, she explained. Heads of climate funds are aware of the challenges and several of them met at COP 28 to discuss ways to enable easier access and standardization in their application processes, the Adaptation Fund’s Ollikainen explained. One example is the Adaptation Fund and the Green Climate Fund’s reciprocal fast-track process. “If one entity gets accredited with one fund, then it’s easier for them to get accredited with the other,” he said. From projects to transformational investments To improve the impact of public adaptation finance, small island states like Fiji are calling on funders to move away from project-based funding. “It’s quite difficult to systematically build resilience through projects,” Lund said. Donors wanting to attribute different streams of finance with different indicators and outcomes is a challenge. “A lot of our work in the climate change division is trying to strategically manage these finance flows so that they have a cumulative, overall outcome, rather than just fractured pilot projects here and there,” he said. Yet, it’s difficult for a small administration to coordinate national development priorities when the majority of additional resources come through projects that exist outside of their budget. Adaptation finance needs to be made available in more consequential sums to become more cost-effective, Lund explained. The challenge is making the case for that type of broad support through the funding bodies, according to Sam Barrett, a researcher with the International Institute for Environment and Development. Calls from vulnerable countries around the need to reform the global financial architecture are only growing louder, as seen with the Bridgetown Initiative spearheaded by Barbados’ Prime Minister Mia Mottley. Engaging the private sector Currently, private sector funding for adaptation is very limited — between 2016 and 2021, high-income countries’ public finance interventions mobilized a total of $7.1 billion of private finance for adaptation, equivalent to 1.2 billion per year on average, according to the OECD report. “We are working with the most vulnerable communities, and in those kinds of settings it’s quite difficult to access loan-based funding, let alone to attract private investment,” Ollikainen said. “In Malawi, financing from the private sector is very hard [to get] because interest rates are very high and most businesses to do with adaptation require a lot of investment before you start getting better returns,” EcoGen’s Kandodo said. The private sector currently plays a bigger role in financing mitigation, as investments in projects such as renewable energy provide investors with the financial returns needed to repay a loan, OECD’s Falduto explained. However, it’s in the very nature of businesses to adapt to changing demands and markets, and climate change is part of that equation. “It’s in the interest of a business to make sure that its assets or activities can adapt to future impacts of climate change,” she said. Private investors could do more to attach adaptation considerations to their investments. For example, a mitigation project to build solar panels could include an additional investment to make sure the panels can withstand flooding, Falduto added. “Whenever you have that mitigation project where the private sector is very interested, make sure to attach as many adaptation considerations as possible,” she said. Commercial investors are slowly starting to see a growing market for climate adaptation, and in 2022, analysts at Bank of America suggested it could be worth $2 trillion annually within five years. Another study published by the Boston Consulting Group, the Global Resilience Partnership, and USAID last December lays out the investment thesis for the private sector to finance climate adaptation and resilience, in an effort to showcase the “opportunity” in the field. Social impact investors are also an area of real hope because they are willing to take a hit when it comes to return, according to IIED’s Barrett. “They're happy to lose 5% of their money a year as long as you can make the case that what you've invested in has had an impact in terms of adaptation and resilience.” While public donors will happily go along integrating buzzwords around resilience and adaptation into their programming, most will never be asked for any demonstrable evidence of having contributed to adaptation, he explained. “The interesting thing about private investors is they'll demand that it has an impact, they'll demand that it's effective because they're gonna want to get paid,” Barrett said.