Opinion: Mobilizing financing for sustainable climate adaptation

Low- and middle-income countries are particularly affected by climate change. They face frequent and intense flooding, droughts, and storms, as well as negative impacts to key economic sectors. To successfully adapt, governments need access to significant private and public sector finance.

Yet while overall climate change financing is on the rise, adaptation finance lags behind mitigation finance. Mitigation, which reduces or prevents greenhouse gas emissions, provides myriad possibilities for profitable private sector participation. But adaptation, which reduces vulnerability to existing impacts, is seen as a public good and does not carry with it the same profit potential.

This puts low-income nations and Pacific Island states at a significant disadvantage: They are already suffering the negative impacts of climate change and lack the resources to fully fund adaptation measures on their own.

Globally, financing for climate change mitigation and adaptation has been steadily increasing. It currently totals an average of $436 billion annually, according to the Climate Policy Initiative. The World Bank recently reported that climate financing from the world’s six largest multilateral development banks rose to a seven year high of $35.2 billion in 2017, up 28 percent from 2016.

Various climate change funds associated with the United Nations Framework Convention on Climate Change, such as the Green Climate Fund and the Least Developed Countries Fund, are operational. The majority of funding is expected to come from the private sector, supplemented by international and domestic public sources.

However, adaptation financing is just a small portion of the overall global climate finance flows and received only $22 billion in 2016, according to CPI. The largest international climate fund, GCF, has only allocated 29 percent of its approved funding exclusively for adaptation, compared to 43 percent for exclusively mitigation projects.

Given these challenges, it is crucial that LMICs and Pacific Island states find, and refine, methods to access financing. From AECOM’s experience supporting 27 Asia-Pacific region countries to access adaptation finance and prepare adaptation projects, we’ve identified three key lessons for low- and middle-income countries as they access adaptation funds.

1. International accredited entities may have different climate priorities from low-income nations, and low-income nations lack the capacity to become accredited — but training and mentoring can help. 

International climate funds work through accredited entities. These entities, which develop project proposals and manage financial flows, serve as intermediaries between the climate funds and the recipients. They are typically multilateral institutions such as the World Bank, Asian Development Bank or U.N. agencies.

In order to gain greater control over the processes and decision-making around project selection, design, and implementation, countries are increasingly seeking to become accredited entities. By doing so, governments gain direct access to global funds, rather than moving through intermediaries.

A growing number of national entities, such as India’s National Bank for Agriculture and Rural Development, have become accredited. However, many low-income nations and Pacific Island countries — those most in need of adaptation funds — lack the capacity to become accredited entities.

Those that can make it through the stringent accreditation process often lack the capacity to analyze, select, and design sound adaptation projects that meet climate funds’ criteria. One of the most common pitfalls is noncompliance with fund requirements, such as social and environmental safeguards.

We propose increased programming around training and capacity building for low-income nations and Pacific Island countries to become accredited entities and successfully apply for and manage funding.

2. Private sector adaptation funding is low and often uncoordinated with governments, but innovative risk management mechanisms can raise profitability.

One of the main reasons adaptation has a low share of climate financing is the lack of private sector participation.

Unlike mitigation initiatives, such as renewable energy investments, adaptation projects tend to lack the incentive structures to attract private sector financing. When the private sector does invest in adaptation, it is generally to protect private property through mechanisms such as flood walls, climate proofing of assets, or risk management in the form of increased insurance. Moreover, in these instances the private sector will generally act on its own, without government engagement or alignment with national adaptation plans or strategies.

For instance, after major flooding in Bangkok, Thailand, in 2011, large auto manufacturers such as Honda and Toyota invested heavily to improve flood protection for their factories. But without government and community coordination, the investments resulted in significant duplication. In many instances, the flood protection dispersed future flooding to neighboring areas, increasing vulnerability.

In addition to supporting enhanced coordination between public and private sectors, we see potential for innovative adaptation financing through risk management and insurance products. For instance, insurance companies have recently used reinsurance products and loss and damage frameworks to invest in adaptation to reduce future claims for climate-related disasters.

3. International climate funds are insufficient to fully meet adaptation needs, but domestic adaptation financing can help fill the gap.

Global climate funds such as GCF and the Adaptation Fund will fall far short of meeting climate adaptation financing needs. Their role in the long run will likely be to catalyze investment and demonstrate best practices. The gap in funding will need to be filled by domestic sources, both public and private.

After signing the Paris Agreement, countries are already making increased investments to meet their nationally determined contributions. Most of these commitments are related to reduction of greenhouse gases.

But as the impacts of climate change become more apparent, many countries have also set aggressive targets for climate adaptation, and governments have begun setting up domestic funds to meet the demand. For instance, India has set up the National Adaptation Fund for Climate Change, which is currently capitalized with over $350 million. The People’s Survival Fund in the Philippines and the Indonesia Climate Change Trust Fund are other examples of national funds focused on adaptation.

In addition to national level funds, governments are increasingly allocating funding adaptation through their annual spending programs. Adaptation strategies are being incorporated into planning and development guidelines. Bhutan, for example, has a system of tagging climate related investments in their nation budget that other countries in South Asia are looking to replicate. Domestic measures are an effective strategy that the international community can support.

Harnessing external funding, developing enhanced private sector coordination and innovative risk management mechanisms, and marshalling internal resources won’t provide the whole solution to the climate adaptation challenge. But we believe that they can provide a start.

Update, Dec 6, 2018: This article has been updated to clarify that globally, financing for climate change mitigation and adaptation totals an average of $436 billion annually.

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