Shifting the View: Attracting Private Finance for Climate Adaptation

Priyanka Sunder

27 Jun, 2016

Attracting private finance for climate change adaptation projects in vulnerable countries is a challenge the Green Climate Fund Board must seriously tackle to meet its mandate. Some private investors are already seeing the opportunities, but it requires a change of mind set, Australian Council for International Development Senior Policy Adviser Priyanka Sunder says.

On Tuesday, senior government officials from around the world will gather in Incheon, South Korea as part of the Thirteenth Meeting of the Green Climate Fund (GCF) Board. The GCF Board, currently co-chaired by Australia and South Africa, will consider a range of issues including a much-anticipated discussion of how the GCF intends to support urgent action on climate change adaptation.

As the effects of climate change become apparent, the international community must pay more attention to the growing adaptation needs of developing countries. There are some positive signals that this is starting to happen. The Conference of Parties (COP) to United Nations Framework Convention on Climate Change (UNFCCC) affirmed that adaptation must be addressed with the ‘same priority as mitigation’ given the ‘urgent and immediate’ needs of developing countries vulnerable to the effects of climate change. In response, the GCF Board announced it would aim, over time, for a 50:50 balance in its investments between mitigation and adaptation.

Despite this, funding for adaptation programming continues to lag behind mitigation. According to a recent report by the Climate Policy Initiative mitigation accounted for more than 90% of annual global public and private climate finance flows. This leaves around $US25 billion or just 7% of global climate finance for adaptation programming.

As a result, there is a vast funding shortfall between the finance needed by developing countries for adaptation and the amount available. A report by Oxfam puts the adaptation costs of developing countries at around $US100 billion per year. Other research suggests that the true cost could be as high as $US300 billion per year.

Much of this shortfall can be explained by the fact that while public finance is gradually responding to the needs of developing countries already facing climate change impacts, private finance does not currently flow to adaptation. Private actors are the largest source of global climate finance – investing more than $US190 billion in 2013. However, research by the Stockholm Environment Institute shows that private finance has to date almost exclusively targeted mitigation projects. In the GCF’s own project pipeline there are currently no private projects that focus on adaptation. And while the majority of private projects are classified as ‘cross-cutting,’ their primary focus is likely to be on mitigation.

This reflects a widespread perception among private financiers that investments in adaptation do not generate financial returns. This is partially true; adaptation projects often involve public goods, such as flood protection or essential services for poor people, that can be hard to privately finance. Adaptation projects can also be too small, fragmented and unpredictable for private investors, who baulk at the high transaction costs.

Additionally, the returns of adaptation projects lie in the counter-factual. Adaptation increases the resilience of communities, cities and countries to the effects of climate change. Conventional wisdom suggests that as we don’t know what would have happened without adaptation investments, it is almost impossible to measure the benefits.

Yet, the benefits generated by adaptation projects are not so different to existing financial concepts. Adaptation projects, at their simplest, work to lower investment risk. Consider a privately-financed toll road in a developing community. While climate-related events may pose a significant threat to the physical asset itself, the resilience of the local community to climate change is equally important. The financial sustainability of the toll road is dependent on the economic well-being of those that use and pay for the toll road. Private investors therefore have an interest in ensuring local people, businesses and markets are resilient to climate shocks. Alternatively, adaptation benefits could be thought of, and valued as, ‘avoided losses’ – a concept commonly used to assess financial damages.

But more fundamentally, climate finance is a rapidly evolving landscape. It is easy to forget that private finance only began to flow to greenhouse gas mitigation projects once the private sector was made aware of the business opportunities, and the right instruments and policy settings were developed. Undoubtedly, this will also be the case for private finance for adaptation.

There are early signs that some investors already see the potential. A Green Bond issued by SEB (a large Nordic bank) in partnership with the World Bank will invest 20% of total funds in adaptation projects including food security and resilient crops, flood protection and ‘avoided’ deforestation. Other climate-related bonds are likely to follow suit. Insurance firms around the world are developing instruments that protect against the risk of climate change – including new micro-insurance products aimed at small-holder farmers in developing countries.

The GCF, as the principle vehicle to assist developing countries respond to climate change, has a critical role in encouraging private actors to invest in adaptation. This could include raising awareness and understanding within the private sector of the importance of adaptation, the emerging commercial opportunities and of the international commitments made by governments to fund adaptation projects.

It could also include surfacing a clear pipeline of adaptation projects. Effective adaptation programming is often based at the community level and is largely invisible to private investors. The GCF could partner with local and international NGOs to highlight concrete adaptation projects that are feasible investment targets. Where project size is a barrier to private finance, efforts should be made to bundle similar projects together in order to monetise them. A longer term objective could be the use of quotas within the GCF to ensure private players equally invest in adaptation projects, or to change the 50:50 balance to favour adaptation over mitigation.

None of this is to say that private finance is a silver bullet, or a substitute for public finance. Public finance will remain critical to ensure poor communities are not left behind, and to incentivise private investment. But there is a real opportunity to attract private finance and ensure adaptation projects are not short-changed. Tuesday’s meeting presents a clear opportunity for the GCF to lead the charge.

  • Priyanka Sunder
    Priyanka Sunder

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