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Climate adaptation: why private investment is needed

Manuela Dupre
Manuela Dupré
Master's student in "Economics for Smart Cities and Climate Policy" at Ecole Polytechnique (IP Paris)
Patricia Crifo
Patricia Crifo
Professor of Economics at École Polytechnique (IP Paris), Researcher at CREST (CNRS) and Associate Researcher at CIRANO
Key takeaways
  • As the effects of climate change intensify, it is essential to step up adaptation measures to limit the damage and exploit potential opportunities.
  • COP28 marked a significant shift in the direction of climate financing, particularly in the field of adaptation measures.
  • Adaptation funding by developed countries must be doubled by 2025.
  • Various solutions have been proposed, such as mixed financing, guarantees and co-financing to mobilise more private capital.

At COP28, a crit­i­cal and increas­ing­ly press­ing agen­da was pushed into the spot­light: cli­mate finance and the grow­ing finan­cial needs for adap­ta­tion mea­sures. This was clear­ly stat­ed in the COP28 Presidency’s let­ter to the Par­ties, where an empha­sis was put both on deliv­er­ing old promis­es and set­ting the frame­work on a deal on finance: “We urge devel­oped coun­tries to ensure that the goal of dou­bling adap­ta­tion finance by 2025 is on track, as agreed at COP26 (…) In addi­tion, we have heard strong sup­port behind the idea that the GGA Frame­work must dri­ve deep­er col­lec­tive action on adap­ta­tion finance”1.

The con­fer­ence opened with the adop­tion of the “loss and dam­age” fund accom­pa­nied by ini­tial fund­ing announced by sev­er­al coun­tries, includ­ing Ger­many, France and the UAE, sig­nalling a grow­ing focus on the mobil­i­sa­tion of cap­i­tal towards the most impact­ed coun­tries and a grow­ing con­sen­sus on the chal­lenges emerg­ing economies face2. Although impacts of cli­mate change are seen world­wide, emerg­ing coun­tries are at the fore­front of the cri­sis as they are most severe­ly affect­ed by accel­er­at­ing nat­ur­al dis­as­ters, floods, and droughts.

While there has been a notable increase in over­all cli­mate finance, with devel­oped coun­tries pro­vid­ing and mobil­is­ing a total of $89.6bn for devel­op­ing coun­tries in 2021, a 7.6% increase from the pre­vi­ous year, the focus of these funds on adap­ta­tion strate­gies remained lim­it­ed3. Between 2016 and 2021, only 25% of cli­mate finance mobilised for devel­op­ing coun­tries tar­get­ed adap­ta­tion, and in 2021, adap­tion finance even dropped by $4bn4. As the impacts of cli­mate change accel­er­ate and become more severe, scal­ing up adap­ta­tion action is fun­da­men­tal to lim­it harm and exploit poten­tial oppor­tu­ni­ties. The more adap­ta­tion is left aside, the more loss and dam­age there is, ulti­mate­ly lead­ing to a vicious cycle of cli­mate and eco­nom­ic vul­ner­a­bil­i­ty. The adap­tion finance gap is grow­ing and the increase in inter­na­tion­al pub­lic finance alone is unlike­ly to close it. And even though is has gen­er­al­ly been con­sid­ered less crit­i­cal than mit­i­ga­tion, this time around, “adap­ta­tion was hav­ing its moment at the COP28” as Tara L. Guel­ing from the Light­smith Group said.

Private investment in adaptation

Adap­ta­tion describes the process of adjust­ment to cli­mate change’s cur­rent and future effects, to mod­er­ate harm, min­imise dam­age or take advan­tage of oppor­tu­ni­ties that may arise5. Adap­ta­tion mea­sures are var­ied, going from farm­ers diver­si­fy­ing their crop vari­eties, to devel­op­ing cli­mate resilient infra­struc­ture. As the May­or of Istan­bul, Ekrem İmamoğlu acknowl­edged dur­ing the EBRD Con­fer­ence “Green Cities: Scal­ing-up Finance for Sus­tain­able Urban­i­sa­tion” held on the 6th of Decem­ber at the COP28: “pri­ori­tis­ing adap­ta­tion projects is essen­tial and there is an urgent need for finan­cial sup­port.” Tra­di­tion­al­ly seen as safe­guard­ing soci­eties from the adverse impacts of cli­mate change, adap­ta­tion action was seen as gov­ern­ment respon­si­bil­i­ty which relied on pub­lic investments.

Pri­vate finance mobil­i­sa­tion for pub­lic invest­ments has pre­vi­ous­ly been con­sid­ered in the con­text of gov­ern­ment debt in cap­i­tal mar­kets. In the past year, how­ev­er, with the chal­lenges of the COVID-19 pan­dem­ic and the war in Ukraine, devel­op­ing coun­tries’ bor­row­ing capac­i­ty has wors­ened, as did their capac­i­ty for domes­tic pub­lic invest­ment in adap­ta­tion. As such, adap­ta­tion finance over the years has main­ly been dri­ven by an increase in mul­ti­lat­er­al pub­lic cli­mate finance, with loans seen as the most fre­quent­ly used instrument.

How­ev­er, at the COP28, the need for the involve­ment of addi­tion­al actors was explic­it­ly stat­ed as the adap­ta­tion finance gap grows sig­nif­i­cant­ly. The last adap­ta­tion report gap indeed esti­mat­ed that the costs would reach a range of $215–387bn/year for devel­op­ing coun­tries this decade6. Con­se­quent­ly, var­i­ous speak­ers and con­fer­ences focused on, and advo­cat­ed for greater involve­ment of the pri­vate sec­tor to inten­si­fy efforts in com­bat­ing and adapt­ing to the cli­mate crisis.

Cli­mate mit­i­ga­tion invest­ments, such as in renew­able ener­gy infra­struc­ture, have received much more sup­port than adap­ta­tion invest­ments from the pri­vate sec­tor in pre­vi­ous years.

Cli­mate mit­i­ga­tion invest­ments, such as in renew­able ener­gy infra­struc­ture, have received much more sup­port than adap­ta­tion invest­ments from the pri­vate sec­tor in pre­vi­ous years. In fact, as Suzanne Gaboury from the Asian Devel­op­ment Bank sug­gests at the OCDE event held on the 3rd of Decem­ber at the COP28: “only 2% of adap­ta­tion finance came from the pri­vate sec­tor and for them, the bar­ri­ers have been very com­plex. When it comes down to the rev­enue mod­el, adap­ta­tion is seen as an increased cost, while mit­i­ga­tion is per­ceived as an oppor­tu­ni­ty. Adap­ta­tion is very sub­jec­tive com­pared to the mit­i­ga­tion side, and this can defer the poten­tial invest­ment. There are oppor­tu­ni­ties but appro­pri­ate right tools are lack­ing, and there is no stan­dard­iza­tion. Increased stan­dard­ized frame­work approach­es would be very important.”

More­over, as Amar Bhat­tacharya from The Brook­ings Insti­tu­tion adds, the main chal­lenge for adap­ta­tion is that “it focus­es on small scale and very con­text-spe­cif­ic projects, which don’t work very well for investors. There is a need to bet­ter match the char­ac­ter­is­tics of adap­ta­tion projects with the expec­ta­tions of investors. It is also hard because it is not very rev­enue gen­er­at­ing. Most adap­ta­tion projects gen­er­ate sav­ings, rather than rev­enue. There is a need to make adap­ta­tion projects cred­i­ble from an investors’ point of view by rely­ing on aggre­ga­tion struc­tures and cred­it enhanc­ing structures”.

Scaling up investments in adaptation

A few action areas to scale up cur­rent finance sources and unlock addi­tion­al finance for adap­ta­tion were dis­cussed at the COP28 – specif­i­cal­ly focused on the pri­vate sec­tor. The main ones high­light­ed at the COP28 were the sup­port for devel­op­ing coun­tries in strength­en­ing their insti­tu­tion­al capac­i­ty, poli­cies, and mar­kets; as well as the strate­gic role that devel­op­ment finance, and specif­i­cal­ly blend­ed finance instru­ments must mobilise pri­vate finance for adaptation.

Although a vari­ety of fac­tors are need­ed to low­er investors’ per­ceived invest­ment risks, such as eco­nom­ic sta­bil­i­ty or the rule of law, regard­ing adap­ta­tion specif­i­cal­ly, increas­ing the avail­abil­i­ty of cli­mate-relat­ed data is key to effi­cient­ly allo­cate impact­ful invest­ments in adap­ta­tion. This was high­light­ed by Deb­bie Palmer, Direc­tor of Cli­mate Finance in the UK Gov­ern­ment: “one of the biggest bar­ri­ers to invest­ments in emerg­ing economies comes around the lack of data, which affects investors’ abil­i­ty to accu­rate­ly price the risks and esti­mate the return. Pub­lic mar­kets have a key oppor­tu­ni­ty to help build con­fi­dence and cor­rect the mis­con­cep­tion about the risk of the market.”

Improv­ing data can there­fore help reduce the bias and increase trans­paren­cy, and thus catal­yse pri­vate invest­ment in adap­ta­tion efforts. Infor­ma­tion asym­me­tries and knowl­edge gaps rep­re­sent an impor­tant bar­ri­er for pri­vate investors, which is cru­cial to solve7.

In addi­tion, inter­na­tion­al devel­op­ment actors can play a crit­i­cal role in unlock­ing pri­vate finance for adap­ta­tion. This is par­tic­u­lar­ly the case for projects that have an expect­ed sta­ble rev­enue stream but are not yet com­mer­cial­ly viable, and where devel­op­ment financiers can help over­come ini­tial bar­ri­ers. Blend­ed finance took a cen­tral role at the COP28 and appeared as a key inno­v­a­tive way to enhance returns and reduce the risks faced by pri­vate investors. Blend­ed finance is defined by the OECD as “the strate­gic use of devel­op­ment finance for the mobil­i­sa­tion of addi­tion­al finance towards sus­tain­able devel­op­ment in devel­op­ing countries”.

Using devel­op­ment finance can strate­gi­cal­ly attract pri­vate investors by high­light­ing the via­bil­i­ty of adap­ta­tion invest­ments and enabling them to trust a new busi­ness mod­el, or type of investee8. The Emerg­ing Mar­ket Cli­mate Action Fund (EMCAF) exem­pli­fies this ini­tia­tive through the part­ner­ship of Allianz Glob­al Investors and the Euro­pean invest­ment Bank, which pro­vides ear­ly-stage equi­ty financ­ing to sus­tain­able projects in emerg­ing mar­kets, with a strong focus on adap­ta­tion9. As Mile­na Mes­sori, Head of Divi­sion at the Euro­pean Invest­ment Bank (EIB) high­light­ed: “cli­mate adap­ta­tion is finan­cial­ly viable, and we need to mit­i­gate risk to attract the pri­vate sec­tor. Here, we are using pub­lic mon­ey as a cush­ion for the poten­tial first loss­es. Impor­tant­ly, it is not only about the risk itself, but about the per­cep­tion of the risk, which is much greater. We can de-risk invest­ment by pro­vid­ing com­fort that the ini­tia­tives are sol­id and that they will deliv­er in terms of impact and in terms of returns.”

There is a key role for inter­na­tion­al providers to mobilise pri­vate funds. As Jen­nifer Mor­gan from the Fed­er­al Office of Ger­many high­lights, “MDBs need to scale up the use of guar­an­tees and bring in dif­fer­ent tools with short-term and long-term visions”. Sim­i­lar­ly, Jamal Saghir, pro­fes­sor at McGill Uni­ver­si­ty added that “if we don’t improve con­ces­sion cap­i­tal, the pri­vate sec­tor will not show up. More­over, inno­v­a­tive instru­ments exist, such as the debt swap to nature, to fos­ter coun­tries to focus on adap­ta­tion measures”.

At COP28, GAIA, a cli­mate change-focused blend­ed finance led by MUFG and FinD­ev Cana­da, Canada’s bilat­er­al devel­op­ment finance insti­tu­tion, was recog­nised as a lead­ing inno­v­a­tive plat­form to mobilise pri­vate sec­tor par­tic­i­pa­tion at scale. Lori Kerr from FinD­ev explains “GAIA is $1.5bn plat­form focused on 25 emerg­ing mar­kets across Africa, Asia, and Latin Amer­i­ca. Impor­tant­ly, 70% of its total port­fo­lio invest­ments will go towards adap­ta­tion projects in the most cli­mate vul­ner­a­ble coun­tries in the world. We pro­vide long-term loans from sources that were pre­vi­ous­ly not avail­able. I am excit­ed as the role pri­vate cap­i­tal can play – the mon­ey is there, and I am excit­ed about how to unlock this capital.”

This ini­tia­tive exem­pli­fies the neces­si­ty of hav­ing more patient cap­i­tal10 to ade­quate­ly match the long invest­ment hori­zon that adap­ta­tion projects have. Some speak­ers, though, clar­i­fy how they per­ceive the empha­sis on “inno­va­tion” that describe adap­tion-focused ini­tia­tives. For Mar­tin Ewald, the man­ag­ing direc­tor of the Fund EMCAF: “This nar­ra­tive around inno­va­tion, I am not sure if it is the right nar­ra­tive to have because we need to rely on the ele­ment of trust to mobilise pri­vate cap­i­tal. For me, the inno­va­tion is on the appli­ca­tion, on how we define and focus on adaptation.”

Support for adaptation project pipelines

Across con­fer­ence and con­ver­sa­tions, Mimi Ale­mayehou, a leader in Devel­op­ment Finance, high­lights the recur­rent men­tion­ing of “the lack of bank­able projects”. There is indeed a sig­nif­i­cant neces­si­ty to assist emerg­ing economies to iden­ti­fy and devel­op adap­ta­tion projects that can attract and meet the require­ments of inter­na­tion­al pri­vate sec­tor investors. Inno­v­a­tive organ­i­sa­tions, such as Allied Cli­mate Part­ners came to light dur­ing var­i­ous con­fer­ences on Pri­vate Cap­i­tal Mobi­liza­tion in EMDEs and Inno­v­a­tive Vehi­cles, to show­case their ini­tia­tives: “In emerg­ing economies, it is the first five dol­lars that unlocks the 95. How­ev­er, this ear­ly-stage cap­i­tal is the hard­est to raise, and this is the invest­ment we aim to under­take to de-lock and de-risk. We cre­ate pipelines that oth­er investors can fol­low,” Ahmed Saeed, Chief Exec­u­tive Offi­cer of ACP, states.  Sim­i­lar­ly, Astrid Man­roth, Head of the Glob­al Infra­struc­ture Facil­i­ty, high­lights how GIF, a glob­al G20 col­lab­o­ra­tion plat­form “sup­ports nation­al gov­ern­ments and munic­i­pal­i­ties with resources and exper­tise to build bank­able pipelines in infra­struc­ture projects. We sup­port projects to help them scale.”

In emerg­ing economies, it is the first five dol­lars that unlocks the 95. How­ev­er, this ear­ly-stage cap­i­tal is the hard­est to raise.

These ini­tia­tives are on the rise and are key to best attract pri­vate finance. It is impor­tant to remem­ber, how­ev­er, that “no project is obvi­ous­ly bank­able. It a process that involves iden­ti­fy­ing the needs to trans­form it ade­quate­ly and struc­ture it in a way that it becomes bank­able. It is not only about mon­ey, but also about exper­tise, about the human cap­i­tal”, declares Imad N. Fakhoury, Direc­tor of the Infra­struc­ture Finance Group at the World Bank. Ulti­mate­ly, it is impor­tant to build up the capac­i­ty of coun­tries them­selves and trans­fer the exper­tise required to scale up project preparation.

Shift towards adaptation en route

In con­clu­sion, COP28 marked a sig­nif­i­cant shift in the focus towards cli­mate finance, par­tic­u­lar­ly in the realm of adap­ta­tion mea­sures. The con­fer­ence called for increased pri­vate sec­tor involve­ment and for enhanced col­lab­o­ra­tion to accel­er­ate the mobil­i­sa­tion of pri­vate adap­ta­tion finance. Devel­op­ing coun­tries retained much of the focus for this top­ic as the impacts of cli­mate will be felt more heav­i­ly there, cou­pled with sub­stan­tial resources required for imple­ment­ing adap­ta­tion strategies.

Tra­di­tion­al­ly over­shad­owed by mit­i­ga­tion efforts, this piv­ot towards pri­vate cap­i­tal for adap­ta­tion high­light­ed the sup­port need­ed from inter­na­tion­al providers and devel­op­ment Insti­tu­tions to de-risk invest­ment oppor­tu­ni­ties and effec­tive­ly catal­yse pri­vate cap­i­tal. Inno­v­a­tive approach­es like blend­ed finance, guar­an­tees and co-financ­ing were pre­sent­ed as impor­tant solu­tions for pri­vate cap­i­tal mobi­liza­tion, as well as the devel­op­ment of bank­able projects to attract pri­vate invest­ment. These strate­gies, cou­pled with improved data avail­abil­i­ty, improved macro­eco­nom­ic envi­ron­ments and ade­quate poli­cies, are crit­i­cal to raise investor aware­ness and change the per­cep­tion that adap­ta­tion is dif­fi­cult to sup­port with com­mer­cial finance.

Over­all, adap­tion can be a viable pri­vate invest­ment tar­get and while col­lec­tive efforts have been show­cased at the COP28, they still need to be strength­ened fur­ther to bridge the impor­tant financ­ing gap in devel­op­ing coun­tries11.

1COP Pres­i­den­cy (2023) Let­ter to par­ties – COP28 UAE. Avail­able at: https://​www​.cop28​.com/​e​n​/​l​e​t​t​e​r​-​t​o​-​p​a​rties (Accessed: 17 Jan­u­ary 2024).
2$700m pledged to loss and dam­age fund at COP28 cov­ers less than 0.2% need­ed (2023) The Guardian. Avail­able at: https://​www​.the​guardian​.com/​e​n​v​i​r​o​n​m​e​n​t​/​2​0​2​3​/​d​e​c​/​0​6​/​7​0​0​m​-​p​l​e​d​g​e​d​-​t​o​-​l​o​s​s​-​a​n​d​-​d​a​m​a​g​e​-​f​u​n​d​-​c​o​p​2​8​-​c​o​v​e​r​s​-​l​e​s​s​-​t​h​a​n​-​0​2​-​p​e​r​c​e​n​t​-​n​eeded
3OECD (2023) Cli­mate Finance Pro­vid­ed and Mobilised by Devel­oped Coun­tries in 2013–2021. Avail­able at: https://​www​.oecd​.org/​c​l​i​m​a​t​e​-​c​h​a​n​g​e​/​f​i​n​a​n​c​e​-​u​s​d​-​1​0​0​-​b​i​l​l​i​o​n​-​goal/
4OECD (2023) Scal­ing up adap­ta­tion finance in devel­op­ing coun­tries: Chal­lenges and oppor­tu­ni­ties for inter­na­tion­al providers: Read online, OECD. Avail­able at: https://​read​.oecd​-ili​brary​.org/​e​n​v​i​r​o​n​m​e​n​t​/​s​c​a​l​i​n​g​-​u​p​-​a​d​a​p​t​a​t​i​o​n​-​f​i​n​a​n​c​e​-​i​n​-​d​e​v​e​l​o​p​i​n​g​-​c​o​u​n​t​r​i​e​s​_​b​0​8​7​8​8​6​2​-​e​n​#​p​age65.
5What is the dif­fer­ence between adap­ta­tion and mit­i­ga­tion? (2022) Euro­pean Envi­ron­ment Agency. Avail­able at: https://​www​.eea​.europa​.eu/​h​e​l​p​/​f​a​q​/​w​h​a​t​-​i​s​-​t​h​e​-​d​i​f​f​e​r​e​n​c​e​-​b​e​tween (Accessed: 17 Jan­u­ary 2024).
6Unit­ed Nations Envi­ron­ment Pro­gramme (2023) Adap­ta­tion gap report 2023: Under­fi­nanced. Under­pre­pared. Inad­e­quate invest­ment and plan­ning on cli­mate adap­ta­tion leaves World exposed [Preprint]. doi:10.59117/20.500.11822/43796.
7Choi, E., Jang, E. and Lax­ton, V. (2023) What it takes to attract pri­vate invest­ment to cli­mate adap­ta­tion, World Resources Insti­tute. Avail­able at: https://​www​.wri​.org/​i​n​s​i​g​h​t​s​/​p​r​i​v​a​t​e​-​s​e​c​t​o​r​-​c​l​i​m​a​t​e​-​a​d​a​p​t​a​t​i​o​n​-​f​i​nance
8Ran­dall, T., Sede­mu­nd, J. and Bartz-Zuc­cala, W. (2023) Pri­vate invest­ment for cli­mate change adap­ta­tion – dif­fi­cult to finance or dif­fi­cult to see the finance?, Grantham Research Insti­tute on cli­mate change and the envi­ron­ment. Avail­able at: https://​www​.lse​.ac​.uk/​g​r​a​n​t​h​a​m​i​n​s​t​i​t​u​t​e​/​n​e​w​s​/​p​r​i​v​a​t​e​-​i​n​v​e​s​t​m​e​n​t​-​f​o​r​-​c​l​i​m​a​t​e​-​c​h​a​n​g​e​-​a​d​a​p​t​a​t​i​o​n​-​d​i​f​f​i​c​u​l​t​-​t​o​-​f​i​n​a​n​c​e​-​o​r​-​d​i​f​f​i​c​u​l​t​-​t​o​-​s​e​e​-​t​h​e​-​f​i​n​ance/
9EIB (2023) Emerg­ing Mar­ket Cli­mate Action Fund , Euro­pean Invest­ment Bank. Avail­able at: https://​www​.eib​.org/​e​n​/​p​r​o​d​u​c​t​s​/​e​q​u​i​t​y​/​f​u​n​d​s​/​e​m​e​r​g​i​n​g​-​m​a​r​k​e​t​-​c​l​i​m​a​t​e​-​a​c​t​i​o​n​-fund (Accessed: 14 Jan­u­ary 2024).
10In eco­nom­ics, patient cap­i­tal is an invest­ment mod­el for entre­pre­neurs who cre­ate busi­ness­es and orga­ni­za­tions in fields where they do not expect to make a quick prof­it. It thus enables the imple­men­ta­tion of pub­lic or pri­vate invest­ment poli­cies geared to sup­port­ing a sec­tor.
11Atteridge, A. (no date) Pol­i­cy brief – Pri­vate Sec­tor Finance and Cli­mate Change Adap­ta­tion. Avail­able at: https://​www​.pre​ven​tion​web​.net/​f​i​l​e​s​/​1​2​3​7​9​_​p​o​l​i​c​y​b​r​i​e​f​p​r​i​v​a​t​e​s​e​c​t​o​r​f​i​n​a​n​c​e​a​d​a​p.pdf

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