Mobilizing adaptation finance in developing countries

Mobilizing adaptation finance in developing countries

The Intergovernmental Panel on Climate Change (IPCC) defines adaptation as the “process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities. In some natural systems, human intervention may facilitate adjustment to expected climate and its effects.”

Even if global manmade warming is limited to 2̊C by end of this century, which is the aim of the Paris Agreement, substantially more funding than presently available is needed for adaptation related investments, particularly in developing countries. The mobilization of adaptation finance has been significantly more difficult than for financing efforts to reduce emissions of greenhouse gases, given the difficulties in quantifying and comparing resilience and vulnerability projects. This is due to uncertainties related to frequency, severity and geographical spread of climate change impacts. Intangibility pervades most adaptation interventions, due to a mismatch between the long-term payback period and short-term horizons of private investors, difficulties in sorting out climate change related adaptations from adaptations motivated by other factors – such as changes in e.g. prices of energy or products, and since many adaptation projects have public good properties. In addition, there are political, institutional and legal barriers to private investments.

Given these barriers, most adaptation finance has been stimulated from public sources such as bilateral and multilateral climate funds, as the private sector usually is deterred by the lack of a reasonably secured revenue streams. Furthermore, there is lack of regulatory policies that could create demand for adaptation projects from the private sector. Nevertheless, some examples of private sector investment in adaptation have occurred, most notably related to crop resilience, financial services (such as insurance and catastrophe bonds), and business climate risk services.

This report examines barriers to stimulating adaptation finance within the context of different policies, instruments and approaches currently being implemented. Innovations related to adaptation finance have been produced, foremost creating a business case for adaptation in the agriculture and water sectors. Examples of innovations are disaster risk management for adaptation, climate insurance arrangements, credit mechanisms (e.g. Vulnerability Reduction Credits and the Adaptation Benefit Mechanism), micro-finance, green bonds, climate resilience bonds, and catastrophe swaps.

This report proposes the following policy initiatives to stimulate increased adaptation finance flows:

  • Explore policy initiatives that create a demand for adaptation, e.g. crediting mechanisms;
  • Align disaster risk financing with climate adaptation policies, so that impacts of post-disaster climate hazards can be managed;
  • Investigate adaptation finance approaches that are suitable for the target socio-economic group, e.g. micro-insurance for the lower socio-economic group, and catastrophe bonds for institutional investors, etc.;
  • Promote the uptake of financial products tailored to institutional investors, such as catastrophe swaps and resilience bonds to upscale financial flows;
  • Assess approaches of aggregation and securitization for green bonds with proceeds earmarked for adaptation projects; and
  • Incentivize adaptation in agriculture and water management, since tangibility within these sectors is likely higher than within other sectors.

These policy initiatives aim to facilitate greater and more private financial flows for adaptation. In addition, the regional context and institutional landscape of the adaptation case at hand must be taken into consideration.

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