With current estimates of climate adaptation needs in developing countries standing at around USD300 billion per year, and adaptation remaining chronically underfunded, the adaptation finance challenge is daunting. Many are pinning their hopes on the private sector to help close the finance gap, but key questions remain. Is private finance appropriate for all developing countries and all adaptation needs? Can the private sector be incentivised to invest in climate adaptation? Who is really paying for adaptation?
These questions were explored during a London Climate Action Week event hosted at the London School of Economics (LSE) in collaboration with the Zurich Climate Resilience Alliance (The Alliance) and Mercy Corps. This hybrid event brought together insights from the international development sector, investors, and Ministries of Finance to share different perspectives on the reality of climate financing and the potential for the private sector to deliver adaptation financing.
Can the private sector close the adaptation financing gap?
New research on the potential for the private sector to deliver adaptation finance, commissioned by the Alliance and presented by Paul Watkiss, Director of Paul Watkiss Associates (PWA), provided a reality check on the issue. Currently, private finance meets only 3% of needs and is mostly focused on a small number of sectors such as agriculture and water.
A critical barrier is that adaptation often has high economic benefits, so is good for society, but has low financial returns for the private sector. Although there is potential for the private sector to invest in adaptation in developing countries – potentially as much as 20% of total adaptation finance needs – this will be primarily in middle income countries (rather than least developed countries) and in a narrow range of sectors, particularly agriculture.
How do we incentivise investment in adaptation?
Debbie Hillier, Head of the Zurich Climate Resilience Alliance for Mercy Corps, highlighted that the most effective adaptation interventions, with high impact and sustainability, are locally led. This makes them more complex, harder to scale, and thus less attractive for commercial investors. Swenja Surminski, Professor in Practice at the Grantham Research Institute (GRI), LSE, echoed this, saying that many stakeholders struggle to know how to document and measure the positive impact of adaptation interventions, undermining the motivation for further investment in climate adaptation.
The Institutional Investors Group on Climate Change (IIGCC) is leading work to help investors understand the many challenges that climate change poses to investors and integrate the management of climate-related risks and opportunities into investment processes. Valentina Ramirez, Head of Climate Strategy Implementation at IIGCC, discussed the different levers of influence that institutional investors can use to incentivize investment in climate adaptation. To encourage investment in adaptation, she added that we need to gather evidence that helps shift the narrative from risk to opportunity, and from the cost of inaction to the benefits of early action.
Hipolito Tallbot-Wright, Senior Policy Fellow at GRI-LSE, highlighted that Ministries of Finance, are key to unlocking investment and driving transformation, and have multiple tools to support public investment. Referring to a recent Coalition of Finance Ministries for Climate Action survey, Hipolito stated that over 90% of Ministries of Finance considered that climate action was a central issue, with 30% of them saying that it was a core economic issue. Well over half of them are concerned or extremely concerned with the impact of climate change on GDP, government expenditure, and government revenue.
While Finance Ministers know most clearly what the risks posed by climate change are, and how taking action could unlock trillions in investments and create millions of jobs, a critical question arises: Who is really paying for climate adaptation?
Who is paying for climate adaptation?
We need to differentiate between who finances and who pays. This is an issue of equity. We might think we’re solving the problem, but we’re actually transferring the cost of adaptation to the households in developing countries.
Paul Watkiss
The panellists underscored the issue of equity when it comes to financing climate adaptation. ‘Who finances’ adaptation focuses on where the initial money comes from, while ‘who pays/funds’ adaptation is about how the costs of adaptation are paid over a project’s lifetime, which often falls on the taxpayer and consumers of adaptation goods and services in developing countries. The reality is that developing countries often pay, which has not solved the funding gap.
The panellists agreed that the private sector has a key role to play, and in some sectors it will be critical. However, private sector financing cannot close the adaptation finance gap alone, and wealthy nations are still obligated to provide public funding for adaptation in developing countries impacted by the climate crisis.
Developed countries have an obligation from the Paris Agreement to provide adaptation finance. Developed countries can’t be let off the hook because it’s inconvenient or not easy.
Debbie Hillier
Debbie reflected on what is needed to close the adaptation gap, emphasising that the impacts of climate change on developing countries are because of actions of developed countries. The panellists discussed how meeting the shortfall of private capital could be achieved by committing to the UNFCCC’s principle of “common but differentiated responsibilities”, which recognises that developed countries have obligations to provide adaptation finance. The “polluter pays” principle was also discussed as a way to create new sources of public funding.
One thing to change, beyond expanding and quantifying needs better, is to shift the conversation to focus on consumption-based emissions to encourage and support the polluter-pays principle.
Valencia Ramirez
The closing discussion underscored the reality that climate adaptation remains critically underfunded and the role of the private sector in addressing the financing gap remains hotly contested. While blended finance has a role to play, it cannot be used if it does not have the potential to attract commercial investors. There is an urgent need for grant-based public financing, and Ministries of Finance can play a key enabling role in the realignment of financial flows to adaptation, if it is done in a way that does not place the burden of funding climate adaptation onto developing countries and communities.
Further reading:
Can the private sector plug the adaptation finance gap? by Debbie Hillier, Mercy Corps
Examples and practical guidance on how Ministries of Finance can play a critical role in enabling green and resilient transitions
Comments