Climate finance is surging with investment in renewable energy and energy efficiency growing rapidly across the globe.
Finance for climate adaptation however faces a huge shortfall. Current investments are a tiny fraction of what is required to avoid costly future impact by a changing climate in terms of lives and money.
UNEP estimate that adaptation costs in developing countries could range from USD 140 billion to USD 300 billion a year by 2030, just over a decade away.
Currently global investment in addressing climate change stands at USD 22 billion (2016 figures). Larger funds have been committed, most notably by the World Bank which recently promised 10 billion over the next 5 years.
But even recent increases are a drop in the ocean, much more is required to scale up climate adaptation finance.
Multilateral Development Banks (MDBs) have been global leaders in rolling out climate adaptation finance. Focusing on developing countries, MDBs have led the way in innovative financial solutions to help countries adapt. The charts below demonstrate their impact. However MDBs cannot fund adaptation efforts alone – both public and private sector organisations will have reallocate and rethink planned projects to focus upon or incorporate climate adaptation efforts.
Multilateral Development Bank Investment in Climate Adaptation by sector and region in 2016
Tracking investment in climate adaption is also important. How is a climate resilient investment defined? There is no agreed approach, but MDBs have attempted to quantify their figures. As many projects incorporate climate resilience as part of a wider ambition it can be tricky to disaggregate figures.
Adaptation finance probably attracts less funding than climate mitigation efforts as financing solar panels or wind farms reaps improved short term benefits. Adaptation and resilience pay offs are long term and uncertain. However resilience measures can be mainstreamed into planned or existing development projects potentially making them easier to achieve given the right circumstances.
Climate adaptation and resilience measures are project and location specific making blanket measures and recommendations difficult. Instead a specific case by case approach is required which can be tricky to track and measure.
In addition, there are many barriers to increasing the take up of climate adaptation finance. Foremost is the lack of awareness in political and business circles of the challenge that adaptation represents, or the realisation that adaptation measures only have a long term pay off and there are always more immediate budgetary concerns.
Derisking adaptation measures, such as early stage funding of new technologies, subsidising resilient infrastructure and investment can help overcome the hurdle that firms face in scaling up or promoting climate resilient investments.
Encouraging suppliers of products and services such as weather and climate forecasters will help bridge the gap by developing a network of providers to support adaptation and resilience measures. In a similar fashion firms and projects that produce climate adaption services can also develop resilience. For example climate smart agricultural products such as crops that require less water to grow. Often the lack of understanding around climate adaptation or up front capital costs can put potential beneficiaries off climate adaptation measures.
Perhaps the biggest gains in adaptation finance could come from policy changes such as making climate risk disclosures mandatory. This would force firms to quantify their climate risk and present their findings to their board, regulators and the public.
Putting a price on climate risk is a slippery concept and there is bound to be controversy on how accurate the figures are as they start to appear more frequently. The EC has published non binding guidelines around the non financial reporting directive which requires large public interest entities with over 500 employees to disclose non-financial information.
The Task Force on Climate Related Disclosures (TFCD) provides a blueprint on how financial institutions can incorporate climate risk into their financial reporting. These measures are in their infancy but if executed correctly will revolutionise finance by recognising and quantifying the risk of physical climate change and carbon transition.
In the public sphere climate risk and carbon transition risk could also feed into sovereign debt ratings and change the value of public bonds. Countries climate risk will be considered alongside traditional factors such as public debt and balance of payments figures.
Climate adaptation finance will experience rapid growth as firms and countries are forced to adapt to a fast changing climate and protect cities and infrastructure as best they can. The sooner pricing climate risk becomes mainstream the faster adaptation measures can begin, as this will force a fundamental rethinking of the cost of climate change.
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