Starting to Adapt 

With adaptation finance flows remaining dangerously low to meet climate goals, has COP28 made a difference?

Last week at COP28, the Institutional Investors Group on Climate Change (IIGCC), the United Nations Environment Private Finance Initiative (UNEP FI) and others, co-coordinated an offer to governments, from the private finance sector, to enhance the enabling environment to accelerate the mobilisation of private finance for adaptation and resilience.  

The call for collaboration, acknowledged by the governments of Austria, Chile, Colombia, Guatemala and Switzerland, reflects long-running efforts to evolve the international financial architecture to drive climate finance, especially adaptation finance, to where it’s acutely needed – the Global South.

Negotiations on a Global Goal on Adaptation (GGA), under Article 7.1 of the Paris Agreement, looked set for failure at the weekend, with the African Group of Negotiators, who proposed GGA in 2013, warning talks were not delivering “fair and equitable finance” for adaptation on the same scale as mitigation.

Since COP27, a series of workshops have taken place, aimed at developing a framework for delivering on the GGA, which was expected to include multiple new targets, intended to be finalised at COP28 – indeed some targets were reflected in the final text on GGA. 

Early reaction to the final agreed text confirmed this morning is that it won’t support country needs on scaling up adaptation with weaker language on adaptation finance for developing nations. And there is no specific reference to ‘Common but Differentiated Responsibilities and Respective Capabilities’ or CBDR-RC – a principle within the United Nations Framework Convention on Climate Change (UNFCCC) that acknowledges the different capabilities and responsibilities of individual countries in addressing climate change. 

But the COP28 agreement does recognise that adaptation finance needs to be significantly scaled up, beyond developed countries’ doubling of adaptation finance by 2025 as agreed at COP26. Developed countries have also been asked to prepare a report on doubling by COP29.  

Adaptation gap  

In November, UNEP FI modelled costs of climate adaptation in developing countries and estimated it will be US$215 billion per year this decade, at a time when public multilateral and bilateral adaptation finance flows to this part of the world declined by 15% to just US$21 billion in 2021.  

UNEP FI estimates the current adaptation finance gap is around US$194-366 billion per year, and positively, Climate Policy Initiative (CPI) found last month that adaptation finance had reached an all-time high of US$63 billion, growing 28% from 2019/20. But this year-on-year growth is still far short of the estimated adaptation finance needs, which CPI says could be US$212 billion per year by 2030 for developing countries alone.  

It doesn’t help that analysing adaptation finance is challenging, with tracked flows nearly wholly dominated by public actors (98%), says CPI, which warns it continues to impede its understanding of the progress of both public and private flows.    

Business case for adaptation  

But COP28 has shown some signs that concrete action on increasing adaptation finance is taking off, along with the call for collaboration between governments and the private sector on the issue. Boston Consulting Group, Global Resilience Partnership and United States Agency for International Development (USAID) launched a report laying out the business imperative for climate adaptation and resilience finance.  

The move is part of PREPARE, set up by US Special Presidential Envoy for Climate John Kerry and USAID Administrator Samantha Power at COP27, as a coalition of major private sector players committed to advancing adaptation and resilience in developing countries.  

The BCG study details the range of opportunities and financial benefits for the private sector to fund adaptation and resilience in both emerging markets and developing economies (EMDEs) and advanced economies. It finds that there is a robust pipeline of deals that directs finance toward adaptation and resilience solution providers which earned valuation multiples of nine times their revenue across food, health, water, energy, and other sectors—with some companies generating valuations as high as 77 times revenue. 

Climate adaptation finance is also important for risk management of net zero assets, according to the UK’s Green Finance Institute. It warned in October that climate assets risked being stranded if barriers to financing adaptation and resilience were not addressed.  

Blended finance flows  

Against this backdrop, it makes sense that the Best Blended Investment Nationally Determined Contribution (NDC) Initiative of the Year award at COP28 was won by GAIA, a climate change-focused blended finance platform, where 70% of portfolio investments will be allocated mainly to climate adaptation projects through its US$1.48 billion fund.  

Christopher Marks, Head of Growth Markets, Innovative Finance & Portfolio Solutions at MUFG EMEA, describes GAIA as an “ecosystem” incorporating elements such as technical assistance . It also seeks to move the needle on longstanding and well-known barriers to blended finance such as currency risk. 

The topic was a focus of high-level talks during COP28’s Finance Day with former Brazil premier Dilma Roussef, President of New Development Bank, talking about the importance of deepening local currency capital markets to lower the cost of capital for organisations on the ground.  

By blending grants from the public sector, GAIA will be able to take the “unprecedented” step of allowing borrowers on the ground to take financing in local currency for adaptation projects, says Marks.  

The deal origination pipeline for long-term loans across 25 developing countries will also be localised dealing with multiple actors on the ground at locations. 

Deal size 

Another key issue with attracting public along with private finance, to climate finance projects in the developing world, is deal size. There is a mismatch between tiny loans, in capital market terms, that climate finance adaptation projects in the Global South can absorb, and the large investment deals preferred by big institutional investors.  

Marks explains that GAIA is trying to crack this nut through a “Lego construction approach”.  

“It’s a modular approach,” he says. “We’ve understood that we need different types of partners to achieve different additionality benefits, to go as far as we want to go. It’s not as easy as doing 20GW solar in a middle-income jurisdiction, but it has to be part of everyone’s toolkit – how you get big money into small situations.”  

GAIA overarching target is to support countries in financing projects that will help those countries meet their NDC’s and National Adaptation Plans, therefore engagement with the countries is key. Linked to this GAIA is considering country-level orientation sessions, so they feel comfortable with new ways of financing and facilitate access.    

New thinking on finance looks likely to also come out of the One Caribbean programme announced at COP28 by head of states from the region. It has climate adaptation as one of four focus areas.  

Dr. Gillian Marcelle, Founder of Resilience Capital Ventures, expects One Caribbean to include blended finance in this regard. Her Triple B Framework – an approach to blended finance incorporating behavioural change and greater alignment of different types of capital – underpins the Bahamas Sustainable Investment Programme, announced at Clinton Global Initiative in September and in Dubai during COP28.

Bureaucratic barriers  

The failure in scaling blended finance in a meaningful way is well known – flows are decreasing with volumes falling to a 10-year low in 2022, according to the latest Convergence report.

“The industry should acknowledge this failure of traditional blended finance because flows are decreasing,” notes Marcelle.

She says that conventional bureaucratic organisations trying to control financial flows is part of the problem. “We welcome the involvement of DFIs, if they do not slow things down and subject projects to bureaucratic requirements and procedures that actually have a little to do with the value of the projects themselves and a lot to do with their internal rules and regulations.”

Conscious of pressure to change, MDBs launched a joint statement at COP28 on progress made on promises of better collaboration with partners and stronger climate commitments. World Bank President Ajay Banga announced a commitment to devote 45% of its annual finance to climate by 2025.  

Such moves are encouraging, said Laura Hillis, Director, Climate & Environment at the Church of England Pensions Board.  

We are going to need an enormous mobilisation of public finance, both in emerging and frontier markets in order to finance the transition to net-zero,” she said.  

“We are encouraged to see DFIs like the World Bank looking at ways of bringing in private institutional capital – these institutions can play a key role in de-risking investments for investors like pension funds.” 



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