Climate change mitigation remains important, but the need to finance adaptation measures is becoming urgent, says Lindsey Stewart, Director of Investment Stewardship Research, Morningstar.
“I don’t believe in fairytales or sermons or stories about money, baby sister, but thank you for the cigarette.”
I’m certainly not writing to advocate for cigarettes. Or even for the Coen Brothers’ 2010 remake of the classic Western ‘True Grit’, from which the quote above is taken.
But this memorable line, spoken by the film’s antihero, Rooster Cogburn, is the one that sprang to my mind when I was asked my thoughts about the upcoming COP28 Climate Conference in Dubai, and the challenges delegates will need to tackle.
There has been no shortage of ‘stories about money’ at previous COPs: promises of climate financing that have yet to materialise. Notwithstanding that, COP28 president Dr. Sultan Ahmed Al Jaber is bullish on the impact of this year’s conference. “The COP28 outcomes on adaptation and loss and damage will aim to advance real action towards building resilience and contributing to sustainable development, including by driving enhanced adaptation finance,” he says. But will the outcomes match the rhetoric?
There are several key challenges to address, with the first Global Stocktake expected to reveal (to nobody’s surprise) that the world is well behind on its goal of mitigating the impact of climate change by limiting global temperature rise to well below 2°C.
There are several financing questions to answer too – areas where developing nations in particular are keen for ‘stories about money’ to transform into cash in the bank. One such area is the currently unfunded Loss and Damage Fund, intended to help developing countries deal with impacts of climate change that they bear little responsibility for, and hailed as the key triumph of last year’s COP27. The US$100 billion of annual climate-focused financing for developing countries from 2020 onward – a 2009 promise that remains intangible – is another.
Insufficient focus on adaptation
A key emerging area is the perception that climate adaptation is not receiving the focus it needs compared with mitigation. This is increasingly important as it becomes clear that major investment is needed just to cope with the 1-degree temperature rise we are already known to be experiencing.
A 2021 paper by the BlackRock Investment Institute opined that the US$100 billion financing target for developing market transition was “not sufficient”. The paper’s authors saw a need for public budgetary resources to “be leveraged up to the needed US$1 trillion per year of public and private capital”. Furthermore, they predicted that financing needs were “likely far higher if adaptation and demand-side costs are included”.
The UN Environment Programme seems to agree. A paper from UNEP published late last year stated that developing nations’ “estimated annual adaptation costs/needs are in the range of US$160–340 billion by 2030 and US$315–565 billion by 2050”. UNEP concluded that “estimated adaptation cost/needs are currently between five and 10 times higher than international adaptation finance flows, and the adaptation finance gap continues to widen”.
A work programme for a Global Goal on Adaptation was agreed at COP26 in Glasgow two years ago, and developed nations pledged to double adaptation finance levels by 2025 from a 2019 baseline to around US$40 billion.
Clearly US$40 billion per year falls well short of what is needed for adaptation, given the heatwaves, droughts, floods and fires the world is already experiencing. The Standing Committee on Finance will produce a report on progress toward this target at COP28 – it will be important for the conference to outline ways to scale up this aspect of financing as soon as possible.
The Global Goal on Adaptation’s two-year work programme concludes at COP28 and has progressed relatively slowly. Agreeing on the detail of the goal (or, more likely, a suite of targets addressing climate exposure and resilience, and financing means) is now a crucial next step.
Many institutional investors are keen to take up opportunities to support the climate finance needs of emerging markets countries, but these opportunities usually focus on mitigation. It will be important for the Global Goal on Adaptation to provide a framework that will incentivise private investors to scale up initiatives to help the world adapt to the temperature rise already locked in, as well as preventing further increases.
We can all only hope the COP28 parties find the true grit to deliver.