The increasing need for climate adaptation finance

Awareness of our need to adapt to the climate crisis has certainly risen. After a summer marked by extreme weather events, such as fires in southern Europe or floods and landslides in Pakistan, we have become more aware of the need to adapt to the effects of climate change.

Climate adaptation actions in response to this challenge consist of adjustments in ecological, social, and/or economic systems in response to actual or expected climatic changes. While rather broad, this is not a bad definition. It is however important to consider that the key issue for adaptation is that, unlike most mitigation actions, adaptation actions require the development of highly localized strategies for effectiveness, which will differ significantly across contexts and locations. Furthermore, these actions are not usually technology-dependent, although technologies can play a supporting role. Taken together, this means that there are challenges with the scalability and replicability of adaptation actions, in some cases even within the localised context, but certainly once you move beyond the local boundaries. This matters because adaptation needs are falling unevenly across geographical locations. Subsistence farmers in Sierra Leone will struggle far more with adapting to climate change than a homeowner in Kent in the UK.

How bad is it?

The implementation of adaptation measures requires considerable funds. Considerably less money is available for adaptation than there is for mitigation, and that is a problem. This isn’t a guess, as the reported numbers show. Adaptation has continually represented a small share of total private climate finance mobilized in 2016 - 2020 period. This has in effect been the case since we set up the MDB climate finance tracking system in 2010.[1] More recently, UNEP’s Climate Change Adaptation Finance Gap Report in 2016 estimated that the annual cost of adaptation will be between USD140-300 billion by 2030, a figure that will no doubt have increased by now, as the 2021 report notes.[2] The current amount pledged, but not delivered, by developed countries to developing countries is USD100 billion for both mitigation and adaptation. While this amount was to be allocated equally between adaptation and mitigation, the OECD estimates that adaptation projects received far less funding than mitigation. The OECD estimates that climate finance in 2019 totalled $62.9bn (still falling considerably short of the $100bn pledge anyway), but just $15.7bn (25%) was allocated for adaptation.[3]​

Finance and justice

Furthermore, when it comes to being able to access this finance, there is a significant problem especially for smaller actors like SMEs and farmers raising funds for climate action. Yet it is these groups in the poorest countries that are the most vulnerable. While the poorest 50% of the world’s population are responsible for only about 7% of global emissions, they will face 75-80% of the costs of climate change. In other words, those who have contributed least to climate change will experience its worst effects.

This isn’t a recent realisation. Addressing the unjust distribution of the impacts of climate change was already raised by coalitions of farmers, fishworkers and indigenous communities in the 8th UNFCCC Conference of Parties (COP) in New Delhi in 2002, where the notion of climate justice was first taking form[4]. One of the main tenets of climate justice was the affirmation of the principle of ecological debt, and we see this reverberate today in the debate on Loss and Damage[5]. Conceptually, climate justice sought to protect the rights of victims of climate change to receive full compensation, restoration, and reparation for loss of land, livelihood, and other damages.

At COP13 in Bali, developing nations succeeded in adding mitigation and adaptation finance to the climate negotiations. In 2009, at COP15 in Copenhagen, developed countries in a chaotic finish to the event undertook action to mobilize $100bn per year for climate action in developing countries by 2020, half of which to be allocated to climate adaptation. This was subsequently reflected in the GCF results framework.

But this high-level direction in itself did not address the issue of justice, and as we note below, much of the finance is provided in the form of sovereign and private sector loans, which by definition make it harder to address adaptation challenges in poor countries. In our view, you can either chase leverage for climate funds, or holistically address adaptation challenges. Achieving both at the same time is impossible.

Furthermore, CARE International’s overview paper Climate Adaptation Finance: Fact or Fiction?, has found that the final cost of adaptation projects is routinely misreported.[6] Even though countries and organizations report on their adaptation expenditures, there is no detailed information on how this money is spent and whether it goes to the most affected communities. Often, while we know the amount of climate finance allocated for an adaptation purpose in a specific country, there is inadequate or no information on whether poor communities have benefited from this money.

Our obsession with innovative finance

Large-scale infrastructure projects come with clear economic benefits, revenue flows, basically numbers that can be modelled in a spreadsheet and allow you to calculate a Debt-Service Coverage Ratio and Internal Rate of Return. As climate adaptation finance mostly will consist of funds to help vulnerable communities adapt to existing adverse effects of climate change and reduce future potential climate impacts, by investing in measures such as livelihood diversification, building resilient infrastructure and changing agricultural practices, and investing in early warning systems, these projects don’t model well, if they model at all.

This challenge is compounded by an obsession by donors and climate funds with ‘innovative finance instruments’ (usually to stretch scarce donor finance over more projects) and further complicated by a lack of what we call ‘absorption capacity’ – there isn’t just a lack of projects, there is a lack of people who can finance projects, a lack of funds for co-finance, a lack of borrowing/repayment capability (these are the poorest we are talking about), a lack of revenue streams, as projects are just trying to safeguard the current livelihood from further deterioration, and a lack of technical capacity at all levels including in development insitutions. Interestingly, these challenges should be very familiar to anyone who has a background in energy efficiency, the under-appreciated also-ran in mitigation finance.

This then creates the problem, as set out repeatedly (e.g. by the World Resources Institute[7] or OECD[8]) that climate finance, i.e. really adaptation finance, doesn’t reach the poorest and those most in need. Because, in a situation when your challenge is a struggle to define your project, a struggle to structure it according to complex donor requirements, a struggle demonstrate the economic and/or adaptation benefits due to the underlying complexity, a struggle to find a role for the financial instrument the donor insists on, and/or to prove 100% that the proposed solution addresses a vulnerability caused by climate change, what could possibly go wrong with your project design and implementation?

But technology will save us, right?

Climate adaptation actions are fundamentally different from mitigation actions, and unless that is understood by all actors, many errors will continue to be made and scarce finance wasted. The reason is that the same action (e.g. climate-controlled water-efficient irrigation systems) might deliver adaptation impacts in one location, and not do so in another location, even though it might still make sense in that non-adaptation context for other reasons. There isn’t a ‘solar’ or ‘wind’ solution for adaptation. For mitigation on the other hand, a tonne of CO2 saved is tonne of CO2 saved. It doesn’t matter where you save it, it will always have the same impact, albeit at different costs.

As adaptation actions are location-dependent, it follows that there isn’t a technology that can deliver them in the same way in varying locations. Some technologies may work in many locations, some in few, some in none. It is therefore necessary not to view adaptation through a technology lens. In consequence, global, tech-driven funds for adaptation, such as a recently approved GCF Project, for which Andreas was the lead reviewer on the GCF Board’s ITAP, require highly intrusive safeguards and conditions to ensure that they utilise the already scarce climate finance they request for the benefit of those who it is provided for – the poorest and most vulnerable. But as funds are inherently profit-seeking financial institutions, how much can they do to address the core failure of climate finance – reaching the poorest and those most in need? We expect that the answer is ‘very little’. If you are living on the margin of subsistence farming, access to technology solutions will be limited to non-existent.

That does not mean that technology won’t have a role to play, only that it cannot drive the adaptative processes. Only once the need has been understood, and the response moved from the conceptual to the implementable, can technology come in and aid adaptation actions.

Where do we go from here?

Summing up, the currently available climate finance budget for adaptation actions is already vastly insufficient for meeting the needs of vulnerable communities, doesn’t address historical justice consideration, and those most in need struggle to access even these insufficient sums. To address this, we need to fundamentally rethink what is being done in adaptation climate finance. We can start this by coming off our addiction to financially ‘innovating’ in order to create the illusion of leverage, or to chase mythical private sector funds.

We also need to have a cold hard look at how we direct adaptation funding, or rather fail to do so. This needs to start by investing to build project structuring capacity in the most exposed countries, and by increasing the understanding of the local situation and barriers. We then need to find ways for our development institutions to truly address this, rather than chasing pipeline volume. If we don’t do this, the situation will not change, and we will continue to see donor reports trumpeting the achievement of randomly selected target numbers while not having delivered on the ground to help those whose lives we have thrown into chaos through our addiction to fossil fuels.

Finally, we cannot expect that pushing technology solutions will deliver results. On their own, they are bound to fail in our view. They need to be used in the appropriate context, with a deep understanding of local needs and applicactions.

There’s much to be done, and while we know we can do it, it is by no means clear that we can overcome the inertia of the present system.

Footnotes

[1] See https://www.eib.org/attachments/documents/joint_mdb_report_on_adaptation_finance_2011.pdf and https://www.eib.org/attachments/documents/joint_mdb_report_on_mitigation_finance_2011.pdf​

[2] https://www.unep.org/resources/adaptation-gap-report-2021​

[3] https://www.oecd.org/newsroom/statement-from-oecd-secretary-general-mathias-cormann-on-climate-finance-in-2019.htm​

[4]https://unfccc.int/sites/default/files/resource/Khan%20et%20al.%20%282019%29%2025%20yrs%20of%20adaptation%20finances.pdf​

[5] https://www.ft.com/content/3195ce2f-d4b3-4f9d-b6d4-6a05aa3da01a​

[6] https://careclimatechange.org/wp-content/uploads/2021/01/CARE_Synthesis-report_Final_April-2021.pdf​

[7] https://www.wri.org/insights/difficulty-defining-adaptation-finance​

[8] https://www.oecd.org/environment/climate-finance-provided-and-mobilised-by-developed-countries-in-2016-2020-286dae5d-en.htm​

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