Financing climate adaptation and resilience: ten policy approaches

Climate-related disaster exposure is growing across the world – increasing by 80% since 2005.  Emerging markets and developing economies (EMDEs) alone will face annual adaptation and resilience (A&R) investment needs of USD310–365bn by 2035.  

A&R investment needs already dwarf public capabilities. Private investment is crucial to global resilience. However, resilience finance remains less developed than mitigation finance, with greater clarity still needed around what constitutes a credible resilience investment and how it can be assessed. 

Policymakers have the potential to scale private sector adaptation finance, currently estimated at around USD5bn a year, to USD50bn a year.  
 
If private finance is to flow towards A&R, policymakers need to change the conditions that shape investment decisions 

Policymakers across the world are already taking steps to mobilise private A&R investment. Our new report, “Financing Climate Adaptation and Resilience: Ten Policy Approaches”, sets out ten examples of how governments and public institutions are already doing this, and what can be learned from approaches that could be replicated elsewhere. 
 
These examples show how policy interventions at different stages of the investment cycle can drive A&R investment.

Source: Climate Bonds Initiative

Embedding resilience in decision-making

Embedding resilience in decision-making, from national adaptation planning to climate-related disclosure, can help ensure that physical climate risks and resilience are considered in all investment and financing decisions. 

Indonesia’s National Adaptation Plan, for example, provides a whole-of-government approach, linking adaptation priorities to national development planning and public finance. The example of the Coalition for Disaster Resilient Infrastructure (CDRI), led by India, shows how middle powers can sustain attention on adaptation by framing infrastructure resilience as a global public good amid geopolitical fragmentation. 
 

Making resilience worth investing in 

Policy can also help to change the economics of resilience investment, providing incentives for climate-related investment or directing bank lending towards A&R objectives. 

Such policies may not require financial incentives. Singapore’s incentive scheme for green buildings grants additional floor area for developments that meet environmental targets, creating economic value for developers without requiring direct public expenditure. 

These fiscally-efficient policies will be increasingly important as countries, in both emerging and developed markets, face tighter fiscal space and reduced ability to provide financial incentives for urgent climate investments.

  
Closing risk protection gaps

Some climate risks cannot be addressed through investment incentives alone. Insurance, contingent finance and other risk-transfer mechanisms can provide protection where conventional markets struggle to absorb the risks involved. 

Insurance is particularly relevant to the A&R investment conundrum. Protection gaps are not limited to developing economies: significant climate-related risks remain uninsured even in developed markets. New insurance solutions will be necessary, and development finance institutions are playing a crucial role in driving such solutions – able to co-fund, structure, and provide capacity building for these products.

  
Scaling A&R investment requires a combination of policy approaches   

No single instrument can overcome the multiple barriers that constrain A&R investment. Scaling resilience finance will require a combination of approaches, alongside stronger institutional capacity, better climate risk data and collaboration between governments, development finance institutions, regulators, insurers and investors. 

The examples show that governments across the world are already taking action to drive A&R investment. Ensuring joined up and impactful policy mixes is crucial to ensuring this investment drives real world resilience improvements.  

For Climate Bonds, this is crucial.  We are currently developing targeted policy guidance to unlock capital for EM A&R and would welcome discussion on this topic. Contact policy@climatebonds.net to find out more. 

Read the report
 
‘Till next time,  
Climate Bonds