adaptation – Chasing Tales

Climate change adaptation finance is the gangplank between addressing constantly escalating climate threats, and our current level of climate adversity preparedness- that is, it is used to help adjust to the adverse effects of climate change, such as floods, fires, or other extreme weather events.

The UNEP’s Emissions Gap Report 2024 states that while it remains technically possible to get on a 1.5°C pathway, a failure to deliver superior results would put the world on course for a temperature increase of 2.6-3.1°C over the course of this century.¹ To achieve the pathway to limiting temperature rise to 1.5°C, the current estimates are that the annual adaptation finance gap is US$187-359 billion per year², and developed countries, that did most of the climate damage must double adaptation finance to at least $40 billion a year by 2025³.

In 2022, the total financial flows to adaptation efforts were assessed to be $32.4 billion⁴, while another approximation puts this value at $63 billion⁵, which is nearly twice the first estimate- and yet, to put our requirements into further perspective, the all nations at COP29 agreed that the all sources of finances should generate $1.3 trillion annually by 2035, less than 10 years from now⁶.

Various financial mechanisms and instruments have been devised to address the gap. Here is a brief run down of some interesting ones:

1. Results based finance/ Outcome-Based Instruments- Money is paid out only once the previously agreed results are achieved. Debt-for-climate swaps/ Debt-for-Nature Swaps- “In a debt-for-adaptation swap, countries who borrowed money from other nations or multilateral development banks (e.g., the IMF and World Bank) could have that debt forgiven, if the money that was to be spent on repayment was instead diverted to climate adaptation and resilience projects.”⁷ These are a type of Results Based Financing.

2. Blended finance- The use of cataclytic finance to increase private sector participation in climate financing.⁸ Catalytic capital—debt, equity, guarantees, and other investments that accept disproportionate risk or concessionary returns compared to a conventional investment in order to generate positive impact.⁹ For example, guarantees are an assurance by a party that they will bear all losses for a project in case any occur, so that other investors come in to finance the project. Pooled investments are another example of blended finance, where capital from different entities is combined to finance projects.⁸

3. Payment for Ecosystem Services (PES)- The beneficiaries of ecosystem services remunerate those who tend to the ecosystem in question. A hypothetical example is paying the tribespeople who live in and tend to the Amazonian forests for providing a green lung to the rest of the world.

4. Liquidity facilities- Providing loans at the time of a crisis, often at concessional rates, or deferring repayments of old debts after an extreme weather event so that the nation(s) suffering from it have adequate liquidity to help their citizens.

5. Bonds- A bond is a debt instrument which offers an interest rate in exchange for lending money to the issuer of the bond. When the issuer is a sovereign, the interest rates are usually low since it is believed that they can cover at least the nominal value of the interest and the basic capital borrowed, whereas riskier debts such as corporations must offer more attractive rates of interest.

Catastrophe bonds are bonds issued to investors by insurers or pension funds which are offered at attractive rates and cover the risk of a climate catastrophe. In case such an event occurs, these funds are called in, however in case no such disaster happens, the investors benefit from the high interest rates.

There are also a variety of sustainable bonds, such as green bonds, sustainability-linked bonds, blue bonds, etc. and are used to fund different types of climate projects.

6. Green securitisation- Securitisation is the practice of clumping various financial instruments with similar characteristics together to form a completely new instrument which can then be sold to those willing to accept the risks and rewards associated with that new instrument, and the underlying securities. If the underlying securities were originally issued for climate friendly projects, they are called “Green Securitisation”.¹⁰

These and other mechanisms are all geared towards luring private funds into covering the gaping mouth of climate change adaptation requirements. Its clear that the need is dire, however these and other climate related mechanisms still form a tine part of the global capital markets.

Sources

Tag: adaptation

Financing climate solutions – II: adaptation finance

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