Harry Boyd-Carpenter: Time to shift the balance on climate adaptation finance vs climate mitigation

A sea change is taking place in climate finance thinking, caused by the worsening impacts of global warming in recent years. Global temperatures are already more than one degree Celsius above pre-industrial levels, affecting business and communities both in vulnerable regions and, increasingly, in areas that were not previously considered at significant risk.

The notion that nature is telling us something through extreme weather events worldwide — whether floods in Pakistan, drought in the Horn of Africa, or the scorching summer of 2022 in Europe and North America — is giving added urgency to acting on climate adaptation. This is the strand of climate planning that involves accepting that lives are already changing as a result of our planet heating up and making provision for it.

This changes the balance of climate finance, whose focus has traditionally been on climate mitigation measures — proactively reducing harmful emissions in line with the Paris Agreement before they have a chance to affect our lives.

Understanding that climate-resilient design, investment and systems — far from being add-ons or a future concern — must take their place at the heart of how we transform society and business in the face of global warming. This requires rethinking business and social interactions. Building resilience and adapting to the impacts of climate change must be seen not as a cost, but an investment to preserve economic growth and social cohesion.

As recognition that there is a need to allocate resources for planning and preventative measures increases, the growing availability of data and modelling capabilities offers scope for more targeted actions.

While global action on adaptation has been increasing, progress is uneven. The most recent science suggests that the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels is hanging by a thread. The incidence of serious and potentially catastrophic climate events is bound to increase significantly and we are not adapting fast enough. The UN Environment Programme Adaptation Gap Report now states that finance availability is not reaching commitments made and estimates that adaptation finance needs are higher than previously thought, possibly to the tune of 10 times that of current financing.

The convention is that adaptation projects involve activities, such as planting mangroves to protect a coastal system, which have a strong social component and are more about risk avoidance than generating revenue. These systemic approaches to climate resilience building lend themselves naturally to sovereigns taking leadership.

Impact on the private sector

And yet climate vulnerabilities are felt increasingly by the private sector, through business operations that are being disrupted or supply chains that are struggling and breaking.

This is where the European Bank for Reconstruction and Development (EBRD), whose focus is on developing the private sector, feels it has an important role. The EBRD, which considers itself a leader in climate finance, has been incorporating resilience and adaptation elements into its projects for a decade already. And it has long-standing business relationships with private-sector clients across three continents, all facing the challenge of climate adaptation.

The EBRD’s way of doing more on climate adaptation today, based on its remit, is to help build up private-sector investment in climate adaptation. Put broadly, what is needed is an exercise in capacity building to make clear where the emerging risks are, where adaptation is needed and to make the case to the private sector that this is something that needs to be on their agenda now — including in the central and eastern Europe, central Asia and north Africa regions where the EBRD works.

This is particularly complex due to broad uncertainty about how to approach adaptation and resilience. While climate mitigation might be difficult to achieve, there are at least clear targets such as the Paris Agreement’s goal of 1.5 degrees Celsius or the race to net zero. But while making plans to adapt to physical climate risk, an organisation cannot know the extent to which the world is going to reduce carbon emissions. The lack of a finish line makes adaptation planning significantly more exacting.

With that in mind, at the EBRD we believe it is important to shift the focus away from adapting systems and infrastructure and towards a more agile approach — increasing the capacity of systems to be more flexible and resilient in the way that they operate and manage, so they can consider different degrees
of vulnerability.

Many in the private sector are already well aware and publicly report their climate risks and opportunities through a voluntary reporting system set up in 2015 — the Task Force on Climate-related Financial Disclosures (TCFD) — that standardises knowledge of climate risk and approaches to tackling it.

Private clients that are ambitious in their TCFD reporting are already working to find ways to mitigate their climate-related risks. We see it as our role to support them in that and to identify new financial products to help.

At this year’s COP27 global climate summit, at which adaptation was a key theme, the EBRD launched its Climate Adaptation Action Plan to catalyse ambitious transformation, investment and policy activity over the next three years.

The plan involves enhancing EBRD action on climate adaptation by integrating climate resilience into project design, building new and enhanced partnerships to share knowledge, and mobilising private finance.

During COP27, the EBRD signed a memorandum of understanding to expand its partnership with the Global Centre on Adaptation. In line with the bank’s conviction that Africa has strong potential as a global leader on climate adaptation, it also endorsed the Africa Adaptation Acceleration Programme, which aims to mobilise $25bn over five years to scale climate adaptation action. EBRD president Odile Renaud-Basso also spoke on the need for more adaptation finance, including the COP27 world leaders’ event, Accelerating Adaptation in Africa, and discussed adaptation with the African Development Bank’s president, Akinwumi Adesina.

Doing more on adaptation meets the needs of EBRD countries, several of which — especially those in the southern and eastern Mediterranean and central Asia — are extremely vulnerable to climate change impacts. Between 2008 and 2018, insured losses to extreme weather events in EBRD economies totalled $25bn. And over the past decade, the EBRD has already financed more than 350 climate resilience investments and adaptation finance exceeding €2.8bn.

Practical guidance

Since issuing the world’s first dedicated climate resilience bond in 2019, the EBRD has also prepared the Guide for Issuers on Green Bonds for Climate Resilience, together with the Global Center on Adaptation and the Climate Bonds Initiative, to provide practical guidance to sovereigns, sub-sovereigns, financial institutions and corporates on raising capital in the green bond market to invest in climate adaptation and resilience. 

A decade ago, when we really began to look systematically at adaptation, our focus was on working internally with clients on how to incorporate a physical climate risk assessment into decision-making. We developed a risk management practice that has gone on evolving, and have been transferring this knowledge to clients. We also started working with other multilateral development banks on metrics defining adaptation investment, as well as on proactively trying to identify investment opportunities.

Our early projects were largely in water infrastructure where the economic case for involvement is clear. Among early landmarks was a transformative water transfer system that delivers more than 100 million cubic metres of irrigation water to Morocco’s Saïss Plain every year, instead of leaving the area to rely on the unsustainable use of groundwater, thereby protecting the water-scarce area’s agricultural sector from the impact of climate change. Other projects included the rehabilitation of hydropower plants in central Asia, notably the Qairokkum hydro plant in Tajikistan, where we both took into account climate risk and found ways to address it.

The EBRD has also built on this work by strengthening its climate risk capacity, engaging with clients and trying to pursue adaptation components in new projects.

But the next phase is to look at making more targeted financial instruments available and to try to build the business as well as the economic case for further investment by the private sector.

Our aim is to build on existing strengths in developing adaptation work with the private sector. For instance, food security is already a major area of focus for the EBRD, and there is a major interplay between food security and climate resilience. We are planning products that can address both issues, using existing platforms such as our flagship EBRD Green Cities urban sustainability programme or our established expertise in green capital market instruments.

As results-based financial products of this kind create or expand markets for adaptation benefits, we hope our work to make private companies more aware of the needs and supporting them to act will reap rewards. As clients learn the role of adaptation in preserving economic growth and embrace the related business opportunities, we see a lot of opportunity for investment in this field to grow.

Harry Boyd-Carpenter is managing director, climate strategy and delivery at the European Bank for Reconstruction and Development.