Chipping away at the huge adaptation gap

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💡This week: To spur private financing for climate adaptation and resilience, a United Nations-backed collaboration with Standard Chartered and KPMG has published a guide on eligibility assessment.

Created with inputs from more than 30 global organisations, the guide represents a positive contribution towards the massive problem of underinvestment in adaptation and resilience.

It is, nevertheless, a small step forward in a race against time with an immense distance to be covered. Also needed are strong government support, especially in emerging markets, and localised research and development.

With global warming likely to overshoot the 1.5-degree-Celsius threshold – thereby increasing the risk of irreversible effects from climate change – it seems like the world should be investing more in climate adaptation and resilience.

Yet, the Climate Policy Initiative found less than a tenth of climate finance goes towards adaptation. The United Nations (UN) Environment Programme’s Adaptation Gap Report places the current adaptation finance gap at US$194 billion to US$366 billion per year, which is 10 to 18 times as big as financing flows.

The new guide builds on a 2023 report by Standard Chartered that looked at climate adaptation in emerging markets. The earlier report estimated that US$30.4 billion of adaptation investment by 2030 in 10 emerging markets could lead to US$376.6 billion of economic benefits under a 1.5C warming scenario.

Those benefits comprised US$338.8 billion of avoided damages and US$37.8 billion of potential GDP creation. In other words, every dollar invested in adaptation in these markets could generate about 12 dollars of returns.

Authors of the 2023 report also polled 150 financial institution executives, and found that three key barriers to allocating more capital to adaptation projects in emerging markets were uncertainty about where private capital is needed, uncertainty about the impact of climate change and lack of knowledge within their organisations.

But overcoming those hurdles at scale will undoubtedly require more than a guide.

Governments can go a long way towards removing a lot of uncertainty. The 2023 Standard Chartered report said almost seven out of 10 firms surveyed cited the need for government intervention to achieve commercial returns, and for public-private partnerships.

Governments have generally been slow to lay out their adaptation and resilience plans, though. Of the 10 South-east Asian countries, only two – Cambodia and Thailand – have submitted National Adaptation Plans (NAP) under the Paris Agreement framework.

Singapore has not filed an NAP, but its Green Plan includes a pillar on resilience focused on coastal and flood defences, food security and cooling.

Clarity about national plans and priorities is critical in mobilising private capital, which needs a firm grasp of the revenue and risk potential of projects that are being funded.

For example, property developers are more likely to incorporate green spaces or design for water retention systems if there is a credible national accreditation system to certify those efforts.

There is also a need for much better localised research and development into climate impact modelling, which could be funded by both governments and financial institutions. A better understanding of the extent of potential loss and damage as well as when that loss and damage are likely to manifest helps on a few fronts.

The first is with helping to calibrate projects. Research also helps the market to price risk better. The 2023 Standard Chartered report showed almost nine-tenths of the economic benefits from adaptation investment comes from damage avoidance. Without a clearer picture of the downside of climate change, private capital naturally will gravitate towards the more growth-friendly mitigation projects.

Just as importantly, better risk pricing allows banks and insurers to pass these potential costs through to the wider economy. Companies and consumers are more likely to address adaptation and resilience if doing so will lower their insurance premiums or improve their creditworthiness.

The numbers that we have now also point to the need for a much faster pace of investment in adaptation and resilience. The 2023 report estimated that the minimum adaptation investment needed in a 1.5C scenario for the 10 emerging markets would jump from US$30.4 billion by 2030 to US$106.7 billion by 2040 and US$480.3 billion by 2050. Survival of the fittest could well be the resilience of the earliest.

🌱Top ESG reads:

1. Asia experienced 79 disasters linked to water-related weather hazards in 2023, with more than 2,000 deaths from floods and storms, the World Meteorological Organisation reports.
2. Financial institutions need to simplify sustainable financing for South-east Asia’s small and medium-sized enterprises, most of which have yet to adopt sustainability practices, says UOB’s group head of global financial institutions and sector solutions.
3. Everyone knows what needs to be done to address climate change, but nobody can agree on who should do what, write The Business Times’ Janice Lim and Claudia Chong.
4. Private credit funds are descending on struggling commercial real estate with green credentials, giving rise to a green premium for more sustainable properties.
5. UK companies need to “urgently” review all products and services with sustainable features before authorities begin to crack down on greenwashing in May, says EY.

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