Six ways to scale private finance for climate adaptation

What are the recommendations?

To create a clear way forward, the Climate Resilience Center and the United Nations Climate Change High-Level Champions hosted a series of roundtable discussions. They brought together key stakeholders from the private and public sectors, and their insights resulted in the Call for Collaboration. The call identifies opportunities for the public and private sectors to collaboratively accelerate investment in and action for climate resilience.

Immediately after its launch at COP28 in Dubai, the supporting organizations, companies, and individuals as well as other key stakeholders participated in a new series of working groups. In support of the Sharm el-Sheikh Adaptation Agenda and the Call for Collaboration, these stakeholders worked to understand ways to learn from these global frameworks and inform actions to meet global finance goals.

The priorities and summaries of those larger discussions are captured in the report that follows. They focus on a range of actions and priorities, ranging from physical climate risk analytics to financial standards. While the later sections of the report dive into those conversations, the following six recommendations serve as a guiding reference for key stakeholders. These recommendations crystalize a way forward for this continued work. As the discussions continue, they will also continue to expand and evolve.

The six core recommendations

Make countries’ national adaptation plans (NAPs) investible and transparent, including other adaptation communications and ensuring synergies with nationally determined contributions (NDCs).

Support emerging market and developing economies’ (EMDE) national and subnational governments and their respective public and private finance institutions with technical assistance. This support can increase their adaptation and resilience capacities across ministries and enable collaboration with both the domestic and international private sectors.

Create high-level global guidance and harmonize standards, frameworks, and disclosures for physical climate risks and adaptation that allow public and private sectors to understand, manage, plan, and invest in adaptation and resilience internationally, nationally (through NDCs and adaptation planning), and regionally.

Improve the availability of blended finance instruments by creating more data transparency and accelerating, increasing, and harmonizing access to public and philanthropic capital. This effort can catalyze private investments across instrument providers for adaptation and resilience.

Increase the availability of insurance products—including parametric insurance—for adaptation and resilience for countries, natural ecosystems, assets, and people.

Invest in locally led adaptation, nature-based solutions and ecosystem-based approaches that can offer climate adaptation benefits and emerging climate adaptation tech solutions.

Envisioning a new climate information architecture

This section summarizes the key conversations focused on improving data, standards, taxonomies, and disclosures.

Under the Cancun Adaptation Framework, each signatory must establish a national adaptation plan. These plans identify national adaptation needs to reduce vulnerabilities, build adaptive capacity, and integrate strategic resilience efforts across policies and programs. The country-driven plans are iterative and reflect clear opportunities to inform and align on future efforts—both nationally and globally.

Given the nature of these plans, the recommendations and insights are developed through a public-sector lens. The resulting scope is high-level and often lacks the practical and actionable insights needed to mobilize private-sector support.

To increase opportunities, the public sector must consider how to make these plans more specific and responsive to private-sector priorities. The private sector is largely untapped. By aligning these plans to create investment opportunities, countries can open their efforts to new streams of funding.

As a result, there must be a stronger climate information architecture. From data to standards and disclosures, it is crucial to inform and support the growing adaptation and resilience investment ecosystem, especially in emerging markets and developing economies (EMDEs).

Currently, data on adaptation, physical climate risks, and adaptive capacity are not effectively mainstreamed into financial decision-making. This information gap leads to a lack of transparency and limited ability to track progress and inform policies.

Disclosures and standards like national taxonomies should be linked to countries’ national and subnational adaptation planning. By clearly defining what qualifies as an adaptation investment, both public- and private-sector taxonomies can offer reliable guidance to investors. This in turn will increase confidence and attract capital to prioritized sectors and regions. Aligning taxonomies with fiscal incentives like tax breaks or subsidies can further mobilize private funds.

Case study: Standard Chartered Bank, UNDRR, and KPMG’s Guide for Adaptation and Resilience Finance

The guide outlines over one hundred investable activities, ranging from climate-resilient crops to public hospital infrastructure. It helps private financial institutions better prioritize and integrate adaptation finance into decision-making. Ultimately, the guide seeks to foster an aligned global approach that can unlock opportunities for sustainable finance.

Recommendations and necessary reforms

• Increase technical and human capacities to make data on physical climate risk and adaptation more available, both for public finance institutions, regulators, rating agencies, and private finance institutions.
• Integrate physical climate risks into financial decision-making and improve the availability of data for the financial ecosystem. Further, governments, rating agencies, and public and private finance institutions should collaborate to explore the impact of climate change on their debt burden and cost of capital for countries. The impact of risk mitigators and adaptation and resilience planning on credit ratings must also be better tracked.
• Increase alignment for standards, metrics, and frameworks for physical climate risks and adaptation and resilience. This allows the adaptation finance ecosystem to effectively tailor approaches to meet local needs.
• Encourage investors to proactively disclose and manage risks and opportunities. Processes should incentivize financial institutions to actively manage physical climate risks on both an asset and portfolio level. Resources like the Physical Climate Risk Assessment Methodology of the Institutional Investors Group on Climate Change (IIGCC) can offer insight on how to measure and manage physical climate risks at the asset level. Further, it is crucial to develop strategies that prevent capital flight from climate vulnerable regions.
• Create high-level global guidance for national and regional disclosures. Establish adaptation finance standards that define criteria, allowing countries and private-sector organizations to develop context-specific but interoperable taxonomies. Core guidance elements for national disclosure policies and standards could be anchored in the outcome of the Sharm el-Sheikh Dialogue on Article 2.1.(c) of the Paris Agreement to ensure:
  
  • Financial disclosures go beyond exposure to risks and address vulnerabilities. Institutions must actively manage physical climate risks at both the asset and portfolio levels.
  • Disclosures are interoperable across markets and sectors, ensuring consistent classification of adaptation and resilience investments and creating more transparency for investment opportunities.
  • National taxonomies and disclosure policies are country-led and align with national adaptation plans. Governments should collaborate with national and international public and private financial institutions. The importance of capacity building in adaptation and resilience investments of local development finance institutions (DFIs) and second-tier financial institutions is underestimated, while they can be important catalysts to cofinance adaptation and resilience priorities for regions and subnational governments.
  • Adaptation planning involve local communities, which often possess valuable knowledge and can aid in implementing socially integrated measures.
  • Disclosure policies allow for flexibility. They should be adaptable based on new data and experiences.
  • Ensure disclosures prevent maladaptation, such as shifting vulnerabilities to ecosystems or undermining resilience efforts (see e.g., Guide for Adaptation and Resilience Finance by Standard Chartered Bank, the UN Office for Disaster Risk Reduction (UNDRR), and KMPG).
  • Disclosures such as taxonomies are user-friendly and integrable into the operations of financial institutions and governments. The role of suitable digital tools can be decisive to identify and track additional positive benefits with other climate and development goals and accelerate processes.

Prioritizing blended finance

This section overviews effective methods to scale blended finance instruments, tools, and mechanisms to drive progress on adaptation.

Blended finance combines distinct funding sources in a single mechanism. Often, private-sector funders can contribute larger sums, but are hesitant to take on higher risk. By combining privately sourced funds with publicly sourced funds, blended finance allows investors to act based on different risk tolerances.

The effective use of blended-finance instruments for climate adaptation solutions can mitigate risks and attract capital for potential investors. Public funds can leverage private investments by multiple factors, as demonstrated by the below examples.

Recommendations and necessary reforms

• Align due diligence processes. Public and private finance institutions should harmonize their standards, metrics, and frameworks for derisking adaptation investments.
• Diversify and increase the amount of public finance, catalytic capital, and instruments for blended-finance mechanisms, especially through highly concessional finance and grant funding that supports technical assistance and capacity building.
• Streamline procedures for accessing blended-finance mechanisms to meet the urgency of the moment and foster a community among financial institutions. This approach can facilitate deal sourcing, coinvesting, and data intelligence. It also fosters an ecosystem that allows financial institutions to share data intelligence, improve deal sourcing, and coinvest.
• Integrate adaptation into existing blended-finance instruments. Existing tools should incorporate adaptation and resilience objectives, ensuring that investments support community resilience.
• Create more data transparency in EMDEs. Due to a lack of data on physical climate risks and adaptation and resilience, these factors are not adequately priced into financial decision-making. This leads to higher risk perceptions, while more accessible and effective data can improve future decision-making.
• Establish multi-stakeholder partnerships between public and private financial institutions including civil-society actors such as nongovernmental organizations to support the development and implementation of blended-finance structures, and to help with derisking of projects. Such organizations can foster multi-stakeholder engagements as they have in-depth local knowledge and access to local authorities and community organizations. They also can support the integration of responsible business conduct principles into blended-finance structures.

Case study: The Kuali Fund

The fund uses a blended finance structure to raise capital for smallholder farmers and small businesses. It invests in financial institutions that offer climate adaptation finance to vulnerable communities as well as companies that provide the beneficiaries with solutions and resources like regenerative agriculture or efficient machinery.

Investing in nature and technologies

This section considers effective ways to mobilize investments in locally led adaptation, nature-based solutions, and technologies to protect people from climate change.

Both nature and technology are important to address the impacts of climate change. While on first glance, they may seem strikingly distinct, they both have clear benefits and promising data on returns.

Climate adaptation tech is an emerging investment theme, promising opportunities for investors. Significantly, many of these opportunities are also long-term investments. Their implementation can address the “exponentially increasing effects and financial costs of climate change.” The sector is also robust and has shown resilience during economic downturns. In 2022, climate tech represented more than 25 percent of every venture capital (VC) dollar invested. While there was a decline in VC exit activity the following year, the climate tech markets dropped 14 percent compared to a 27 percent drop in the overall VC market.

Nature-based solutions are distinct but offer similar clear benefits. They are cost-effective and offer co-benefits. While nature-based solutions can capture carbon, they also improve soil quality, protect water sources, enhance biodiversity, and keep air quality high. There are distinct opportunities for the private and public sectors to invest in both climate tech and nature-based solutions, both proven to have robust, holistic effects on climate resilience.

Case study: Green corridors in the city of Medellín, Colombia

The city of Medellín has invested $16.3 million into a city-wide Green Corridors project with community buy-in. The funding came from the city’s participatory budget where citizens decided the creation of the green corridors democratically. As a result, this nature-based initiative has a massive impact. Already, it has lowered surrounding temperatures up to 2°C. Through the program, over 8,800 trees and 90,000 plant species have been planted. Such projects could, for example, be bundled into thematic bonds that can generate access to global capital markets.

Recommendations and necessary reforms

• Identify, accelerate, and invest in technologies that warn of climate harm, protect people and resources, and increase resilience.
• Create investment ecosystems and build a pipeline of locally led adaptation projects, investable technologies, and nature-based solutions. Ideally, this would link to taxonomy efforts that provide a catalogue of solutions by sector.
• Build the evidence base to show the benefits of locally led adaptation, nature-based solutions, and climate adaptation tech. For example, this could be achieved by combining modern technologies with local, indigenous, and ancient knowledge.
• Explore the role of voluntary and compliance carbon markets for adaptation and resilience by applying a physical climate risks and adaptation and resilience lens to these projects. For example, agroforestry projects can create multiple cobenefits by storing carbon and also could prevent landslides caused by heavy flooding.
• The public sector must explore the potential to crowd in private capital for nature-based solutions that have been exclusively funded through public institutions.
• Highlight and showcase sector-specific solutions to inform both the public and private sectors. This could facilitate national or regional investment platforms—created through national adaptation planning—that can guide stakeholders toward promising opportunities.

Building insurance-sector capacity

Case study: Howden’s capacity building efforts

To support climate goals, Howden is partnering with the UN Climate Change High-Level Champions to facilitate risk management, increase capacity, and ensure affordable insurance access. This initiative underscores how insurance can drive the global climate transition.

This section explores more effective and efficient ways to engage the insurance sector and facilitate its participation in adaptation and resilience efforts.

Insurance protects clients from climate-related losses and disruptions. It is also indispensable to incentivizing adaptation investments and accelerating climate transition financing.

In fact, over $10 trillion in committed climate investments will depend on expanded insurance coverage. Further, leading research predicts that there will be a 50 percent increase in global insurance premiums for climate resilience and natural disaster protection by 2030. This will create additional market pressures. These statistics underscore the urgent need to reexamine how the insurance sector can prepare to lead on climate resilience.

While insurance can play a pivotal role in reducing risks and attracting investment for resilience building, creating this positive feedback loop requires a holistic approach. Currently, the market for climate adaptation (re)insurance products is emerging and can range from trigger-based, parametric insurance products that pay out before a climate shock or traditional ex post insurance products that are based on losses. Some insurance companies offer additional advisory for their clients ranging from systemic-risk and supply-chain assessments to recommendations for adaptation measures.

Broader collaboration across the financial system is essential to climate-proof the economy and address insurance inflation and rising premiums in hazard-prone areas. Then, by integrating climate adaptation into policies, insurers can demonstrate the long-term savings and risk-mitigation benefits of such adaptation investments.

Recommendations and necessary reforms

• Expand insurance beyond traditional twelve-month terms. Climate change is a systemic threat, and so traditional schemes cannot adequately account for the ongoing risks.
• Derisk climate adaptation investments. Insurers can collaborate with public finance institutions to create resilience-linked products or offer premium reductions for investments in climate adaptation technologies.
• Expand insurance pooling and parametric products. Increase coverage of insurance pooling to additional regions and contexts, particularly in vulnerable areas for lower insurance premiums, and combine with parametric products for a faster payout.
• Improve access to risk data. Greater access to climate and risk data is essential to support insurance markets in developing countries.
• Invest in further development of suitable insurance products. This development will be decisive, especially in markets where insurance policies are increasingly expensive or unavailable due to high-risk exposures.

Mobilizing private-sector investments through public-sector incentives

This section underlines the critical role that the public-sector plays in facilitating private-sector investments.

Governments play a crucial role in guiding financial institutions toward adaptation planning by sharing tools, analytics, and developing project pipelines. Notably, developing countries need additional capacity building to conduct sector-specific risk and opportunity analyses.

In order to scale adaptation finance, governments can support the development of an enabling policy environment. To date, public sector stakeholders have explored effective approaches to incentivizing mitigation. Now, these models can be adapted to mobilize financing for adaptation and resilience. By revisiting tax incentives, grants, aligning investment guidance, and loan terms and guarantees, the public-sector can create the enabling environment needed to properly facilitate private-sector contributions.

Case study: The Inflation Reduction Act

The US Inflation Reduction Act (IRA) is a leading example of how climate action can be combined with economic incentives. The act offers tax provisions for clean energy and resilience-building activities. One supported effort is the Conservation Stewardship Program, which offers farmers technical and financial assistance to incentivize the adoption of conservation practices.

Recommendations and necessary reforms

• Include financial institutions in adaptation planning. Governments must collaborate with banks, insurers, investors, and others on tools and analytics to align financial decision-making with adaptation priorities.
• Develop sector-specific metrics that resonate with both international and national sectors, such as cost-benefit ratios for adaptation investments.
• Replicate policy instruments. Existing policy instruments like the United Kingdom’s Infrastructure Supporting Factor or Colombia’s tax breaks for sustainable activities should be replicated by identifying eligible adaptation and resilience activities to support adaptation and resilience efforts effectively.
• Phase out subsidies for technologies and activities that are harmful to better protect climate-resilient communities, ecosystems, and businesses.
• Evaluate the success and uptake of policy incentives such as the IRA and explore replicability in other countries alongside fiscal space support for EMDEs.

The way forward

Climate risks are financial risks: the impacts of physical climate risks drive food and insurance inflation, lower productivity, and threaten people’s livelihoods. The financial sector must recognize that climate change alters the risk landscape across all asset classes. Essentially, without adaptation, markets will face both heightened volatility and more frequent disruptions.

At the same time, the already locked-in impacts present an “unavoidable opportunity” to make financial flows responsive to adaptation and resilience, supporting climate-proofing for businesses, communities, and natural ecosystems. The transition involves not only safeguarding investments but also unlocking potential for growth. Through adaptive financial products like climate bonds, resilience-linked loans, and expanded insurance options, there is an opportunity for significant and timely progress.

However, none of the aforementioned recommendations can succeed without collaboration. The public and private sectors must join forces to develop harmonized standards for climate risk, measure adaptation outcomes effectively, and prioritize blended-finance mechanisms.

Dedicated finance for adaptation and resilience products is essential, but resilience also needs to be a part of every financial decision. Therefore, key stakeholders must align on the definitions and measures of adaptation and resilience. Once defined, these principles must be integrated into every stage of financial planning and investment.

These recommendations are just a start. What the world needs now is action. The public and private sector have the responsibility to accelerate investment in adaptation tech and nature-based solutions, expand climate insurance products, and facilitate sector-specific partnerships.

The good news is that the solutions to address the recommendations are already there. Now, the pressure must be on encouraging the political will needed to make adaptation and resilience a top priority. Through a collaborative and holistic approach, the financial system can be ready to meet the demands of a climate-resilient future.

Credits and acknowledgements

The report was made possible by the contributions of leading experts, including: Anne Chataigné; Alex Kennedy; Jason Spensley; Kipkorir Koskei; Mahesh Roy; Mark Bernhofen; Marshall Lee; Nicola Ranger; Noah Wescombe; Sabrina Nagel; Sudeshna Raychaudhuri; Thomas Michael Kerr; and Ujala Qadir.

In addition, the key organizations provided critical contributions, including: Asia Investor Group on Climate Change; Atlantic Council’s Climate Resilience Center; Article Six Group; Cadlas; Cities Climate Finance Leadership Alliance; DanChurchAid; GARI; Global Finance and Economy Group, Environmental Change Institute, University of Oxford; The Institutional Investors Group on Climate Change; Insurance Development Forum; Lightsmith Group; Marsh McLennan; Mauritius Commercial Bank; Standard Chartered; and the United Nations Environment Programme Finance Initiative.

Editorial support was provided by the Atlantic Council’s Cate Hansberry and the Climate Resilience Center’s Kathleen Euler.

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