Adaptation remains a blind spot in climate financing
Limiting global warming is at the top of political agendas, but the record temperatures this summer show that the global temperature rise is a reality that both businesses and governments must adapt to now. The Adaptation Gap Report from the UN Environment Programme (UNEP) highlights that even if the goals of the Paris Agreement are achieved, the world is likely to still be on track for a temperature increase of 3°C by 2100.
Insurer Swiss RE provides insight into the immediate consequences. In the first half of 2023, insured losses due to natural disasters already reached $50 billion dollars. Heavy thunderstorms are responsible for 70% of the total. In the United States, a record amount of $34 billion in damages was claimed due to thunderstorms.
Yet only a small percentage of total climate financing goes towards adaptation initiatives. The financing gap is evident. In 2017-2018, global climate financing was estimated at $579 billion dollars per year, of which only $30 billion was allocated to climate adaptation. This funding needs to increase five to tenfold, particularly to meet the needs in developing countries.
The UN Water Action Agenda indicates that by 2030, nearly half of the world’s population will experience acute water scarcity if no action is taken. For food supply and maintaining basic economic activities, it is crucial to integrate the approach to water management, addressing both excess and scarcity, into climate financing.
That adaptation financing occupies a small portion of the green bond market is also evident from research by the Climate Bonds Initiative (CBI). Out of the 33,849 green, social, and sustainability-linked (GSS+) bonds reported by CBI in 2022, only 19% mentioned climate adaptation or increasing resilience against temperature rises as investment objectives. Despite the existence of a well-developed market for green bonds, the emphasis is heavily skewed towards low-carbon investments rather than climate-resilient investments.
“It is clear that financing climate adaptation also makes commercial sense. An investment of $1.8 trillion in climate adaptation measures, according to the Global Commission on Adaptation, yields up to $7.1 trillion in avoided costs and other benefits. The European Bank for Reconstruction and Development (EBRD) set the tone by launching the first climate-resilient bond in September 2019. However, such initiatives are only successful when they reach sufficient scale and are adapted by private parties as well.”
The Institutional Investors Group on Climate Change, an alliance of about 275 investors with €35 trillion assets under management, has a role to play here. The alliance’s mission is not only to mobilize capital for the energy transition but also to invest in adjusting economic activities to the changing climate. As taxonomies develop, it becomes clearer how impactful investments in climate adaptation are defined.
“In the midst of our ‘race to net zero,’ we should not forget climate adaptation,” says Rado Georgiev. “The moment for climate adaptation financing is now: the urgent need, the economic argument, and the favorable market and policy environment? What are we waiting for?”