Note: Technical terms are marked with a * and briefly explained in the Glossary.
The analogy underlying the title of this piece derives from a conversation I had soon after Marrakesh with Harjeet Singh of ActionAid.
ActionAid is one of the development NGOs that has been heroically holding the feet of wealthy countries to some fundamental fires of climate transparency and justice, and recently co-published a report on the Global Goal on Adaptation that was established as part of the Paris agreement.
In our discussion, Singh posed the fundamental question of climate justice to me thus: “The government of an emerging nation wants to build a road between two places as part of a development plan. But now, because of climate change, instead of a regular highway this has to be an all-weather highway, with a 20% higher cost than the regular one. To pay that cost the country has to divert money from some other development goal – for example in India we still have 300 million people with no access to electricity. Why should a country have to do that, when it was not responsible for the change that has led to the increased cost?”
Adaptation has always been the poor cousin of mitigation
There are, of course, many aspects to this question, and I am not nearly enough of a philosopher, theologian, lawyer or engineer to begin answering most, or even perhaps any of them. But the question has led me to wonder whether we are on the right track in thinking about how to pay for all the work that will be needed in adaptation, which, as Singh also noted, “has always been the poor cousin of mitigation”.
First, an idea of the scale of the problem.
In the fast lane of our all-weather climate finance highway, the mitigation finance juggernaut seems to be starting to hit the throttle. Instruments like green bonds are barrelling ahead – the latest estimates suggest issuance could reach as high as $200 billion in 2017, though concerns persist over whether the juggernaut has a defeat device installed, in terms of the true ‘greenness’ of some of these bonds. Meantime, in a classic virtuous circle, the increasing availability of finance for renewables from products such as green bonds is allowing costs to fall so dramatically that in many places – and completely unsubsidised – they are now the cheapest form of new energy build.
Adaptation finance, however, seems to be stuck in the crawler lane, and on what looks to be a long, slow, upward grind. The Climate Policy Initiative’s regular climate finance landscape found that while all climate finance grew to $392 billion in 2014 (the last year for which figures are available), up $50 billion from the prior year, adaptation finance was flat between the two years, at just $27 billion. This was under 1/10th of the spend on renewables alone ($284 billion).
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Coincidentally it was roughly the same fraction of the $300 billion we find at the upper end of UNEP’s guesstimate of what will be needed annually for adaptation actions by 2030. The lower estimate, $140 billion is still 5 times the current level of official spend.
A report just out on the work of the Climate Investment Funds gives some sense of where the major gaps are. On a regional basis, and relative to GDP, they are biggest in South Asia and Sub-Saharan Africa, while on an absolute $$ basis, Latin America has the largest deficit between spend and need. Sector-wise, the largest gaps are in Coastal Protection and in Energy, Infrastructure and Other Built Environment. Most money to date has been spent in the Water and ‘Climate Smart Agriculture’ sectors. Indeed, as the report shows, in many cases this is essentially the only adaptation sector which MDBs have been addressing thus far.
Meanwhile, despite undertakings from developed countries that the adaptation / mitigation split in public finance will be 50/50 by 2020, the OECD’s latest projection of such public finance over this period is that only 24% of funding will be for purely adaptation projects, together with some share of 9% directed to hybrid projects.
Climate Change Effects are Already All too Real
All this is against a backdrop where it’s manifestly clear (except possibly in the corner offices of some government buildings in Washington DC) that climate change is already having dramatic effects across the world.
As 2016 was confirmed as the hottest year on record, global insurer Aon’s annual Climate Catastrophe Report for the year found that “total economic losses [of $210 billion] were 21 percent above the 2000 to 2015 mean (USD174 billion) on an inflation-adjusted basis. Economic losses have annually trended upwards by 4.0 percent above inflation, or … by 7.0 percent nominally, since 1980.” It also noted that floods, perhaps the event most immediately linked in our minds to climate change, were the costliest peril for the 4th consecutive year.
There was a lot of distrust built up over adaptation in the early 2000’s. The Global Goal is now the way forward
And all this also against a political backdrop in the Paris process which remains potentially flammable. Many of the (I)NDCs underlying the Paris agreement are highly conditional, and even if fully implemented still add up to a level of warming of 2.7°C, far away from the 1.5°C that is the agreement’s ultimate ambition. The principal condition is availability of finance and for many countries – especially those where adaptation was actually as large or even larger a feature of the INDC than mitigation – that conditionality will be linked to getting adequate adaptation finance. The history here is not good, as Harjeet Singh points out: “There was a lot of distrust built up as a result of the NAPA[i] process in the early 2000’s. More than 40 Least Developed Countries (LDCs) went away and did a lot of work to draw up these adaptation programmes, only to find when they asked for the money promised to implement them by developed countries, it wasn’t there, or it was only there for bits and pieces of the programme.”
“The Paris Agreement’s Global Goal on Adaptation is the forum for progress in the public sphere,” Harjeet Singh says. “That’s where the three key issues need to be addressed, so that when finance starts to flow properly we are ready.” The three issues he identifies are, first, capacity building, where there are vast differences between country advancement; second, systems and processes to implement National Adaptation Plans, and also to address cross-border complexities, for example river systems that may take in many countries; and, finally, funding. “We need to get policy frameworks right, and we need to move the whole implementation effort beyond the environment ministries, as they aren’t the places where there is expertise on agriculture or education or planning or finance.”
Singh sees a significant role for development NGOs such as ActionAid in making progress on these key issues. “A lot of current adaptation is being built out of work on disaster risk reduction, which is what organisations like mine have been doing for decades.” He also points out that as well as holding developed countries and multilaterals to account, NGOs are ‘on the case’ with developing countries too, trying to improve transparency and performance on issues such as the rights of children, women and indigenous peoples, and tackling corruption and tax evasion. (Global institutional investors probably have little idea how much this work by civil society organisations is helping to extend the geographical spread of investment possibilities.)
While the Global Goal must be seen as good news, it’s also notable that the actual language on funding in the Paris agreement talks only about a “balance” between adaptation and mitigation, “taking into account country-driven strategies”.
As to the main public funding sources for adaptation, the GCF does mention in its Mission a “commitment to aim for 50:50 balance between mitigation and adaptation investments over time”, and it has also committed to $3 million of capacity building grants for each LDC. So how is the GCF performing thus far? An estimate from the Climate Funds Update suggests that by the end of 2016, 29% of project funding related to adaptation, 34% to mitigation and 37% to crosscutting projects, so to have met its 50:50 goal at this point a large proportion of the crosscutting finance must be leaning towards adaptation.
The Adaptation Fund operated by the World Bank is also an important source of multilateral adaptation finance and survived talk of its disbandment at Marrakesh (though by several accounts, only by the skin of its teeth). The future of the Climate Investment Funds (which mainly works with multilateral development banks) is unclear at this stage.
The focus on public funding for adaptation will, however, continue. Perhaps not surprisingly given its own climate perils, Fiji has recently announced that adaptation finance will be among the three priorities for its COP23 Presidency.
So what of the traffic that’s occupying the other lane of our all-weather adaptation highway – the private sector, both corporate and financial? Singh’s view is that while the private sector has an important role over time, at this point funding from corporations is limited to CSR agendas rather than being driven by commercial interest.
But is this in fact the case?
You Say Tomato …
Maybe it’s just a matter of language. Private sector observers would say that there’s actually a lot of adaptation going on in their world, it’s just not called that. Rather, it’s what’s sometimes termed ‘hidden adaptation’.
“The private sector doesn’t talk about adaptation, it’s not a word that’s really recognised,” said one commentator to me. “Instead, they think about these issues as the physical or environmental risks their businesses face. They think about it as ‘reliability’ or ‘business continuity’ or ‘supply chain security’. When there are acute shocks, they think about it as ‘disaster recovery’. These are the kind of terms the private sector uses to digest this set of risks, not ‘adaptation’.”
One example of such ‘hidden adaptation’ – which would come under the rubric of ‘supply chain security’ using the vocabulary above – is Starbucks and its campaign on coffee ‘rust’. Rust is a blight that is threatening substantial parts of the coffee harvest in Central and Latin America, and is being exacerbated in its spread by temperature and humidity changes driven in part by climate change. Supported by a number of DFIs*, Starbucks is engaging with smallholders in Nicaragua to combat this spread by using different cultivation practices and different mixes of coffee types.
Clearly this is not a systematic programme across the agricultural sector in the region, which would doubtless be the most effective approach, but it is a practical and deliverable response and the intention of the public and private partners is that the structure of their interactions is replicable elsewhere.
Is it the case then, that a good proportion of adaptation will in fact be done by companies, often small ones, and often very locally? Amal Lee Amin, Climate Change head at the IDB, has said on various recent panels that much adaptation work will be carried out by SMEs, and parts of the IDB’s NDC Invest platform are set up to assist such players.
It is also worth noting that the risks faced by the private sector – floods, droughts or tropical diseases – are the same risks as those faced by communities. They are, moreover, risks that have been faced and dealt with by industry before, they are now just of a different magnitude and manifesting themselves in new vectors. “This isn’t aliens landing on planet earth risk,” as it was put to me.
In response to these risks, there is some evidence that that the insurance industry is starting to act coherently, both as risk underwriters and investors. The Principles for Sustainable Insurance have been signed up to by insurers representing 20% of the global markets, with $14 trillion assets under management*. Meanwhile, initiatives such as the ILO’s Impact Insurance Facility and Micro-Insurance Compendium, which is published in conjunction with Munich Re (and which NDCi.global recently covered) are designed to promote the creation of inclusive insurance products, including crop and health insurance, that will be a critical part of adaptation by more vulnerable communities.
A Psychological Marker?
What the Paris Agreement seems to have done for private sector engagement is laid down a kind of psychological marker. A company with refrigeration involved anywhere in its supply chain, for example, can’t have helped noticing that temperatures have been steadily increasing, but having a global agreement confirming the trend perhaps creates a kind of permission for corporations around the world to assimilate the new reality and act accordingly. The recognition appears to grow by the day that the next 20 or 50 years will not look at all like the last 20 or 50 years, and that staying in business means doing things differently.
In next week’s blog, we will take a look at some of the solutions that are being attempted, beyond pure donor finance, and at some of the challenges that will need to be addressed to get to scale.
There is some cause for optimism, perhaps, in the history of renewables finance. 15 years ago, for example, finance for windfarms was difficult and patchy. Data was hard to come by, heavy subsidy was required, financing techniques and structures were rudimentary. All of these challenges are now being overcome, in more and more countries, by means of thoughtful policy, agreement of common standards, establishment of best practice principles for finance, technology improvements and so on. Complete supply chains have been established, and with scale has come significant cost reductions.
Could we look forward to the same for adaptation finance in 10-15 years? Learning from the growth of wind finance (or indeed any class of finance), a critical starting point would be a common dataset. Ahead of COP21, this blog’s co-founders, along with nine climate-focussed organisations around the world, called for a ‘standard categorisation‘ of climate actions, in both mitigation and adaptation. The MDBs* have such a categorization (albeit somewhat rudimentary) for mitigation, but it is not public. Nothing of this nature appears to exist for adaptation, yet to create such a tool would be a cheap undertaking. Without it, common specifications for designing, developing and measuring the effects of adaptation actions can’t be created, and finance will therefore be significantly slowed.
[i] National Adaptation Programmes of Action