How climate adaptation finance is coming in from the cold

By Vanora Bennett

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Climate change is hitting the developing world hard. This summer, Pakistan saw a third of its land submerged by floods; the horn of Africa is in its fifth year of drought, with famine threatening in Somalia.

The notion that nature is telling us something through extreme weather events worldwide - – which also include the scorching summer of 2022 in Europe and North America - is giving added urgency to acting on adaptation, 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.

The priorities of the COP27 global climate summit to be held this November in Egypt follow this shift, with adaptation high on the agenda - a particularly poignant emphasis, given that this will be a summit on the African continent.

This is new. Until relatively recently, adaptation planning was the poor relation of climate thinking, sometimes stigmatised as defeatist. The main focus of climate finance has traditionally been on more dynamic climate mitigation measures, which involve proactively reducing harmful emissions before they have a chance to affect our lives and aim to prevent climate change before it happens.

As EBRD adaptation expert Sarah Duff explains, as a result adaptation has until now attracted less finance: “When it comes to money that’s spent on climate finance - not just finance from multilateral development banks like us but also from developed to developing countries - adaptation has always been a much smaller part of the picture than mitigation.”

“But now that it’s become so clear that climate change is inevitable, and impacting us already, it’s also getting clearer that we need to raise the finance for adaptation,” she says. “That is the global message.”

The next big question is how.

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.

For some of the multilateral development banks (MDBs) that together provide billions of dollars of climate finance every year, working with national governments on projects like this and providing finance to support them falls squarely within their mandate.

However, for the EBRD, whose focus is on developing the private sector and whose lending is based on sound banking principles, a broader approach is required: not just building in an adaptation component to projects but also encouraging clients to think more widely and long-term about climate risks and opportunities, Duff says.

“Our approach is distinctive. We ask clients, what are the risks to your business, how can you manage them, how can you make sure you’re able to continue to operate, no matter what future climate conditions there are? If there’s no water in the region, how are you going to keep your operations running if you’re a very water-dependent business? How can you adjust to be able to cope and then maximise opportunities that come up from climate change?”

“That way we demonstrate that there is a business case for adaptation, and then we can go and talk with clients about how they are adapting to climate change and looking for opportunities as well as just avoiding risk,” she adds.

The way adaptation finance was calculated originally was simple. If a road was being built, when the question of climate change was raised a drainage system might be added to address the possibility of heavier rain than expected as a consequence of climate change. The cost of the drainage system would raise the overall cost of the project slightly, and would count on the balance sheet as the adaptation component.

This doesn’t really work in the long run, Duff says, because the ethos of adaptation is that you want people to build it into how they develop a project right from the start. “You don’t want them to come to the end of a project and suddenly remember, ‘oh! climate change’. You want them to plan projects with this in mind, right from the beginning.”

But moving from a project-plus-adaptation-add-on model to a more holistic project-delivering-adaptation-as-part-of-its-remit creates issues with calculating how much funding is being spent on adaptation.

“If you’re planning new developments in a city, you’d want to plan it knowing the climate is changing, rather than just plan it and then say ‘we need to change these bits to make it work’. If you do it properly, it shouldn’t cost you any more money. You might just need to relocate the project - not put it in the flood plain, say – which would change the location but not necessarily the cost. So if we are successful in having resilience built in right from the beginning, there might be no visible finance for adaptation.”

This is why measuring climate adaptation needs to become more sophisticated, she says - and why, in the fast-developing field of climate science, both the MDBs as a group and the EBRD on its own are currently working to update their methodologies for measuring adaptation finance, originally drawn up a decade ago.

“What we’re trying to do with our approach is to focus not only on the cost of adaptation but also on the outcome of a more climate-resilient system, knowing that if you have a more climate-resilient city, you then have less impacts from floods and heatwaves,” Duff says.

Among measurable outcomes that the EBRD has listed are water and energy savings, improved human health and productivity, improved agricultural potential in terms of soil quality, reduced damage from extreme weather events and reduced disruption.

“With electricity, say, if you have a power grid with lots of blackouts and you make it more stable, with less blackouts, we count that. Or a company that develops drip irrigation systems which save water in water-scarce environments: drip irrigation you can measure, it saves so much water in a water-stressed region where water is incredibly valuable.”

“To measure a climate-resilient port project, you look at the cost of the assets, and if they were previously impacted by damaging storm events then you recalculate with the avoided damage cost of the more resilient infrastructure. Or you would look at the assets and typical life span of the project - 10 years before, but 15 years once the project is climate resilient, so that saves you money. Or you would look and see how much it costs to maintain, and if your maintenance costs are lower and you don’t need to repair structures as often, you take that into account.”

 “The key conversations at COP27 will rightly focus on increasing the finance flows for adaptation. With more money we also need to make sure that we’re thinking about the impact of that finance; that it’s delivering adaptation and improving resilience to climate change.”

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