Engaging the private sector to finance climate change adaptation


16 November 2016

The World Bank recently approached Bangladesh, offering unsolicited loans to help the low-lying country adapt to the severe tropical storms whose impact has made it one of the most climate vulnerable countries in the world.

But Fazle Rabbi Sadeque Ahmed doesn’t want that help. The director of the government-managed Bangladesh Climate Change Trust said his government needs to ensure a steady supply of fresh water and upgrade roads with embankments to prevent erosion; measures that are critical to helping Bangladeshis adapt to the punishing effects of climate change.

But, Ahmed is worried about his cash-strapped country’s ability to pay back tens of millions of dollars plus interest. What Bangladesh wants, he said, is what developed countries promised them and other low-income countries: grants, not loans.

“It is our right to take grants for adaptation,” Ahmed said, referencing last year’s Paris agreement, which specifically noted the need for public and grant-based resources for climate change adaptation. “We will stick to that principle and it should be implemented.”

Climate change is an immediate and growing threat to development. The World Meteorological Organization just announced concentrations of major greenhouse gases in the atmosphere continue to increase to new levels with 2016 set to be the hottest year on record. The WMO also found “significant and very early melting of the Greenland ice sheet,” which could accelerate sea level rises that threaten flood prone countries.

Yet, adaptation measures, such as building sea walls and developing drought tolerant crops, remain chronically underfunded and largely handed out as loans, usually by multilateral banks.

According to Oxfam, in 2013, grant funding for adaptation comprised only 12 percent of total climate finance then dropped to less than 10 percent in 2014, the most recent years for which statistics are available. Meanwhile, the Kyoto Protocol’s Adaptation Fund, which provides grants of up to $10 million per country,  suffers from insufficient funds and an uncertain future as the protocol’s term comes to an end in 2020.

Now, some experts say grants are becoming more scarce and climate finance is moving away from grant-based financing and towards loans with low interest rates and long grace periods. This raises concerns about what this could mean for adaptation where the kind of investments being made are critical to the very survival of climate vulnerable countries, but may not be revenue generating.

The Green Climate Fund

When the Green Climate Fund became fully operational in 2015, it was hoped the world’s largest international climate fund would be a reliable source of grants for adaptation. But, that doesn’t seem to be the case.

“There’s been a bit of an outcry in the Green Climate Fund in the beginning where people were saying we can’t be giving loans for adaptation, but I see that as a future trend that’s going to happen in the adaptation space and we need to evolve and transform within our own thinking about adaptation to deal with that emerging new environment,” says Zaheer Fakir, co-chair of the GCF and a former board member of the Adaptation Fund.

Fakir urges the international development community to stop thinking traditionally about adaptation and start thinking about it from the perspective of building the resilience of communities in the developing world, particularly when it comes to strengthening the agriculture sector. This can be done through energy efficiency measures, such as using appropriate irrigation technology.

“That way, not only do we help build resilience in terms of drought in their future, but we also help build more reliable and sustainable food crop, which means more potential production, which means more potential sales, etc.,” he adds.

International and domestic engagement

Much of the discussion at the U.N. climate change conference underway in Marrakesh is how to get more international public financing to incentivize both international and domestic private sector engagements, including for adaptation.

Liane Schalatek, associate director of the Heinrich Böll Foundation North America said that currently, most private sector investments in adaptation finance, both domestic and international, focuses on insurance schemes, such as microinsurance schemes to provide support to individual households or small-scale farmers in cases of drought and flooding.

“This is certainly some area, which could be further developed and the G-7 and other industrialized countries have supported such ‘InsResilience’ approaches,” she added.

Private sector investment can also come via adaptation-related infrastructure measures. But Schalatek cautioned that when designing such private-public partnerships one would need to insure the private sector’s need to make a buck is not undermining the public service provision. For example, it would be a counterproductive use of scarce public finances to raise a road to make it less prone to flooding, but then deny access to people unable to pay a user fee.      

Climate bonds and green bonds, which are used to raise money specifically for climate change and environmental issues, are already growing in popularity, but can be expanded. These bonds can drum up finance for either private or public expenditure depending on who issues the bonds in the market.

The U.K.-based nonprofit Climate Bonds Initiative estimated that 4.3 percent of the $65.9 billion outstanding green bonds are connected to climate adaptation projects and an even greater percentage is in sectors that may be relevant for adaptation. But, there are no international standards for distinguishing green bonds from other bonds. The 2016 Adaptation Finance Gap report published by the United Nations Environment Program also raises questions as to whether or not the seemingly fast rise in green bond finance really does create new capital for green investments or merely repackages traditional bonds and investments..

Government support

There are also key challenges to engaging the private sector. Unlike governments, the private sector is not responsible for improving the lives of people and the extent to which private sector support for adaptation is delivered effectively and efficiently is unclear.

It is therefore crucial for developing countries to utilize the resources available to them through development aid and other public channels to address the financial capacities that developing countries themselves have, said Aaron Atteridge, research fellow at the Stockholm Environment Institute and co-leader of SEI’s Initiative on Climate Finance.

This could mean strengthening countries’ tax system. The 2015 Addis Ababa Action Agenda stresses the need for advanced economies to help developing countries improve their capacity to collect tax and other revenues. As a result, the Organization for Economic Cooperation and Development in collaboration with the United Nations Development Program launched Tax Inspectors Without Borders. This initiative has generated over $200 million of extra revenue in a little over a year.

Reducing the transaction cost of remittances is also critical. According to the World Bank, the value of remittances to developing countries is projected to increase to $516 billion, roughly 3.5 times the size of total overseas development assistance the OECD said flowed to developed countries in 2015.

Remittances may be valuable for adaptation because they rise in the event of natural disasters or economic crises in the migrants’ native country. Also, remittances go directly to households, including those in vulnerable and remote areas, more so than public finance, notes the UNEP report.

“Adaptation is going to require investment across a whole lot of different sectors,” Atteridge said. “Some of it is public expenditure, some of it is private households and private companies needing to spend money to change the way they do things.”