In recent years, the world has largely galvanised around the need to limit global warming to 1.5°C in line with the goals of the Paris Agreement. The financial sector has rallied in support, providing hundreds of billions of dollars of ‘mitigation finance’ directed at the energy transition and technologies to reduce carbon emissions.
This is the right ambition and action, and we must continue to do everything in our collective power to materially decarbonise. However, it is increasingly likely, even with the best intention, that we will overshoot the 1.5°C objective by 2050 and that, in any case, we are going to have to incorporate climate-warming effects into our systems and adapt to its reality.
All nations will need to adapt to climate change by building more resilient agriculture, industry and infrastructure, but the need is greatest in emerging and fast-developing economies with a disproportionate risk of exposure to the negative effects of rising temperatures and extreme weather and in many cases, fewer resources or less capacity to respond.
The Adaptation Economy examines the need for adaptation investment in 10 developing markets: Bangladesh, China, Egypt, India, Indonesia, Kenya, Nigeria, Pakistan, the UAE and Vietnam – and explores the current appreciation and appetite for this investment among global banks, asset managers and investors.
Increasingly frequent, unprecedented events – such as the historic floods and droughts in the past year – pose a grave threat. The UNFCCC and signatories to the Paris Agreement have formally recognised that adaptation is a crucial part of the global response to climate change to protect lives, livelihoods and ecosystems.
The case for adaptation is clear: even if the world succeeds against the odds in limiting temperature rises to the Paris goals, the 10 markets in this study could be facing an estimated cost of USD377 billion in damages and lost economic growth by 2030. This is without adaptation-focused investment of circa USD30 billion, the bare minimum needed to withstand projected climate-related damage and degradation within the same period.
Or put differently, the economic pay-off of early action toward adaptation in these 10 markets presents a twelve-to-one ‘return’ this decade. Beyond 2030, the same cost of adapting reaches grim proportions, rising to a total of USD1.4 trillion by 2050, as climate impact worsens and becomes more expensive to respond to, with diminishing returns. This leaves a crucial question: how do we urgently unlock the capital needed for climate adaptation?
At COP27 in Egypt, developed nations reaffirmed their commitment to double their funding for adaptation in developing markets, while agreeing on a long-awaited ‘loss and damage’ fund. While these steps are positive, they don’t go far enough. Too little global finance, particularly from the private sector, is being directed towards adaptation, and emerging markets are not getting their fair share.
Some 150 global investors, asset managers and bankers surveyed as part of this study indicate that their firms have just 0.4 per cent of capital allocated to adaptation projects[1] in emerging markets. While three out of five intend to increase this number, the respondents also highlight multiple barriers to investment, and call for more product innovation and public-private partnership to unlock capital for this purpose.
Banks such as Standard Chartered have a critical role to play in removing these barriers – working with governments and private investors to develop and scale the structures and mechanisms
1. Defined as infrastructure, market reforms, research and education that builds resilience against climate change and limits the adverse effects of global warming
that will facilitate adaptation investment.
We can create a powerful new movement — an ‘Adaptation Economy’ — if we recognise not only that adaptation is a shared necessity and that inaction creates a shared societal burden of exponentially increasing cost, but also that investing in adaptation is a commercial proposition which can generate market returns for its investors.
Promisingly, the majority of our survey respondents agree. They believe that adaptation finance represents a viable private sector opportunity and almost three quarters point to the recent outperformance of their emerging-markets investments. This suggests there is a willing and ripe investment community to support climate adaptation.
We invite you to delve into the findings in this report and join us on the journey to support the creation of a viable Adaptation Economy that will be as important as mitigation finance to serving society in the collective fight against climate change.
