Very little capital is currently reaching adaptation projects in emerging markets, but the tide is starting to turn.
To gauge the global financial community’s appetite to finance climate adaptation projects – and to identify any barriers to investment – we surveyed 150 prominent bankers, investors and asset managers.[1] We found that currently just 0.4 per cent of their capital is allocated to adaptation projects in emerging markets. Just 0.19 per cent of their capital is in adaptation projects in Asia, with 0.07 per cent invested in adaptation in the Middle East, and 0.03 per cent in Africa.
Global capital allocation to adaptation in emerging markets
Global capital allocation to adaptation by region
Region
Percentage share of total assets
North America
0.19%
Europe
0.22%
Asia (not ME)
Middle East
0.07%
Africa
0.03%
South America
0.04%
Australia/Oceania
[1] 150 interviews with senior leaders from global asset management firms, institutional investors and banks conducted in November 2022.
Increasing focus on the adaptation economy
Although investment flows are currently small, our study shows that adaptation is rising up the agenda. Three quarters of banks, asset managers and investors believe climate adaptation finance will hit the mainstream in 2023 (73 per cent) and that adaptation is ‘the next big thing’ in ESG (74 per cent).
The world’s top finance firms are also waking up to the opportunity that climate adaptation presents, with nearly four in five surveyed (77 per cent) stating that it is a strategic focus and 68 per cent actively working on strategies for adaptation finance and investment.
Most firms (68 per cent) believe that adaptation finance and investment is a promising commercial opportunity. And emerging market investment performance is exceeding or matching the performance of similar developed market investments: 74 per cent of surveyed firms say that their climate adaptation investments or lending in emerging markets over the last 12 months have had an average or above-average performance compared to equivalent investments or lending in developed markets.
Most firms intend to increase their adaptation investments imminently: 59 per cent of our respondents plan to put more money into adaptation over the next 12 months. Over this decade, the adaptation economy should continue to grow, with global adaptation financing expected to rise from 0.8 per cent of assets in 2022 to 1.4 per cent by 2030.
Unlocking the adaptation economy
For this growth to happen, however, collaboration between the public and private sector will be critical. Almost seven in 10 of the firms surveyed say that government intervention is needed to translate the economy-wide benefits of adaptation into commercial returns for investors (69 per cent), and that public-private partnerships will be critical for unlocking adaptation investment in emerging markets (67 per cent).
Banks, investors and asset managers also call for innovation in the financial sector: three-quarters believe entirely new products such as adaptation bonds will need to be created for climate adaptation to attract the capital required. Financial firms also cite a lack of knowledge and uncertainty as key barriers to allocating more capital to climate adaptation projects, both generally and in emerging markets specifically.
Top three barriers to allocating more capital to adaptation projects
What does adaptation mean to you? What impact does it have on the world?
I guess, unfortunately, it means that to a certain extent we have to live with some of the effects of climate change. Adaptation is about how we ensure we can continue to live in a way that protects our fragile communities, helps them to reduce and avoid the effects of our changing climate.
Adaptation also helps shield these communities from the future effects of severe climate events like droughts or storms or severe heatwaves, making populations more resilient
Why is adaptation so important? Shouldn’t we focus on mitigation?
We really need to do both. While it’s easier to define and measure mitigation finance by looking at emissions, adaptation covers a far broader array of activities and could be very location specific.
Investing in renewable energy, for example, is massively important, as is decarbonising hard to abate sectors, but the effects of these investments may not be felt for years. Rising temperatures and sea levels require more immediate solutions – improved building methods in coastal areas will mean that houses can withstand the storms that climate change is making happen more often.
What adaptation projects is the Bank financing?
One of the biggest updates in our fourth version of the Green and Sustainable Product Framework is the inclusion of the climate change adaptation category. This will enable us to define and raise finance for adaptation. It contains critical activities such as climate resilient construction, water reclamation, mangrove conservation, climate resilient crops and data driven climate monitoring solutions.
Unfortunately, adaptation finance is not getting to the areas where it matters the most. A recent OECD report shows that 70 per cent of climate finance went to middle income countries, rather than least developed markets.
As evidenced in our latest impact report, 90 per cent of our Sustainable Finance assets are in Asia, Africa and the Middle East, which is where sustainable finance is really needed.
I am excited that adaptation is one of our key priorities for 2023 and beyond.
What can companies do to adapt to climate change?
The changing climate will alter the conditions that all companies and economies operate in. This will affect global supply chains and food systems and floods and storms will cause billions of dollars’ worth of losses.
Companies of all sizes will need to climate proof themselves; they may need to invest in new technologies to protect themselves from future threats that might stop them from being able to deliver goods and services in the future.
What opportunities does adaptation present for investors?
Adaptation is a hard concept to fathom for an investor. Mitigation is far easier, we know what a solar array costs, we know what returns we will get from financing it, we even know how much CO2 it might save. It is immediate and impactful.
Adaptation is the opposite, it is spending money to protect ourselves from a threat that may come unannounced, it is amorphous and intangible. What adaptation does that mitigation does not is that it builds resilience – and in the changing fortunes of time, as the negative effects of climate change become more and more real, resilience feels incredibly important to me.
While we don’t have all the answers, we are working hard to understand the problem. For me personally, 2023 will be a year of focus on adaptation (alongside biodiversity and social finance), and I look forward to finding some innovative ways of channelling capital towards adaptation finance in emerging markets – where it is needed the most.
