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FEATURE: What does private finance mean for adaptation to climate change?

Aaron Atteridge is a Research Fellow at the Stockholm Environment Institute, Sweden. The SEI working paper, “Will Private Finance Support Adaptation in Developing Countries” is available for download here.

Private-sector finance has generated a lot of attention in the climate debate, particularly in discussions about design of the Green Climate Fund, but also in the wider context of developed countries’ commitment to raise USD 100 billion annually by 2020 to support climate-related actions in developing countries.

The debate has focused in particular on mitigation of GHG emissions and ‘low-carbon development’, while virtually ignoring the fact that for many developing countries, the priority is to reduce their people’s exposure to climate impacts.  The private sector has played an important role in financing mitigation and renewable energy, but if developing countries are expected to rely heavily on private finance to support their adaptation efforts, we need first to consider the implications for poor, vulnerable communities.

The first step is to define what we mean by ‘private finance’. Amid all the rhetoric about leveraging and scaling up, there has been almost no nuanced analysis of what kinds of finance are needed: Equity investments? Bank lending? Bond finance? Philanthropy? Each of these has different qualities from the point of view of recipients.

There is also no attention on where finance is needed. For adaptation, it matters greatly where finance goes and who has access to it, not just in terms of countries but in terms of specific communities and economic sectors. Climate change impacts are very unevenly distributed, and people’s vulnerability also varies greatly depending on socioeconomic and other factors. Thus, questions of how private funds for adaptation might be distributed are crucial.

Both foreign direct investment (FDI) and international bank lending, for instance, are unevenly distributed to developing countries. Large emerging economies like China, Brazil, Mexico and India see significant interest, while the Least Developed Countries struggle to attract private capital. Of total FDI inflows to developing countries in 2010, the LDCs received only 3%, despite making up around 15% of the developing world by population. Climate policy instruments to date appear not to have changed this pattern: India and China attract most investment under the Clean Development Mechanism (CDM), while more than half the LDCs have not seen a single CDM project.

There are also significant variations in the way private finance moves towards different economic sectors. Within poor countries it tends to concentrate around natural resource projects in the mining and petroleum sectors. International statistics show that sectors cited as adaptation priorities in the National Adaptation Programmes of Action (NAPAs) of LDCs – particularly water, agriculture and health – struggle to attract the kind of capital which might boost local livelihoods or reduce vulnerability. According to the World Bank’s database on Private Participation in Infrastructure, since 1990 there have been only two investments in new water sector projects in Africa. The UN Conference on Trade and Development (UNCTAD) reports that agricultural investments tend to be concentrated in large-scale export crop production rather than in small-scale farming or local food staples.

These historical patterns can tell us a great deal about private sector behaviour, and from a coarse review of data it is clear that much more analysis is needed in order to anchor the debate about its role in responding to climate change. It is not that private finance is inherently unsuitable for supporting adaptation. However, because commercial investors are driven by competitive instincts, it seems many of the world’s most vulnerable communities might not see much private finance that actually helps adaptation efforts. Worryingly, this pattern might only worsen as climate change itself creates deteriorating domestic conditions.

Image: ET Nepal07 Chialsa (1999), courtesy of IMs BILDARKIV

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