FEATURE: Who benefits and who’s willing to pay? Key questions for adaptation finance
Last week in London, Climate Policy Initiative, adelphi and GIZ convened a roundtable to examine developing countries’ financing challenges, needs and opportunities in response to climate risk. The discussion ranged from government preparedness to the insurance industry’s role in encouraging resilient behaviours by adjusting premiums. Mairi Dupar of CDKN shares her view.*
The adaptation finance roundtable focused on how developing countries can mobilise investment for climate adaptation more effectively. The discussions explored a key question: ‘Who benefits from investments to reduce climate risk and, as a result, who is willing to pay?
Indeed, ‘who benefits’ is a question that gets to the heart of individual and organisational incentives to invest in climate change adaptation.
Consider a mangrove forest
Convincing businesses to pay for climate adaptation depends on aligning identified risks (and mitigating measures) with their business plans.
The group considered the hypothetical case of a 5 star hotel on a stretch of coastline, where mangroves protect against coastal erosion. Imagine how important the mangroves’ ‘green infrastructure’ could be in breaking up wave energy and retaining soils as storm surges increasingly pound the coast in a changing climate. The hotel’s very existence depends on the shoreline’s integrity and the presence of mangroves.
The hotel company would benefit directly and materially from preserving the mangroves. There is a clear business case for why the company should invest in mangrove conservation to protect its own continuity. Here, investing in mangrove protection, a form of climate risk reduction, becomes an integral part of the business plan.
In this scenario, it is likely that conserving the mangroves would benefit the local community and wider society, by providing many ecosystem services (some with direct monetary value, others not), such as hatching grounds for fish, carbon storage and sequestration, etc. These would be ‘positive externalities’ of the company’s investment, which would bolster broader social resilience.
Consider another case: the 5 star hotel is positioned several kilometres inland. Removing the mangroves has no immediate impact on the hotel’s physical integrity and its profitability over five, ten, even twenty years. Imagine in this scenario that thousands of low income residents are situated close to the mangrove forest and highly exposed to coastal storm surges if the mangroves are cut. Some community members gain from cutting the mangroves today for their firewood and income needs, but overall, these gains are small and short-lived; whereas a mangrove conservation scheme promises steadier long term employment for some workers and indirect benefit from healthy fisheries and a resilient, more protective coastal environment, for thousands more people.
In this scenario, the hotel company doesn’t have a business case for investing in the mangrove’s protection; it has less stake in the game.
By contrast, thousands of community members have a material, long-term stake in the mangroves’ health. Here, the needed investment in mangrove conservation (and hence climate risk reduction) is a public good. Who invests? Who is willing to pay?
The hotel company may be willing to pay, but as a matter of corporate social responsibility or ‘charitable work’ rather than as an integral part of its business operation.
The community members may band together to self-organise and pay in cash or in kind for mangrove conservation. Or, this could be a role for financing by local or national government (or benevolent, external actors) of this public good.
Business basics are what drive private sector adaptation investments
“We need to be careful about over-emphasising the call for ‘innovative’ financial mechanisms to attract private investment to climate adaptation,” said John Firth, Director of Acclimatise. “What we need to do to mobilise private sector investment is in fact quite simple. We need to answer two questions: ‘Is there a business case, for investment in climate change adaptation and for more resilient investments,’ and ‘is there a return on investment?’”
Sometimes the investments that companies need to make to reduce their climate exposure and vulnerability are clear-cut.
Other times, it takes big picture thinking and good data and analysis to pinpoint the investments that will reduce climate risks to a manageable level. The Oasis Platform for Catastrophe and Climate Change Risk Assessment and Adaptation – which is funded by the CPI’s Global Innovation Lab for Climate Finance, offers ‘a set of tools that together aim to offer a more transparent, robust and comprehensive approach for analysing and pricing risk from extreme events’ including modelling of climate-related disaster losses.
Dickie Whitaker, its Chief Executive, said: “We are looking at mangrove swamp removal and coral reefs and the connection is embedded in the model-as well as factors such as the type of soil, the saturation of soil, and the runoff. We don’t say ‘I wonder what will happen to the mangrove swamps because it’s included in the model already – if someone takes the mangroves away, then the insurability will go down’”.
Financing adaptation when it’s a public good
Craig Davies of the EBRD pointed out that recent developments such as the Task Force on Climate-related Financial Disclosures (TCFD) are beginning to create incentives for a more rational allocation of capital in a way that reflects the realities of climate change impacts. Multilateral finance institutions and climate finance mechanisms should urgently consider how the public funds that they manage can help ensure that developing countries are not left behind. ‘International climate finance has an important counter-cyclical role in supporting vulnerable locations and communities that commercial finance would otherwise not reach’ said Dr Davies.
Forms of blended finance, where the public sector takes the ‘first loss’ for an adaptation investment and reduces financial risk for private investors, are growing in popularity – a recent article by Charlotte Ellis and Kamleshan Pillay documents promising blended finance initiatives in Southern Africa.
Ultimately – according to John Ward, Director of Pengwern Associates, the public sector may have a role to play in monetising and paying for the benefits of resilience activities that are not currently monetised and paid for.
These interventions to build climate resilient societies – beyond the company level – could be as fundamental and diverse as: data and information sharing, creating education and alert systems, creating, preserving or restoring public infrastructure and many other activities.
Once these public goods activities are identified, then either they can be funded by public monies or, said Mr Ward, “you identify who the people are who are willing to pay to access those benefits and match them to the investors who are willing to bear the costs.”
Roundtable participants agreed that non-governmental organisations have often led the field in identifying the multiple benefits of adaptation projects and either financing them directly from their own private sources, or setting up reciprocal financing mechanisms to make programmes self-sustaining. Many successful NGO initiatives involve nature-based solutions that mediate the impacts of climate change—such as tree-planting and sustainable water management in watersheds to benefit both upstream and downstream water users and compensate natural resource managers for their efforts. One such combined initiative on climate adaptation and mitigation, by the NGO Natura Bolivia in Santa Cruz Department of Bolivia, has now grown exponentially in size and is being adopted across many other parts of Bolivia and South America.
Inaction is not an option
One thing is for certain: experts at the roundtable agreed that identifying climate risks, who has a stake in managing the risks and who’s willing to pay – plus the job of unlocking that finance – is a process that generally takes too long. Climate risks are here today and action is needed now. Without action to reduce climate-related risks, losses for firms and for societies will mount – with UNEP predicting an annual cost of climate adaptation in developing countries of up to US$500 billion per annum by 2050.
The roundtable was part of an ongoing study and consultative process by CPI and adelphi, on the challenges and opportunities for adaptation finance. The results are due to be presented in late 2018. Top of the study team’s initial conclusions – according to CPI analyst Valerio Micale – are the need to ‘create demand among governments and private companies for services and products to analyse climate risks.’
*The policy roundtable took place under Chatham House rules and all interviewees agreed to be quoted for this article.
Further results of the study will be published on www.climatepolicyinitiative.org
Image: measuring mangroves, Indonesia, credit CIFOR.