Why there’s need to dovetail climate change adaptation policies with customised climate-risk products

Published: June 13, 2019 12:21:17 AM

United Nations Environment Programme reported that climate change adaptation costs could range between $140 bn and $300 bn per year by 2030, and between $280 bn and $500 bn per year by 2050.

There is a need to dovetail climate change adaptation policies with customised climate-risk products (Representational image)There is a need to dovetail climate change adaptation policies with customised climate-risk products (Representational image)

By Kushankur Dey

In 2018, Food and Agriculture Organisation (FAO) reported that the agricultural sector is the most vulnerable to climate change, having absorbed almost 22% of the total economic impact ($1.4 tn) of natural disasters in Africa, Asia and Latin America from 2003 to 2013. Hence, designing of appropriate climate risk products, including ‘on-farm’ measures to protect small farms from natural hazards, and their financing warrants policy attention.

Although (weather) insurance emerged as a potential risk adaptive instrument to climate change in early 2000, its penetration, along with the financing of weather-derivative products in developing and underdeveloped countries has been abysmal due to lack of reliable data, and re-insurance market, coupled with profiteering motive of insurance carriers.

In response, climate risk products, by blending a mix of insurance and derivative options, came to the fore in 2015-16, as an outcome of comprehensive and integrated climate change policy approach.

In Africa and Asia, climate change adaptation goals are 100% and 92%, respectively. Yet, while 18% of adaptation goals are determinable, more than 30% of these countries’ Nationally Determined Contributions do not specify a time-frame for achieving targets.

United Nations Environment Programme reported that climate change adaptation costs could range between $140 bn and $300 bn per year by 2030, and between $280 bn and $500 bn per year by 2050. Given the potential demand, as measured by the United Nations Framework Convention on Climate Change, there is a supply-side constraint on global adaptation finance: only $22 billion of tracked investment is available to address climate change against the target amount.

Multilateral/bilateral development finance institutions (DFIs) are major sources of adaptation finance, accounting for 36% ($8 billion) of the total sum tracked in 2015-16. In 2017, multilateral development banks (MDBs) funnelled 21% of the total climate finance into adaptation activities and mobilised $8.2 billion per year, from public and private sources, between 2015 and 2017 in co-financing adaptation. Bilateral donor governments and funding agencies channelised an additional $2.4 billion in 2015-16 for adaptation finance, while climate funds, such as Green Climate Fund (GCF) and Adaptation Funds or Green Bonds, contributed another $0.4 bn.
How has adaptation finance been institutionalised; what are the key products of adaptation finance? According to Climate Policy Initiative, MDB/DFI-sponsored market-rate loans, amounting to an average of $11 bn /year, are the main instrument used in adaptation or resilience activities. Backed by bilateral donor agencies and climate funds, concessional funds, like grants and low-cost loans, constitute a second instrument for adaptation financing, with a contribution of $5 bn.
In addition to these tried and tested instruments, green bonds have emerged as a new debt instrument in financing adaptation activities, accounting for5-7% of total issued outstanding by 2017. Other climate funds, like GCF, commission private sector facility to fund and mobilise institutional investors in climate resilient activities.

It is evident that public sector plays a significant role in financing adaptation activities, while private sector participation has not gained momentum yet due to contextual barriers related to policy, institutional, market environment, capital and human resources; business model barriers related to cost and management policy, technical capacity, uncertainty in value-addition; and internal capacity barriers. IPCC, think-tanks and quasi-government bodies, in consultation with MDBs/DFIs and private investors, must dovetail adaptation policies with customised climate risk products.

An inclusive, bottom-up approach in financing is rather warranted to sustain climate smart projects that have scope of replication and financial mainstreaming. Before funding a project proposal, lending agencies should evaluate the proposal with respect to financial indicators—viz. project payback period, net present value, modified internal rate of return and risk adjusted return on capital invested—along with social and environmental parameters. While impact investment, or sustainable finance, is gaining traction as part of adaptation finance, private investors seek returns from such projects.

The new government should instil responsive bureaucracy to promote public-private partnership in financing climate change adaptation and encourage diverse stakeholders’ feedback on sustainable business models of climate adaptation/resilience. Impact assessment is essential to sustain the effects of adaptation models.

Author teaches finance at the IIM Bodh Gaya (Views are personal)

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