Investing in Adaptation

A couple of things have crystalized for me over the last couple of months, driven primarily by work with several Multi-Lateral Development Banks (MDBs), and further developed this week with exposure to a very bright group of investment managers looking for ways they can identify opportunities for adaptation for SMEs in Nepal and Bangladesh.

The first is the importance of framing spending on adaptation and resilience as an investment with a potential return and not just a cost. The default position is of adaptation as an additional expense for a project, which naturally puts programme and fund managers on the defensive. Making the case that this is expenditure which can protect investment, and potentially increase returns, completely changes the equation. More broadly there’s a lesson here on how we communicate and engage with those outside of our community; I love double loop learning and robust decision frameworks as much as the next person, but we also need to comfortable talking about Return on Investment, Internal Rate of Return and marginal costs!

For many of us this is uncomfortable territory, and may mean confronting our own prejudices and assumptions about finance and investment. However, and this is my second point, the volume of money involved is truly enormous, and creates a real opportunity to design programmes and investments which increase resilience and contribute to sustainable development.

The MDBs have annual portfolios of several hundred billion dollars, and are generally committed to spending 25-30% on climate finance by 2020. Now mitigation accounts for a large portion of this (around 75%), but in part that’s because it’s easier to spend money on mitigation. It feels to me that MDBs, as well as the group on our Climate Resilience for Investment Managers course, are crying out for ways to increase their investment in adaptation*. On a personal level, work with the MDBs feels very rewarding; helping design procedures to ensure that projects are more climate-resilient feels like a very tangible impact.

There are clear questions here: how do we ensure that this is transformative, and doesn’t simply entrench existing inequalities? Are we content in trying to make the investments we have already more climate resilient, or can we start to structure finance and investment in a way that leads to the sort of transformative change in economies which will be needed? In this respect the increasing flow of finance into renewable energy, and the growing divestment movement, provide pointers. If we can make a convincing case for adaptation to financial institutions and investors - and yes this might mean designing instruments which allow investors to make money from adaptation – then the potential investment is huge.

So a question to end with; with a blank cheque, how would you spend your money to create a prosperous, happy, and climate resilient economy?

* Shameless plug – this is part of what we’re trying to do in our Private Markets for Climate Resilience project.

Cover Photo: Abstract, mlfeatherstone