PROADAPT: How do we grow the market for climate resilience finance?

Article by GCAP's Tom Downing for the IDB/NDF PROADAPT Private Markets for Climate Resilience project (repost via PROADAPT)

Global investment in climate adaptation is currently running around $25 billion per year. How much finance do we need? Can we get ahead of the game?

The urgent challenge is to grow the market. The Green Bond and Climate Bond markets released figures for 2017 of about $350 billion and are each looking for $1 trillion as realistic goals. The emerging market shown above is benchmarked at $22 billion investment per year from publicly tracked funds (see the Climate Policy Initiative’s Global Landscape of Climate Finance 2017).

Three pathways are widely promoted.

• The most common pathway is to reduce the risk of weather-related disasters. Average costs of disasters have been running around $200 billion per year. However, the past year is at least double that and we can expect the economic costs of disasters to increase, due to an increase in both the severity of hazards and increased economic development in exposed areas. Globally, about half of the economic cost of disasters is insured. So a clear gap is to finance the uninsured losses—there are many strategies for doing that. The target for this pathway will continue to grow. One estimate places $2.5 trillion of total financial assets at risk in a business-as-usual scenario.
• Reducing the impact of extreme events is part of the larger pathway of climate finance, shown in the top stream above. This pathway starts with the benchmark of over $400 billion in climate finance and includes both mitigation and adaptation, of which only 5% of current climate finance is devoted to adaptation. Political commitments target a public fund of $50 billion per year for resilience by 2020 or so. Yet, the total cost of climate change impacts may be $1.7 trillion per year by the 2030s to 2050s and so there is a considerable gap ahead. The cost of adaptation to prevent the projected climate damages remains difficult to estimate.
• Investment strategies for Sustainable Development and impact investment go beyond disasters and embed climate resilience into broader sustainability and green economy opportunities. This is the largest investment stream at present that is closely related to resilience—transformation in the green economy and achieving the Sustainable Development Goals. Estimated expenditure of $1 trillion at present should grow somewhat over the next 20 years to achieve the SDGs. Climate resilience is part of the SDGs and there are ways in which climate-smart investment achieves multiple objectives with cost savings.

What is the goal for climate resilience investment across these three pathways? A not implausible estimate is that the market for climate resilience products and services may reach $1 trillion per year within a decade or two.

As we move from market construction to an emerging market, interest in private sector investment in climate resilience is moving rapidly to the fore. New actors look for new opportunities for selling services, launching products and Big Data, and much else. Svante Persson, coordinator of the PROADAPT Program at the IDB notes, “We are seeing a growing demand for climate resilience projects in Latin America and the Caribbean due to increasing extreme weather events and that businesses see the benefits and opportunities in becoming more resilient.”

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Private Markets for Climate Resilience (PMCR)

Private Markets for Climate Resilience is an assessment of risks and opportunities for companies and investors. This project, established by the PROADAPT program in the Inter-American Development Bank in collaboration with the Nordic Development Fund, is the first major investment by Climate Finance Institutions to systematically evaluate the potential market for climate resilience solutions in the private sector. Focusing on transport and agriculture, this initiative seeks to examine current best practices and investigate the opportunities in this emerging sector by identifying the leaders that will shape the emerging market, highlighting products, services, tools and innovative processes, creating an information platform with emerging opportunities for investment, and identifying companies that are candidates for investment.