4 reasons why blended finance is our best bet in adapting to climate change

The recent heat waves and devastating floods in Europe are just some of the warning signs of what is to come, making adaptation to climate change urgent and imperative in order to save lives and economies.

Over the past decades, South Pole has been fully focused on mitigating climate change. Our teams developed solutions and market-based mechanisms that have helped reduce over a gigaton of CO2 emissions, working together with partners to scale up action.

But we now realize that this is not happening fast enough globally, and we need to also focus on adaptation. We no longer have the luxury of time to address climate change only by lowering greenhouse gas emissions. Our new reality forces us to quickly protect vulnerable communities before they are severely impacted by the tremendous consequences of a warming planet.

That is why, together with the World Wide Fund for Nature (WWF), the Global Environment Facility (GEF) and luxury brand Chanel, South Pole launched the Landscape Resilience Fund – a public-private partnership that will finance adaptation in landscapes where communities are most vulnerable to floods, droughts and other climate-related risks.

The Landscape Resilience Fund uses a blended finance approach, which we believe is the most effective way to galvanise leaders to take on this huge task of global climate change adaptation – and, more importantly, close the yawning adaptation finance gap. Blended finance means the use of public and philanthropic finance to mobilize private capital flows.

Here are four reasons why we use a blended finance approach:

1) Both private and public sectors benefit from investing in adaptation

In most cases, adjusting to climate change creates direct private benefits. Farmers and companies are already adapting agricultural practices and operations to changing temperatures and rainfall patterns, simply because it makes business sense: smallholder farmers, especially those in developing countries, are the most vulnerable to the effects of climate change yet they produce 80% of agricultural output, putting many supply chains at risk.

In the words of Andrea d'Avack, Chanel’s former chief sustainability officer: “Chanel’s involvement in the Landscape Resilience Fund provides an opportunity to explore different approaches and methodologies that could help advance changes in our own supply chain and business practices as we progress on our own business transformation.”

At the same time, adaptation measures will also create public benefits. For example, investments in adapted, early warning systems against floods or in more accurate weather data, provide a value-add to the overall economy and society. Germany, for example, would have been able to better prepare for this year’s catastrophic flooding with improved flood alert systems.

Finally, there are plenty of situations where investments in adaptation – in the form of climate-smart agriculture, climate-resilient infrastructure or better climate-monitoring technology – create both private and public benefits. This is when blending finance is so important: commercial capital can unlock private goods, soft capital unlocks public goods, and blended finance can enable solutions and investments that benefit both businesses and the public.

2) Blended finance allows for better risk management

Blending finance is a proven approach for optimised risk management. The private sector is well-equipped to manage project implementation risks, but may not be best suited to take on policy risks or investments in innovative approaches that competitors can easily replicate.

The Landscape Resilience Fund is an example of how blended finance can optimise risk management. Private small and medium-sized enterprises (SMEs) take on the implementation risks of projects with cocoa growers and rattan harvesters, which help them access better farming materials, such as drought-resistant seeds, as well as training. In addition, public and philanthropic funding from the Landscape Resilience Fund absorbs risk through technical assistance, and provides venture debt with favourable conditions, turning risky investments into good business cases.

3) Public finance is woefully insufficient to meet adaptation finance needs

The third reason for favouring blended finance is a very practical one: we just need it! To begin with, just 5% of overall climate finance goes towards climate adaptation – and virtually none of it comes from the private sector. Of the tracked adaptation finance, over 95% or around $30 billion per year is public. And this is just a drop in the ocean when considering the projected costs for adequately financing adaptation over the next decade is a whopping $140 billion to $300 billion per year for developing countries alone.

Public finance for adaptation is expected to increase over the next decade, but so will the scale of adaptation challenges. Financing needs can only be met if scarce public finance is spent in a way that helps mobilise scalable sources of capital from the private sector.

The Landscape Resilience Fund is a great example of how to achieve this: an initial commitment of $1.3 million by the GEF helped mobilise $25 million of private finance from Chanel, which in turn is now catalysing even more private investments from SMEs and other investors.

4) Blended finance can nudge the private sector to invest in adaptation

Blended finance can address multiple barriers holding back private sector investments in climate change adaptation: not all innovations can be protected with patents, and so private actors cannot harvest all returns – which leads many to underinvest without public finance backing. Many businesses also prefer to follow industry standards and need pioneers to blaze the trail on adaptation-related investments. Under the Landscape Resilience Fund, Chanel – supported by public finance from the GEF – has taken that leadership position by committing to financing adaptation in 2020.

With so little time left and so much to gain, we need to learn about how to prepare for the colossal climate challenges that are yet to come. We hope our approach to public-private blended finance will inspire other multinational companies, development banks and climate funds to invest in protective measures that ensure the climate resilience of their supply chains and the global economy.