Trillions are being committed to climate mitigation, but what about climate adaptation?

One of the most unexpected announcements at November’s UN Climate Change Conference (COP26) came not from a government but from a staggering private sector investment pledge: the GFANZ group, a coalition of private financial institutions, announced that financial sector commitments to net zero now exceed $130 trillion.

This and other COP26 commitments must now be put into action. This year’s World Economic Forum Annual Meeting provides an opportunity for leaders from government, civil society and the private sector to begin devising actionable roadmaps for scalable climate solutions. To maintain momentum from COP26, these leaders must not lose sight of an important question: since it is now too late to focus only on reducing emissions, how will we help the most vulnerable adapt to a warming planet?

Addressing climate adaptation, not just mitigation

Farmers from Central America to Africa are already watching their crops wither on the vine due to prolonged drought, while others see their harvests washed away during increasingly unpredictable flooding. Largely, these communities are in the Global South and are responsible for only a fraction of global emissions—the entire continent of Africa contributes just 3.7%, for example.

To avoid the worst fallout from the climate crisis, more funding must be dedicated to helping people adapt to climate change. The world needs to invest an estimated $5.7 trillion annually in green infrastructure and other adaptation and mitigation efforts. This will require a generation-defining level of creativity and commitment, not just from governments, but also from the private sector.

Boosting private sector funding

Traditional funding sources — government agencies, foundations, and multilateral institutions like the UN and the World Bank — have long been the primary way to tackle entrenched global development challenges like poverty, food insecurity and conflict. But tackling the climate crisis will require options beyond these institutions’ typically discrete, time-bound projects, as well as an appetite for risk that is better suited to the private sector.

The cost of climate adaptation could reach $300 billion per year by 2030, according to a report by the World Bank Group and the Global Facility for Disaster Reduction and Recovery. While investment in climate adaptation is trending upward across private and public sources, less than 2% – or about $500 million – of adaptation finance currently comes from private sources. Furthermore, private adaptation investments are primarily going to higher-income countries and not the lower-income countries where communities are trying to survive the impacts of the climate crisis today.

Supporting climate action innovation

Climate action entrepreneurs in frontier markets are rapidly devising marketable solutions to help vulnerable communities cope with the consequences of the climate crisis. They need the capital and support to de-risk these projects for larger commercial investors and to unlock capital flows at a large scale.

Some investors are leading the way. Union Square Ventures launched the $162M USV Climate Fund dedicated to climate mitigation and adaptation solutions last year. But mainstream venture capital has been slow to see how big the climate market opportunity is, leaving much opportunity untapped.

Mercy Corps Ventures, my organization’s impact investing arm, seeks out early-stage startups in frontier markets, taking on risk that other investors often won’t. Projects we have invested in include an artificial intelligence-enabled platform that allows governments and insurers to accurately assess, price, transfer and respond to catastrophic flood risk; a company supplying microinsurance to climate-vulnerable smallholder farmers in francophone Africa; and a venture providing hyper-local weather forecasts to farmers in the tropics.

These investments are helping individuals and communities adapt and thrive in the face of climate change. They also showcase what’s possible when the social entrepreneurs creating climate adaptation solutions are connected to catalytic financing.

Encouraging information flow

To ensure that capital flows to the most impactful solutions, investors also need access to information and insights on the ecosystem. The Global Adaptation & Resilience Investment Working Group, launched at COP21 in Paris in 2015, provides private investors and other stakeholders with briefings and connections around the practical intersection of investment and climate adaptation and resilience.

The just-launched Insurtech Series guides investors through considerations in scaling crop microinsurance, a service with transformative potential for the more than 600 million climate-vulnerable smallholder farmers around the world.

A step-change in climate financing from the private sector can also catalyze institutional donors to pursue unconventional funding structures. Some of this is already happening. For example, the US Agency for International Development’s Private Sector Engagement policy has created a new mandate for USAID Overseas Operating Units to increasingly work with the private sector in country operations. AFD, the French development agency, has a seed fund for digital startups in Africa and is allowing grant funds to be used for equity investments. We need to see much more of this in the years to come.

Climate adaptation is a smart investment strategy

Climate change is the defining challenge of our generation. Mitigation is critical to the survival of our planet, but failing to fund adaptation will result in a huge economic toll and widespread increases in poverty. This will severely undermine long-term global economic prospects and the recovery from the pandemic.

With the right capital, entrepreneurs can confront this critical moment head-on. Climate adaptation done right will save lives, reduce inequality, and create opportunities. Crucially, climate adaptation is not only the right thing to do, it is a smart investment strategy. Proactively creating the inclusive, climate-smart ecosystems of the future will put any company at an advantage. The question is: who is going to step up to do it?