COP27: How climate finance and adaptation can support vulnerable countries

As the first developing nation to host the UN Climate Conference (COP) since Morocco in 2016 (COP22), Egypt is pushing the needs of developing nations to the top of the COP27 agenda, with a focus on climate finance, climate adaptation and loss and damage. To date, the global response to climate change has focussed on climate mitigation — an issue championed by the developed world, which is calling on all countries, not just historical emitters, to make drastic efforts to cut emissions.

Equally, with more than a third (702) of the world’s largest companies having net zero commitments, and 550 financial institutions committing to aligning their portfolios with a net zero world, the private sector is mobilising around global mitigation targets.

However, as Marisa Drew, Chief Sustainability Officer of Standard Chartered Bank, highlighted in a recent interview for the World Economic Forum, there is a growing need to focus on financing climate adaptation efforts. She notes: “The world has largely galvanised around the concept of mitigation, which is reducing carbon emissions. But we must deal with the reality that climate change is here to stay and even with all the best will in the world we're going to have to deal with this. Therefore, we need finance to flow towards the reality that is here.”

Climate adaptation refers to adjustments to an ecological, social or economic system in response to actual or expected impacts of climate change. In practice, climate adaption means countries, businesses and communities investing in measures to respond to the impacts of climate change now, as well as prepare for future impacts. “We need to abandon that misleading reductionist approach that has only focused on one area of climate action to be on the mitigation and the decarbonisation front. We cannot ignore the race to resilience in our race to zero,” says Dr. Mahmoud Mohieldin, UN Climate Change High-Level Champion for Egypt.

At COP26, developed countries agreed to at least double finance for adaptation from 2019 levels by 2025. This equates to roughly $40 billion. At COP27, developed countries must also specify how they will ensure this finance reaches those who need it. This means committing more finance for locally-led adaptation, ensuring local people and organizations, often disproportionately vulnerable to climate impacts, have a say in investment decisions and can access the resources required to build resilience.

The UN’s Standing Committee on Finance, a key committee dealing with climate finance, published four new reports that will inform negotiations at COP27. The reports show that, while there has been an increase in the overall global climate finance flows, key targets to mobilise climate finance for developing countries have not been met. Furthermore, the report identifies innovative solutions to investing in specific projects, such as to include specific investment pipelines in national climate action plans (Nationally Determined Contributions) and scaling up access to climate finance and innovative instruments, such as sovereign guarantees. This sets the scene for COP27 negotiations between governments.

Developing countries also want more public finance and grants instead of loans, as many of the worst-impacted countries face debt crises. Jennifer Morris, CEO, The Nature Conservancy, notes: “A lot of countries are unable to adapt because of increased debt burden. Between 2010 and 2020, the public debt of developing countries increased from 40% of their GDP to an average of 62%. More than a third of that happened in 2020 alone. We have to think of the climate crisis in the frame of the debt crisis as well. Most climate finance – 61% ($384 billion) – was raised as debt, of which only 12% ($47 billion) was low-cost or concessional.

“We know all governments are facing extreme stress. We need that $100 billion to be pledged during COP27, but we also have the potential to bring out some really innovative solutions when it comes to climate finance.”

There is a disastrous nexus between debt and climate vulnerability. The cost of climate-induced damages and lost revenue streams from extreme weather events contributes to higher debt. Tropical countries, particularly small island developing states, are at the frontline of this disastrous nexus. Financing climate adaptation and resilience in the world’s most climate-vulnerable countries through increased borrowing is, therefore, unlikely to be a sustainable option. Currently, adaptation finance is predominantly delivered through grants, while public mitigation finance predominantly takes the form of loans.

We need innovative models to finance adaptation in vulnerable countries. A pioneering example relating to this is the Seychelles' Ecosystem Based Adaption Project. Seychelles was the first country that adopted "blue bonds" which is a novel approach that has allowed a growing number of developing nations to cut their debt by investing in conservation. The project is reducing climate-related vulnerabilities by spearheading ecosystem-based adaptation and putting 30 percent of its waters under protection and providing sanctuaries to vulnerable species. It aims to restore ecosystem functionality, enhance ecosystem resilience and sustain watershed and coastal processes to secure critical water provisioning and flood attenuation ecosystem services from watersheds and coastal areas.

Barbados recently convinced the International Monetary Fund to provide a cheaper loan to help it build its climate resilience. This makes it possible to pay back up to seven-fold in avoided costs when extreme weather events occur. Costa Rica, Bangladesh and other climate-vulnerable countries are set to benefit from the IMF’s new $45 billion resilience trust.

The stage is also set for other non-government actors - businesses, investors and cities - to play an increasingly important role in climate finance and climate adaptation.

Adapting to climate change requires a concerted global response. This includes leveraging innovative forms of blended finance, forging new multistakeholder partnerships and incubating innovative solutions to adapt to climate impacts. Governments, businesses, investors and innovators can partner with communities at the frontline of climate impacts, to ensure they not only survive but thrive in a climate-impacted world.

A good example of this is the Green Climate Fund (GCF), which has invested $3.9 billion across 45 private sector climate projects, attracting co-investment to the tune of $17.5 billion in total private assets under management. GCF was able to use public funds to mobilise over four times the amount of total capital.

“For climate adaptation, we need to have more serious attention to public-private partnerships, which can enhance the private sector's contribution. The private sector globally doesn’t contribute more than 2%,” says Mohieldin. “When we dig into private sector contributions, they mainly come from institutional investors and philanthropies, so there is a great deal of work we need to push when it comes to adaptation.”

To support this private sector engagement, governments can provide clarity by setting National Adaptation Plans (NAPs). These plans enable countries to identify medium and long-term adaptation needs and to develop and implement programmes to address these needs. As of early 2022, 31 developing countries had published NAPs. Private sector engagement in global and national responses to climate change, however, still lags.

The Inter-American Development Bank has released a toolkit for decision-makers aiming to develop public-private partnerships for climate resilience. It captures several instruments used to address climate change issues in the context of infrastructure production that could be integrated into the structure of a multi-stakeholder process from project identification to contract management, identifying options for a low-cost and seamless implementation in a resilient public-private sector partnership model.

The adaptation market could be worth $2 trillion per year by 2026, with the developing world standing to benefit from much of this. Currently, only 1.6% of all adaptation funding comes from private investment — making climate adaptation an untapped opportunity. There is a clear business case for climate adaptation: a 2019 report by the Global Commission on Adaptation demonstrated that investing $1.8 trillion globally in climate adaptation measures, such as early-warning systems, climate-resilient infrastructure and nature-based solutions from 2020 to 2030 could generate $7.1 trillion in net benefits. “If we think about this in the context of a generated market rate of return, a US dollar invested in climate adaptation generates five to seven times that investment in risk or GDP degradation avoided. There's a real economic case here for those investments,” Drew adds.

Businesses must, therefore, lead the charge on driving climate adaptation through enhancing resilience across supply chains and leveraging products, services and business models that help businesses, communities and ecosystems adapt and build resilience to climate risks. Moreover, protecting communities and ecosystems is fundamental to continued social license to operate and the long-term survival of businesses themselves.

“Some of the key areas for investment that we can think about would be early-warning systems, resilient infrastructure and resilient agriculture,” says Marisa Drew. For example, E Green Global is a Seoul, Korea-based agricultural technology company producing the world’s first disease-resistant potato seedlings (microtubers) on a commercial scale. These are higher yield and lower cost than conventional methods. The company promotes climate adaptation by improving crop resilience against changing climatic conditions. It's secured $92 million in contracts to date.

In Madagascar, one of the world’s most climate-vulnerable countries, companies, including Danone, Mars, Firmenich and Veolia, are providing €2 million to help local farmers –representing more than 6,000 hectares of vanilla production – use more sustainable farming practices. These partners help to increase the adaptive capacity of smallholder farmers while managing climate risks in their supply chains.

However, major barriers still exist to scale these best practices. One such barrier to mobilising investors, insurers and companies to scale adaptative measures is a lack of financial incentives and business models for the private sector to invest in adaptation. Upfront revenue streams from adaptation efforts are often difficult to generate as adaptation interventions are mostly designed to reduce the risk of future damages to public goods. Blended finance models, where public funds are used to de-risk private investments, can be a powerful tool to tackle these barriers.

Another roadblock to increased private sector engagement in climate adaptation is a lack of robust data. Governments can attract the private sector to deliver adaptative measures by providing robust data on climate impacts. For example, the UN Global Early-Warning Initiative to Implement Climate Adaptation aims to ensure every person on earth is protected by early-warning systems for climate disasters, such as floods, droughts and other extreme weather events.

The insights from experts quoted in this article were captured from the World Economic Forum’s Our World in Transformation series for our partners and digital members. Become a digital member to gain timely analysis from live expert briefings and publications.

To find out more about how businesses can prepare for climate adaptation, see the World Economic Forum Briefing Paper Critical Business Actions for Climate Change Adaptation