It is against this backdrop that political leaders meet this month at the UN COP27 in Egypt. Developing countries, increasingly dismayed by the lack of support from developed countries to address ever apparent physical climate risks, have placed climate adaptation and its financing as a key negotiating point for COP27.
Climate adaptation refers to adjusting to and preparing for the changing climate – improving infrastructure to manage floods and rising temperatures, for example, or building resilience in natural ecosystems, cities and communities. The extent of action taken to address climate mitigation1, will directly impact the extent of climate adaptation required in the future.
Nevertheless, the climate pathways explored in the IPCC 6th Assessment Report on Climate Change, estimate the planet will still be exposed to a changing climate for decades to come due to the existing concentration of greenhouse gas emissions in the atmosphere. Despite this risk, there is a significant skew to climate mitigation in climate finance flows, with only 7% of all climate finance allocated to adaptation in 2021, according to a study by the Climate Policy Institute2. Within the green bond market, the Climate Bonds Initiative estimated 4% of green bond use of proceeds were allocated to adaptation and resilience in 2021, up from 2% in 20203.
Climate adaptation solutions within our Environmental Solutions strategies constitute a small proportion of the investment opportunity set. A bias to public expenditure and developing markets, insufficient scale and knowledge gaps represent constraints. However, we expect the opportunity set to grow with increased policy level awareness alongside a broadening of conceptual understanding of adaptation and growing focus from private sector corporates as they address climate risks within TCFD reporting obligations. Water and Agriculture are likely to be key areas of focus, as illustrated in the chart (below) showing the two sectors as the most prominent of the World Bank country recommendations for adaptation action.
Distribution of adaptation and mitigation recommendations, by sector
Source: World Bank Group report, Climate and Development: An Agenda for Action. Available at: CCDR-SynthesisReport.pdf (worldbank.org)
Take the global food system for example. It contributes to 24% of global emissions4 and is a major contributor to freshwater depletion and deforestation. Policymakers are faced with the tough task of determining how to decarbonise the global food system, while at the same time people are struggling to afford their grocery bills. Solutions will have to come from a multitude of options across both the supply and demand side, as outlined in the chart (below).
Food systems emissions trajectory and mitigation potentials by transformation domain
Source: 2022 UN Environment Programme (2022) Emissions Gap report: The Closing Window – Climate crisis calls for rapid transformation of societies. Available at: Emissions Gap Report 2022 (unep.org)
One type of organisation that embeds intersecting development and environmental factors into its operations are development banks. These institutions will play an increasingly prominent role in the deployment of climate finance, as developed countries potentially look to them as a mechanism to honour their climate finance commitments to developing countries. Adaptation financing is gaining in prominence within their strategies, as demonstrated by the International Bank for Reconstruction and Development’s (IBRD) target to have at least 50% of climate finance allocated to adaptation within its 2021-2025 Climate Action Plan5.
Within the fixed income component of our strategies, we invest in the green bonds of development banks. These instruments provide a lens to individual projects as determined by their Use of Proceeds. This allows us to observe and assess how adaptation finance is deployed. For example, the green bonds issued by IBRD include the financing of an integrated irrigation system for climate resilient agriculture in Odisha, India. This project cuts across food security, climate mitigation and adaptation, highlighting its role in delivering across multiple policy fronts. This growing strategic importance in turn underpins the resilience in their credit investment profiles. Solving environmental challenges at pace will define this decade and likely the 21st century. Governments globally are recognising the role of the financial sector in meeting these challenges, as the transition is set to require unprecedented public and private investment to develop environmental solutions technologies to mitigate and adapt to climate change and restore natural capital. COP27 does not in itself represent a catalyst for transformational change, but successful negotiations would make an important contribution to building on the ongoing drumbeat of progress.
1 Climate mitigation refers to actions taken to reduce the stock and flow of greenhouse gases in the atmosphere.
2 Climate Policy Initiative. Global Landscape of Climate Finance 2021. Available at: Global Landscape of Climate Finance 2021 – CPI
3 Source: Climate Bonds Initiative.
4 WWF and UNEP. Enhancing NDCs for Food Systems. Available at: 200814_WWF_NDC_Food_V12.indd (panda.org)
5 World Bank Group, Climate and Development: An Agenda for Action. Available at: CCDR-SynthesisReport.pdf (worldbank.org)
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