In an interview with ESG Investor, Dr Nicola Ranger, Director of the Global Finance and Economy Group and the Resilient Planet Finance Lab at the Environmental Change Institute, says financial institutions’ understanding of climate adaptation has accelerated over the past three years.
[Previously] financial institutions saw adaptation as an issue for government, not the private sector, because adaptation is all about upfront costs and long-run benefits. However, their perspective has changed greatly in recent years.”
Several working groups have laid the groundwork in explaining adaptation, including those under the UN Environment Programme Finance Initiative and the UK’s Climate Financial Risk Forum (CFRF). As a result, financial institutions have progressed from risk assessment and management within their organisations to exploring potential market solutions and business opportunities.
Dr Ranger highlights concerted efforts in developing adaptation taxonomies, which are lists of activities that can be classed as having a major contribution to adaptation.
The EU Taxonomy was one of the first to incorporate adaptation and now there are more than 30 adaptation taxonomies around the world, which has been important for financial institutions to see what an adaptation investment looks like.”
The Climate Bonds Initiative, for example, recently expanded its green bond taxonomy to cover adaptation and resilience.
While there’s still a long way to go in terms of mobilising adaptation finance, financial institutions are proactively asking to be part of the solution. Dr Ranger added: “They see an opportunity but need governments and policymakers to [create the right environment for investing].”
Clear road map
A recent CFRF report, co-authored by Dr Ranger, identified several challenges in terms of increasing efforts to mainstream adaptation and scale-up financing. She said: “Governments need to describe what ‘good’ adaptation looks like for their country and its industrial sectors.
“Adaptation is much more complex than mitigation, where it’s easy to show that investing in a power plant with emissions below X is a good outcome, for example. Thus, well-defined guard rails are important to help financial institutions verify that specific activities are supporting adaptation.”
Fundamentally, mobilising finance for adaptation is all about policy, Dr Ranger argued. “Financial institutions say that having that right policy environment in place will enable the finance to flow. However, policymakers don’t fully understand how to engage with financial institutions around adaptation.”
For example, the UK government has focused on getting the private sector to fund flood defences. But while the private sector is unlikely to do so directly for “many good and economically sound” reasons, according to Dr Ranger, financial institutions will support clients with their adaptation efforts, particularly in infrastructure and agriculture.
“Policymakers should ask financial institutions to use existing products to help their current client base adapt, effectively mainstreaming adaptation finance opportunities. That would be a much more constructive dialogue.”
Several countries have taken the lead in developing policy road maps, including the US, which published a new resilience strategy in September that focuses on setting an enabling policy environment and investing in data. Rwanda has also set out clear goals in its Vision 2050 to support both mitigation and adaptation.
Dr Ranger added: “There are a few examples of governments taking the right steps, but we need that enabling approach to become more widespread.”
Global public goods
Blended finance facilities, combining public and private funds, reached a five-year high of US$15 billion in 2023, according to Convergence’s State of Blended Finance 2024 report. Dr Ranger said:
We often talk about needing more blended finance in adaptation, as these types of investments tend to have a ‘public good’ aspect. But while blended finance facilities are often allocated to infrastructure or agriculture, it’s difficult to find ones that prioritises adaptation.”
This missing piece in the financing architecture means that financial institutions aren’t receiving the appropriate incentives and support to get more involved in adaptation. Dr Ranger added:
This is a relatively simple thing to change – with hundreds of millions of dollars flowing through these facilities, it should be easy to add adaptation as a key goal.
If we are damaging natural capital, we will undermine adaptation. Therefore, multilateral development banks (MDBs) should think about how they can support countries to build nature resilience, in addition to ensuring that a new bridge is climate-proof.”
While acknowledging the World Bank’s progress in the adaptation space, such as Resilience Rating System and Country Climate and Development Reports that include adaptation, Dr Ranger would like to see the MDB ensure that all its blended finance facilities prioritise adaptation. “Infrastructure facilities should highlight adaptation and nature as well,” she added.
Adaptation leads to both regional and global public goods, according to Dr Ranger. The Oxford Programme for Sustainable Infrastructure Systems, (OPSIS) part of the ECI, has studied the UK’s dependence on global infrastructure systems and supply chains, and how the country is affected by disruption. These present significant risks to the UK, which have been brought to the attention of the Cabinet Office. Dr Ranger said:
When we invest in resilience in developing countries, the UK also benefits. That is one motivation for the country to invest in resilience, but it is also important for institutions like the World Bank and IMF to be putting more of their concessional finance into delivering these global public goods. There’s a clear rationale for adaptation, resilience and nature.”
Embedding nature
The ECI is pushing for more financial institutions to recognise the materiality of nature-related financial risks. It published a study in April with the Green Finance Institute and other partners that illustrated how the UK , for example, could potentially see a 6% to 12% decrease in GDP due to the deterioration of the country’s natural environment. Dr Ranger added:
Financial institutions haven’t internalised the nature risk message as fully as climate risk, although the research shows that nature can be at least as big a risk as climate. We need to get both financial institutions and policymakers to integrate nature and climate when they’re thinking about risk.”
The recent COP16 in Cali in Colombia was a key moment in addressing this issue, as it was the first time leaders came together since the historic signing of the Kunming-Montreal Global Biodiversity Framework two years ago.
While progress was made in some areas, including on voluntary levies on corporates that benefit from genetic information from plants and animals (the so-called ‘digital sequence information’) paid to a new fund to support conservation, there was disappointment at the lack of progress in other areas. By the summit’s end, only around 20% of the parties had come up with the new biodiversity plans that they had committed to producing.
In addition, finance was a key bottleneck in Cali, according to Dr Ranger:
With only six more years to 2030, we need a radically new approach to addressing the financing gap. Fundamentally, we need to rewire our financial system to integrate nature-related risks, dependencies and opportunities into financial decisions, and this requires action not just from financiers but also from governments, regulators and international financial institutions.”
Read the ESG Investor interview [paywall] in full: The Value of Investing in Resilience