John Shum in Singapore shares his insights on the state of adaptation finance – and why standards and government initiatives are needed to help mobilise capital to the space post-COP28.
One of the significant – and celebrated – outcomes from COP28 was the Global Goal on Adaptation. This includes a consensus on targets and a framework to reach them. The Adaptation Fund received almost US$190m in new pledges.
In this post, Singapore-based banking & finance partner John Shum shares his insights on the state of adaptation finance. Are investors backing adaptation projects? Will 2024 bring the boost needed to reach targets?
Part of this insight originally ran as a quote in a Reuters story on COP28 outcomes. For more insights, subscribe to KWM Pulse using the button below.
‘Pure’ adaptation finance is (very) undeveloped
Funding for efforts to build resilience and protection from climate impacts is still dramatically lower than the levels needed to help people and land at risk. The 2023 Adaptation Gap Report released by the United Nations Environment Programme (UNEP) in November highlighted how serious the problem is: a funding shortfall of between US$194-366b a year, despite increasing weather extremes. The focus is usually on public funding, but private finance is a key source to bridge the gap – something UNEP flags.
But lenders are finding it challenging to see the returns that can be made in this sector. There are insufficient incentives for lenders at the moment. The “social” goals and standards (the “S” in the ESG) in most industry benchmarks are designed to reduce the negative social effects of a particular project, rather than recognise the need to mitigate the social effects of climate change generally.
This is having the knock-on effect of boosting flows elsewhere – like the energy transition. With limited capital available, industry players are deploying more capital into the “safer” areas of green, sustainability and transition finance, which have more immediate returns and tick the boxes for current benchmarks and standards.
Lenders need more incentives – and a longer term view
Updated standards are needed to incentivise lenders to finance adaptation projects without falling foul of their regulators, shareholders or other stakeholders.
Governments need to get more involved in identifying adaption projects and bringing together key players: the sponsors, the companies with the technologies and the financiers.
Private companies and investors need to consider adaptation projects more holistically and with a long term lens. And perhaps tied with other green or sustainability projects. This would include encouraging projects that mitigate risks to their existing businesses or investments (because of immediate geographical concerns or indirectly protecting their supplier or customer base) and attracting capital to support those projects. One way to achieve the latter would be to offer credit support on a cross-business, or portfolio basis.
Return on investment is critically important to boost adaptation finance
Without economic benefits it is difficult, if not impossible, to incentivise holders of capital to make investments.
With enough government support, and a longer term and wider outlook from investors, business and lenders, a reasonable return should be achievable. And this in turn should attract the necessary funding.
We are watching developments in this space, particularly attractive government policies and incentives.
For more insights on sustainable finance, see:
