How important is adaptation finance for a just transition?
Preventative measures for climate change are in the spotlight as COP27 begins. But finance needs to be directed at adapting to the damage that is being caused. Here, Investec’s Global Head of Sustainability Tanya Dos Santos explores the role of adaptation finance.
Over the past two years, the term ‘just transition’ has entered conversations about sustainability. However, the concept of a 'just transition' is believed to have originated in the 1970’s North American trade unions from Tony Mazzocchi, a US labour and environmental activist. Mazzoocchi had campaigned for the creation of a ‘superfund’ for workers who had been exposed to toxic chemicals over decades of employment. The fund would provide them with minimum incomes and education benefits to enable them to transition away from their unsafe jobs. The term 'superfund' was then seen to have too many negative associations, so it was changed to 'just transition'.
What does this have to do with climate adaptation? Everything. The climate crisis is directly linked to mankind’s insatiable appetite for minerals and natural resources, of which fossil fuels is one. The burning of fossil fuels for decades has accelerated the amount of greenhouse gas (GHG) emissions in the atmosphere which is disrupting the ecosystem we rely on for sustenance as a species. It is for this reason that we are under massive pressure to transition away from carbon-intensive fossil fuels as our primary source of energy to a mix of low-carbon and renewable energy sources. This process is known as a climate mitigation measure. But there are also climate adaptation measures which are far less known or understood.
What is climate adaptation?
Adaptation focuses on building resilience to limit or eliminate the negative and intolerable impacts of climate change on lives and livelihoods. Adaptation measures include relocating communities who are at risk.
The risks include a steady deterioration in the environmental conditions required for daily living, for example access to water, energy, air quality and tolerable working temperatures. They may also arise because of short-term shocks, such as storms, floods and wildfires which often have abrupt and devastating consequences.
The impact of climate change is felt acutely by less developed countries that have less resources to fund mitigation and adaptation.
Africa is seen as the most vulnerable continent, with its increasing frequency and severity of climate-related shocks. Southern Africa has been living through prolonged drought conditions for a number of years and cyclones impact millions of people in Mozambique, Malawi, and Zimbabwe. West and Central Africa are also experiencing temperature increases and reduced rainfall. In East Africa, locust swarms cause severe crop destruction across Ethiopia, Somalia, and Kenya. There is a pressing need to support people, small and medium businesses, municipalities, corporations, financial players and governments in building resilience to these climate impacts.
COP26 explored how more developed countries could support less developed countries – including those in Africa – with this task. This is because many larger economies have grown as a result of industrialisation and fossil fuel use that contribute to climate change. At COP27, there will be renewed calls for funding commitments from wealthier nations that support adaptation, at a time when these more developed countries are investing in their own transitions in response to the energy crisis. The support of more developed countries in helping less developed countries with climate-related issues, is described by advocates as a ‘just transition’.
How can we address climate impacts with finance?
Currently, the global climate finance needed to address climate issues remains severely lacking, despite many pledges from the developed world at recent Conference of Parties (COP) meetings.
Historically, financial support has been predominantly directed towards reducing emissions and climate mitigation measures rather than to adaptation. Data from the Organisation for economic Co-operation and Development (OECD) and published in 2020, shows that only 33% of climate-related finance commitments to Africa are targeted at adaptation.
Furthermore, adaptation finance tends to be in the form of loans that need to be repaid. This increases the debt burden for developing countries who have limited public finances available for adaptation measures. These countries require grant-based funding from a climate justice perspective which argues that vulnerable, less-developed countries have had little responsibility for climate change and should therefore be financially assisted by the developed world.
Public spending and grants alone cannot meet the adaptation finance gap. Private sector investment is needed alongside public investment to supplement limited public resources. A wider range of funds are needed to mobilise further investments to build climate resilience. Financing options range from highly concessional terms with lower return expectations and longer tenors to commercial terms with market-related returns and shorter tenors.
Development Finance Institutions (DFI) also play a critical role in adaptation finance. They evaluate climate risks and vulnerability while assisting country governments to build capacity and help to draw in private capital from commercial banks who are restricted by international standards set by Basel II and III regulations for capital adequacy. Besides providing further capital, commercial banks are able to leverage their critical banking relationships with farmers, co-operatives, and SMEs – all who contribute valuable adaptation solutions.
Historically, financial support has been predominantly directed towards reducing emissions and climate mitigation measures rather than to adaptation.
What are the barriers to adaptation finance?
There are many challenges and barriers to adaptation finance that must to be addressed. These include regulatory barriers and a dire lack of robust climate data. According to the Stockholm Environment Institute, agriculture and water supply and sanitation account for half of all adaptation commitments to Africa. Support to the basic development of sectors, such as education or health, is negligible in comparison and only a small fraction of adaptation-related funding targets biodiversity.
To be effective, adaptation finance requires a number of key factors to be considered, such as currency stability, strength of debt capital markets, insurance and risk management, the policy environment and sovereign credit ratings.
This also provides many adaptation finance opportunities. For example, there is potential to help highly indebted countries through ‘general purpose’ debt financing linked to climate and nature key performance indicators (KPIs). This concept is similar to a corporate sustainability-linked loan but at the national level. Debt challenges could also be addressed by linking credit ratings with a reduction in climate risk to incentivise resilience and lower the cost of debt. For less debt distressed countries, the best instrument would be general-purpose performance bonds for climate and nature. When considering all these financing opportunities, it is important to ensure that adaptation funding reaches the most vulnerable and supports equitable development.
Until his death in 2002, Mazzocchi sought to mobilise the just transition campaign and mitigate inequitable effects on livelihoods caused by transformations in energy systems and resource use. Two decades later, we have never been more acutely aware of the need for a just transition.
Decisions made now regarding adaption, including infrastructure, research and finance, will affect how climate impacts play out in the future. It is clear that immediate and ambitious action is needed across the full range of potential adaptation finance sources to respond to present and oncoming climate impacts and to building a more climate-resilient equitable and liveable future.
Individuals can help by choosing to work with accountable suppliers and organisations that contribute meaningfully to the discussion and funding of sustainability initiatives.