14 Nov 2022
COP27: How important is adaptation finance for a just transition?
Investec analyses this and other critical questions about adaptation finance — one of the key themes of the UN Climate Change Conference (COP27).
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Over the past two years, the term “just transition” has been bandied about as part of the latest woke capitalism movement. In reality, the concept is believed to originate from the 1970s when Tony Mazzocchi, a US labour and environmental activist, campaigned for the creation of a “superfund” for workers who had been exposed to toxic chemicals to enable a “just transition” away from their unsafe jobs.
What does this have to do with climate adaptation? Everything. While we are all familiar with climate-mitigation measures that involve the transition from carbon-intensive fossil fuels to a mix of low-carbon and renewable-energy sources, climate adaptation measures are far less known.
Climate adaptation refers to the climate impacts that come as a result of 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.
Adaptation focuses on building the resilience and protection capacity to limit or eliminate the negative impacts of climate change on lives and livelihoods.
"There's a pressing need to invest in climate adaptation to build resilience and protection capacity to limit or eliminate the negative impacts of climate change on African lives and livelihoods."
Africa is seen as the most vulnerable continent with increasing frequency and severity of climate-related shocks. In Southern Africa, we have been living through prolonged drought conditions for a number of years and cyclones affect 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 invest in climate-change adaptation to support people, small and medium enterprises (SMEs), municipalities, corporations, financial players and governments in building resilience to these climate impacts.
How the private sector can help plug the adaptation-finance gap
The global climate financing needed to address climate issues is 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) 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. We urgently need private-sector investment to scale 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 (DFIs) 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 of whom contribute valuable adaptation solutions.
Challenges to overcome
There are many challenges and barriers to adaptation finance that must be addressed. Investment needs to be activated from an extensive range of public and private sources with many hurdles to be overcome, such as regulatory barriers and a dire lack of robust climate data. According to the Stockholm Environment Institute (SEI), agriculture and water supply and sanitation account for half of all adaptation commitments to Africa. Support to the basic development 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."
To be effective, adaptation finance requires a number of key factors to be considered, such as currency stability, strength of debt capital markets (DCMs), 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 adaptation, 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 build a more climate-resilient, equitable and liveable future.
This article first appeared in Business Day