Driving Liquidity into Climate Adaptation and Resilience
By Gemma Lawrence-Pardew, Head of Sustainability, LMA
The growing number of extreme weather and climate-related natural hazards has dominated agendas at global conferences and put pressure on decision makers to establish adaptation and resilience targets.
Despite the importance of adaptation and resilience finance1 in reducing the risks of natural hazards, current levels are well below what is called for in response to the climate crisis. In this article, we explore how market led initiatives such as the “Guide for Adaptation and Resilience Finance”2 (the Guide) are looking to mobilise private finance.
1. Adaptation and resilience are defined in the ‘Guide for Adaptation and Resilience Finance’ on page 8. 2. Standard-Chartered-Bank-Guide-For-Adaptation-And-Resilience-Finance-FINAL.pdf (sc.com).
A Growing Phenomenon
Extreme weather and climate-related natural hazards have had a devastating impact on livelihoods and businesses through damage to supply chains. As global temperatures rise so to do the frequency of natural hazards, contributing to the significant economic and social costs of climate change.
Borrowers are becoming increasingly aware of the risks of under investing in the climate change response, with the difference in losses between the 1.5°C pathway and business-as-usual scenario expected to grow to at least USD 1.266 trillion. This has driven interest in adaptation and resilience finance, but not fast enough.
January 2024 marked the first time that global temperatures exceeded 1.5°C above pre-industrialised levels for an entire year. This critical juncture suggested that finance for adaptation and resilience was likely to become much more pressing for corporates and public institutions.
Call for Collaboration
The Guide was produced by Standard Chartered, KPMG and the United Nations Office for Disaster Reduction, with the LMA acting as a secondary reviewer, in response to the COP28 call for collaboration to protect people from the impacts of climate change. It sets out a common reference for adaptation and resilience to support investment, alongside an indicative list of adaptation and resilience activities.
“Standard Chartered operates in over 50 markets, most of which are low income, and 90% of which are coastal. Capital just isn’t flowing towards sustainability in emerging markets, and when it does, it is mostly earmarked for mitigation and not adaptation.
Adaptation and resilience are huge areas of risk for markets and financial institutions. But, it also presents a real opportunity with every USD 1 spent on adaptation this decade generating a potential economic benefit of USD 12 – highlighting the significant economic pay-off of early action towards adaptation and the potential gains for investors.
The Guide aims to unlock private sector capital flows into adaptation and resilience and build a common set of definitions of what the investable universe is. The Guide also sets out a process for assessing that there is both a substantial contribution to adaptation and resilience and also that potential for maladaptation and significant harm to other sustainability objectives is adequately mitigated. For the first time also, the multiple co-benefits of adaptation and resilience have been analysed and documented, allowing for large scale interoperability across different sustainability thematics including nature and social outcomes.”
Alex Kennedy – Head of Sustainable Finance Solutions at Standard Chartered
Identifying the Barriers
The guide sets out two perceived barriers to private finance for adaptation and resilience including:
(a) limited revenue streams for many adaptation and resilience investments; and
(b) long investment horizon and size of adaptation and resilience projects.
The real barriers centre around the need for greater education on the benefits of investing in adaptation and resilience, and the barriers which have limited issuance of sustainable finance more generally, including a lack of data and standard definitions.
The Solution?
Integration of natural hazard risk management into the mandates and decisions of key stakeholders within the financial system; utilising a diverse range of financial tools; clear presentation of the business case for adaptation; engagement with governments and regulators; and blending the use of philanthropic, private and public capital is all vital to boost natural hazard adaptation and resilience.
The development of a framework for natural hazard and disaster information – including data, disclosures, metrics, and alignment strategies to promote market transparency and integrity is highlighted as a key issue. The Guide states that this should take the form of an adaptation and resilience taxonomy or classification system in order to provide a consistent and common language for investment activities.
The Guide goes on to set out high-level screening principles to aid the categorisation of natural hazard and resilience investments, and recommends that borrowers and issuers of adaption and resilience financial products should develop a framework to detail the use of proceeds for adaption and resilience activities. Most importantly, and likely helpfully, for the market, the Guide offers an indicative list of adaptation and resilience investments relevant to investors and financial institutions, to help determine eligible uses of proceeds to contribute to adaptation and resilience outcomes.
Looking Ahead
The market needs to mobilise finance into adaptation and resilience investments, a failure to do so resulting in substantial costs to the natural world and those that live within it. Now it is for market participants to utilise the Guide, and recognise the potential of adaptation and resilience as investable asset classes, to address the shortfall of finance on offer.