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As we are witnessing delayed monsoons followed by severe rainfall and subsequent flooding, along with sizzling summers across most parts of the globe with temperatures almost touching 50 degrees Celsius, we are experiencing the accelerating impacts of climate change first hand. This comes against the backdrop of the failure to meet the 1.5 degree Celsius temperature goal set out in the Paris Agreement, with global temperatures projected to exceed 2 degree Celsius above pre-industrial levels by the end of this century. With developing countries grappling with both human and financial resources to deal with these impacts, reports show that the most vulnerable communities in these countries are bearing the brunt of the situation.
Peter Drucker, the management theorist, had once famously quoted, “What gets measured, gets managed”, wherein he argued that the ability to track, monitor and/or quantify something tends to make it more likely to attract notice with actions undertaken to improve it. This phenomenon has been observed to be true in several cases, where a shift from an abstract and vague concept to a well-defined and quantifiable target has produced the desired results. Take, for example, the Montreal Protocol of 1987; it developed a robust monitoring mechanism to measure the concentration of ozone depleting substances (ODS) in the atmosphere that led to collective action taken by the global community. Recent reports show that the recovery of the ozone layer is on track, with the UN-backed Scientific Assessment Panel to the Montreal Protocol on Ozone Depleting Substances quadrennial assessment report confirming the phase out of nearly 99 percent of banned ozone-depleting substances. The key point here is that resolving global issues requires significant amounts of finance, and leveraging finance becomes easier with an absolute target that is well defined and quantifiable as it provides more clarity to investors in terms of the end result of their investments.
The key point here is that resolving global issues requires significant amounts of finance, and leveraging finance becomes easier with an absolute target that is well defined and quantifiable.
The world faces a similar challenge today with regard to finance for climate change. While there are differences between the ozone layer depletion challenge and the climate challenge, the need to be able to measure the progress made, essentially in quantitative terms, is vital for bringing the international community together on this. The issue of climate change is tied to the increasing emission of green-house gases (GHGs) into the atmosphere, thereby leading to substantive warming of the earth’s climate. While ODSs such as chlorofluorocarbons (CFCs) found replacements in other gases that do not affect the ozone layer, we are yet to find GHG alternatives that are economical and viable for use with lesser impact on the earth’s climate. The major challenge in bringing down the emission of GHGs has been the fact that they are linked to production.
Addressing the issue of climate change necessitates two crucial aspects—one, to work towards the mitigation of the issue by reducing GHG emissions; and two, to reduce the impacts of climate change on economic systems and communities. In terms of undertaking action to contain the impacts of climate change, climate finance constitutes a key element—one which is highly contentious in international negotiations. A report by Climate Policy Initiative (CPI) in 2023, showed that global climate finance approached US$ 1.3 trillion on annual average in 2021/2022 compared to US$ 653 billion in 2019/2020. However, significantly more still remains to be done.
Financing adaptation along with mitigation
The contentions among countries in international negotiations with regard to climate finance have primarily been around the concept of ‘additionality’. ‘Additionality’ of climate finance refers to the idea that funds raised for climate change should not be diverted to address other issues, particularly socio-economic ones. The measure of additionality then becomes quite straightforward for activities aligned towards mitigation of climate change as they are measured by one common metric—the reduction in GHG emissions in the atmosphere. But in the case of adaptation to climate change, its localised and context specific nature makes it difficult to arrive at a consensus as to what defines adaptation activities. Climate adaptation is a moving target; one that is also not currently well defined. The current financing gap for adaptation, according to the UNEP Adaptation Gap Report, has been estimated to be in the tune of US$ 194-366 billion per year. The World Bank, at COP28, committed to increase their climate finance to 45 percent of all financing with a 50:50 ratio for adaptation and mitigation. However, it has to be noted that increasing finance for adaptation would require an improved access to grant-based or concessional financing to all developing countries in addition to a significant increase in the financing from non-concessional sources including the private sector.
‘Additionality’ of climate finance refers to the idea that funds raised for climate change should not be diverted to address other issues, particularly socio-economic ones.
Scaling up non-concessional sources of financing in this sector could be a boon but has been severely limited so far due to the overlapping nature of adaptation and development. Investors claim that the lack of clarity of the impact of investments or the ‘additionality’ is a major limitation in this regard. This can then perhaps be addressed with the development of a taxonomy for adaptation action. But, adaptation action, as mentioned previously, is not a one-size-fits-all solution. It comes with dimensions that are affected by aspects such as the availability of local resources, local and traditional knowledge, and local vulnerabilities among other things, thereby making the list endless. For mitigation, there were several approaches too, but the one thing that they all had in common was the ‘end’ result, which was the reduction in GHG emissions. Similarly, such a Machiavellian approach, that focuses on the ‘ends’ of adaptation over its ‘means’ could be a possible way out. While there is a lack of consensus on the exact definition of adaptation to climate change, or what actions come under its ambit, there is a general understanding of its primary objective—to minimise the impact of climate risks on communities and systems. This means that an agreement on what the outcomes of adaptation can be is possible even at the global level. A focus on measuring the outcomes of adaptation in quantifiable terms can be the game changer that this sector needs.
Result Based Financing (RBF) for climate change essentially implies tying payments to the achievement of pre-agreed upon results. The terminology of RBF is diverse with multiple terms that refer to the same instrument but they all centre on the idea that payments should be linked to results and not to the process of obtaining them. The World Bank defines Result Based Climate Finance (RBCF) as finance that is paid when results are achieved, and occasionally upon meeting interim milestones. As most funds, grants and even a large part of the global capital market are intrinsically linked to the achievement of results; the development of RBF for climate action can pave the way for bringing in private finance. For adaptation, it then goes on to imply that the measurement of results and outcomes in quantifiable terms will enable the mobilisation of result-based financing mechanisms, not just from Multilateral Development Banks and bi-lateral sources, but also from the global capital markets and the private sector, essentially through blended finance and the creation of more innovative instruments.
As most funds, grants and even a large part of the global capital market are intrinsically linked to the achievement of results; the development of RBF for climate action can pave the way for bringing in private finance.
RBF can bring in financing instruments such as bonds that have the potential to leverage the market for financing adaptation by bringing in the private sector. This presents a huge opportunity for any multilateral organisation to lead the work on developing RBF for adaptation. Issues such as spending inefficiencies and the lack of an understanding of what can be used to track progress in a project include some of the roadblocks that have long plagued financing for adaptation. This can be remedied through the use of result-based financing (RBF) mechanisms as payments will be made on the achievement of pre-agreed results or outcomes. The rationale behind this financing framework is to link payments to outputs and outcomes of actions, rather than inputs and processes. RBF can bring in financing instruments such as bonds that have the potential to leverage the market for financing adaptation by bringing in the private sector. This presents a huge opportunity for any multilateral organisation to lead the work on developing RBF for adaptation.
The RBF will help opening up adaptation for the private sector. Besides, once it takes off, the World Bank Group and the World Economic Forum respectively have stated that investing in climate adaptation can lead to returns with a benefit cost ratio of 4:1 and that the adaptation market could be worth US$2 trillion by 2026. The transparency provided by the RBF presents a massive opportunity to direct private investors towards investing in adaptation to climate change as the end result of their investments is clear.
Tom Kerr is the Lead Climate Specialist, South Asia at the World Bank Group.
Dhriti Pathak is a Climate Change Analyst with the World Bank’s South Asia Region Climate Team.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
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