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Gopalika Arora, Ed., Funding Our Future: Unlocking Resources for Adaptation Financing, November 2024, Observer Research Foundation.
ISBN Paperback: 978-81-19656-38-7
ISBN Digital: 978-81-19656-10-3
The climate crisis has evolved from a looming threat to an undeniable reality that demands immediate attention. The compounding and cascading effects of climate-induced extreme weather events are increasingly being felt worldwide, with their growing frequency and intensity resulting in devastating loss of lives and livelihoods. Developing countries already burdened by economic disparities find themselves especially exposed to the escalating risks posed by climate change. Over 80 percent of the weather-related hazards reported in Asia in 2023 were floods and storms, affecting more than nine million people.[1] In Africa, climate-related disasters annually diminish the GDP by 2–5 percent.[2] As we increase our efforts to curb emissions, it is crucial to simultaneously invest in building climate resilience and adapting to the changes underway. Equally important is ensuring that financial resources are deployed effectively, reaching the most vulnerable communities to maximise their impact on the ground.
Adaptation finance has long been the neglected sibling of development and transition finance, facing challenges on both the demand and supply sides. In developing countries, the projected cost of adaptation is estimated at US$215 billion annually for this decade, while the finance needed to meet domestic adaptation needs stands at US$387 billion per year.[3] Despite these pressing needs, public, multilateral, and bilateral adaptation finance to developing countries dropped by 15 percent in 2021, reaching just US$21 billion.[4] This shortfall, coupled with rising adaptation demands, has widened the current adaptation finance gap to an estimated US$194–366 billion per year.[5]
While adaptation finance can originate from both public and private sources, the vast majority has so far come from public funding. In 2022, the private sector contributed US$2 billion—representing a mere 2 percent of tracked adaptation finance.[6] This scarcity of private investment stems from well-documented challenges in tracking private adaptation finance as well as enduring barriers that inhibit private-sector engagement in this area.
Adaptation projects have historically struggled to secure financing compared to their mitigation counterparts for several reasons. First, mitigation investments tend to yield quicker returns, whereas the benefits of adaptation efforts are often realised over a longer timeframe. Second, the intrinsic ‘public goods’ nature of adaptation diminishes the private sector’s interest in investing.[7] Additionally, aligning adaptive capacity with investors’ risk and return expectations poses a significant challenge. The absence of a clear taxonomy for climate adaptation adds to the uncertainty, as there is no unified definition of what constitutes an adaptation activity. Furthermore, weak governance standards can lead to the misallocation of funds towards personal interests and maladaptation, exacerbating the plight of vulnerable nations.
Against this backdrop, this compendium, Funding the Future: Unlocking Resources for Adaptation Financing, brings together researchers and practitioners from around the globe to explore key issues and opportunities for increasing adaptation finance flows to developing economies. This collection of essays offers a comprehensive guide to innovative ideas and mechanisms that can help elevate adaptation finance within the broader climate finance agenda.
The volume opens with an essay by Mikhail Korostikov, who argues for a sector-specific framework for adaptation finance. The current diversity of interpretations and fragmented markets create confusion for investors. A localised adaptation finance taxonomy would establish clear standards, enabling investors to compare opportunities and better assess environmental impacts.
The second essay, authored by Suranjali Tandon, highlights the critical role of domestic public funding—often fully supported by national and state budgets in driving adaptation initiatives. Public finance management systems can also act as catalysts for mobilising private finance for climate action. Given the importance of the Union Budget as a policy tool reflecting government accountability and priorities, integrating climate-responsive budgeting is imperative.
Paul Horrocks and Jens Sedemund then investigate the challenges that confront investors when financing adaptation projects. They highlight the potential of performance-based sustainability-linked bonds as a forward-looking instrument for attracting private investment.
In their piece, Somit Dasgupta, Amrita Goldar, Sajal Jain, and Diya Dasgupta discuss the role of innovative financial instruments and mechanisms in unlocking private investments and increasing the funding required to meet climate adaptation goals.
My essay then follows, focusing on mobilising the private finance for ecosystem-based adaptation through nature-based solutions. These approaches offer cost-effective and sustainable alternatives that complement national and subnational adaptation strategies. By leveraging the inherent benefits of nature, these solutions aim to tackle climate change, combat biodiversity loss, and mitigate land degradation, all while advancing sustainable development objectives.
In the sixth essay, Adele Tanguy, Alexandre Magnan, and Lola Vallejo examine the current strategies employed by multilateral development banks and the challenges they face in measuring the climate effectiveness of the adaptation financing they provide. It also investigates how innovative assessment methods could address these challenges.
It is followed by an essay by Tom Kerr and Daphne Basangwa which focuses on established financial instruments and de-risking mechanisms that can support adaptation financing.
Ornela Çuçi then offers her perspective on the current landscape of adaptation finance, and argues that it is at present marked by fragmentation. This fragmentation, characterised by diverse operational approaches, results in high transaction costs, a lack of unified goals and targets, varying application processes, and inadequate standardised monitoring and evaluation. These issues collectively undermine the overall effectiveness of climate finance initiatives.
In the penultimate essay, Vera Songwe explores the adaptation financing needs of African nations. Nivedita Joshi and Harjeet Singh close the contributions with an essay that addresses the progress and realities surrounding Loss and Damage (L&D) finance.
Nilanjan Ghosh rounds up the volume with his concluding essay, which underlines that the imperatives for adaptation financing are both epistemological and ethical.
As we strive for a resilient future, navigating the complexities of climate adaptation financing can feel like walking a tightrope. This compendium aims to serve as a beacon to illuminate the critical opportunities and challenges in mobilising public, private, and multilateral finance for climate adaptation.
I extend my heartfelt gratitude to all the authors for the valuable knowledge and insights that they have shared in their contributions to this compilation. Their unwavering commitment to the pursuit of climate resilience shines through in the depth of their research and the visionary perspectives articulated in their essays.
Read the monograph here.
[1] World Meteorological Organization, State of the Climate in Asia 2023, Geneva 2, Switzerland, 2024, https://library.wmo.int/viewer/68890/download?file=1350_State-of-the-Climate-in-Asia-2023.pdf&type=pdf&navigator=1
[2] World Meteorological Organization, State of the Climate in Africa 2023, Geneva 2, Switzerland, 2024, https://library.wmo.int/viewer/69000/download?file=1360_State-of-the-Climate-in-Africa-2023_en.pdf&type=pdf&navigator=1
[3] United Nations Environment Programme, Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate Investment and Planning on Climate Adaptation Leaves World Exposed, Nairobi, 2023, https://www.unep.org/resources/adaptation-gap-report-2023
[4] United Nations Environment Programme, “Adaptation Gap Report 2023”
[5] United Nations Environment Programme, “Adaptation Gap Report 2023”
[6] Martinez et al., “State and Trends in Climate Adaptation Finance 2023,” Climate Policy Initiative, December 14, 2023, https://www.climatepolicyinitiative.org/wp-content/uploads/2023/11/Global-Landscape-of-Climate-Finance-2023.pdf
[7] Nilanjan Ghosh, “Financing climate adaptation: How do we equate the social and the economic rates of return?”, ORF Expert Speak, 2023, https://www.orfonline.org/expert-speak/financing-climate-adaptation
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Gopalika Arora is an Associate Fellow at the Centre for Economy and Growth in New Delhi. Her primary areas of research include Climate Finance and ...
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