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Ken Teegardin

Ken Teegardin

Private-public finance for adaptation and climate risk management: many challenges, some emerging opportunities

201507-08

By Reinhard Mechler, Tom Downing, Helena McLeod

 
Climate finance is essential to reducing climate risks, and is at the heart of the UNFCCC’s climate regime where developed countries have pledged to mobilize US$100 billion of climate finance per year from 2020 onwards.

“In parallel this year, the Post-2015 process to negotiate the Sustainable Development Goals, the Financing for Development Conference in Addis Ababa, and the Third United Nations World Conference on Disaster Risk Reduction will also agree on new financial commitments and/or principles for providing support to developing countries.” At the same time, as Tom Downing of the Global Climate Adaptation Partnership (GCAP).

While the question of how to mobilise funds is crucial, the equally important question of how to ensure their effective use has been given far less attention. 

According to Aaron Atteridge of the Stockholm Environment Institute (SEI), these different flows are governed and delivered separately, across a fragmented finance architecture, and this among other factors creates problems for using limited financial resources effectively. 

There is scope for much greater alignment of international public-private finance for development, climate change and other goals (such as for disaster risk reduction or environmental management), and yet also challenges to achieving greater alignment. 

The Warsaw Loss and Damage Mechanism holds high appeal for transforming both adaptation and mitigation and delivering financing for climate risk management.

Yet, negotiations are caught in between the red lines of a demand for climate justice (compensation for increases in extreme event risk) raised by non-Annex I countries, and the unwillingness of non-Annex I to consider Loss&Damage outside of an adaptation framework. 

Researchers Reinhard Mechler and Thomas Schinko of the International Institute for Applied Systems Analysis (IIASA) are suggesting an actionable way forward for the deliberations based on the concept of climate risk management and principles of distributional and compensatory justice. 

Using a short-medium, needs-based perspective, the approach involves support for risk management beyond countries’ ability to absorb risk. In a medium-longer term, rights-based perspective a consideration for liabilities attributable to climate change. 

The suggestions are based on country-level stress test modelling and good practice examples of disaster risk management. The calculated cost for absorbing high-level climate-related risk are in the lower billion USD, but if efforts are well linked to risk reduction incentives, such an approach may lead to strongly reducing any adaptation deficits and large cost savings to the international community in terms of reduced ex-post spending on disasters.

On the other hand, engagement with the private sector goes beyond the expectation of finance for public funds or protection against expected losses and damages. 

“If you want scale quickly, we need the private sector,” said Helena McLeod of KPMG.

“Public funds can be used in innovative financing solutions to leverage private sector capacity, energy and finance. Public sector, not for profit and private sector need to work together to realize the enormous scaling potential that currently exists.”

As the private sector has its own requirements for investment and many adaptation projects will not be able to respond to the return on investment, stage of development or scale requirements of investors. Thaven Naidoo of the Climate Technology Initiative - Private Finance Advisory Network (CTI PFAN) in South Africa identifies the following four success factors that will help to secure private sector funding for adaptation: 
--development of a pipeline of investment grade projects; 
--leveraging of public funds to generate investment tipping points and to create a market of these types of investments; 
--mechanisms to bring these projects into view so that they become part of the available options for investment
--developing metrics for assessing adaptation activities.
 
What is the evidence of private finance for adaptation and its potential contribution to the industrialised countries’ mobilisation of USD 100 billion of annual climate finance from 2020 onwards? 

Pieter Pauw of the German Development Institute (DIE) examined 101 case studies of private sector adaptation under the Private Sector Initiative (PSI) of the UNFCCC Nairobi work programme against ten ‘climate finance criteria’ that were distilled from UN climate negotiation outcomes. 

Results show that private adaptation interventions complement public adaptation activities all over world, including in priority sectors in developing countries such as water and agriculture. 

Yet the ten adaptation finance criteria are not met, which demonstrates that the diplomatic UNFCCC conceptualisation of adaptation finance is dissonant from the private sector reality. 

For example, only a minority of the case studies takes place in the `prioritised’ most vulnerable developing countries.  And while the case studies' investments are 'new and additional' to Official Development Assistance (ODA), their 'predictability' remains unclear. And despite some commitment for 'up-scaling', plans and associated costs for doing so remain undisclosed. 

Pauw advocates strict monitoring and reporting only of private investments that principally aims to finance adaptation. 

This practical way forward would allow private finance to meet criteria such as predictability, transparency, and mobilisation, but would drastically reduce the amount of private investment that could contribute to reaching the USD 100 billion climate finance target.

By Reinhard Mechler (International Institute for Applied Systems Analysis), Tom Downing (Global Climate Adaptation Partnership) and Helena McLeod (KPMG). 

This is part of a blog series profiling climate scientists, economists, social scientists and civil society members who are presenting and discussing innovative climate science at Our Common Future. For more follow @ClimatParis2015 and #CFCC15 on Twitter.

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