Unlocking the Potential of Climate Adaptation Finance
COP29 and the Adaptation Fund
Last week at COP29, climate adaptation didn't receive the attention it deserved. The UN's Adaptation Fund managed to secure just $133 million in new funding pledges, falling far short of its target. This highlights the ongoing struggle to meet the growing demand for adaptation finance.
However, amidst the main conference's shortcomings, there were some exciting developments on the sidelines. The Global Environment Facility announced $20 million in grants through its Challenge Program for Adaptation Innovation. One of the notable winners was the Climate Bonds Initiative (CBI), which received $1.5 million for its Adaptation and Resilience Bonds Accelerator.
The CBI's Adaptation Bond Hubs
The CBI's Adaptation and Resilience Bonds Accelerator aims to overcome obstacles in the adaptation bond market. With limited awareness and a lack of bankable projects, the market has been slow to grow. The UN's Adaptation Gap report estimates the gap between demand and supply for adaptation finance at $187 billion to $359 billion.
The GEF funding will help the CBI establish two adaptation bond readiness 'hubs' - one in a least developed country and one in a middle-income country. These hubs will nurture fledgling adaptation projects and create a pipeline of 'bankable' investments.
Bonds as an Entry Point to Adaptation Finance
"Bonds are a good entry point to adaptation finance," says Mahesh Roy from the Institutional Investor Group on Climate Change. Whether through the use of proceeds or other labelled products, adaptation-focused investors can build familiarity with adaptive activities.
CBI has been leading the way with the launch of the Climate Bonds Resilience Taxonomy. Issuers can use this taxonomy as a blueprint for building bonds that finance adaptation priorities across various themes.
Climate Shocks and Investment Opportunities
The election of Donald Trump has raised concerns about climate progress in the US and disrupted the transition to clean energy. Investors are now more focused on the risks of worsening climate shocks and the opportunities they present.
CalPERs, California's $500 billion public employees' pension fund, is one such investor. In the face of expected policy rollbacks, the fund is looking at areas like heat-resistant crops and power generators as potential investment opportunities.
Invesco's Climate Adaptation Action Fund
Invesco's $1.7 trillion asset manager is betting on adaptation in the fixed income space through its Invesco Climate Adaptation Action Fund (ICAAF). This emerging market debt fund focuses on adaptation-themed projects in developing countries, particularly those most vulnerable to climate shocks.
The fund has a target size of $500 million and has attracted significant investor interest. About half of the institutions come from Europe, the Middle East, and Africa, while 40% are from the Asia Pacific region and only 10% from North America.
Blended Climate Bonds
Blended finance is seen as the future of adaptation investments, including bonds. According to data from Convergence, blended climate bonds made up just 9% of total climate blended finance in 2023.
The ability of blended finance to raise the creditworthiness of climate bonds is crucial. It can help overcome sovereign credit risk ceilings and make investments in developing countries more attractive to investors.
However, the variety of adaptation projects poses a challenge. Standardization can help mobilize money into adaptation finance, and the CBI Taxonomy and Adaptation and Resilience Bonds Accelerator may play a role in this regard.