As countries begin their trip to Dubai for the UN climate summit beginning Nov 30, it is clear that fulfilling the promise they made in Paris seven years ago to limit temperature rises to well below 2 degrees Celsius is looking increasingly unattainable.
The UN Intergovernmental Panel on Climate Change’s (IPCC’s) sixth assessment, revealed that even if the countries of the world cut their greenhouse-gas emissions dramatically (something most are far from doing) temperatures will likely be 1.5ºC higher than they were in the 19th century by 2050—if not before. A world faced with a catastrophic 3ºC temperature increase, once unthinkable, is no longer outside the realm of possibility.
This reality puts the focus squarely on the efficacy of every action taken and every dollar spent on adapting to and mitigating climate change. Unlike mitigation, where the benefits are shared globally, however, most of the burden of paying for adaptation and resilience will fall on the countries themselves. The expenditures will be immense. The UN Environment Programme estimates that the annual spending needed for adaptation in poor countries is likely to rise from around $70 billion today to between $140 billion and $300 billion in 2030, and double that by 2050. Countries will need to tap all potential sources of financing, including private investors, to pay for those investments. Institutions like the IDB can help.
Impact investment: an untapped opportunity for climate change adaptation
An estimate by the Climate Policy Initiative finds that in 2018 private investors contributed only 2% to global adaptation spending. The lack of reliable assessments on the effectiveness of adaptation measures and the belief that adaptation offers low returns may in part be holding investment back. At the same time the growth of impact investors has been remarkable. The International Finance Corporation (IFC) estimates the market reached $2.1 trillion in 2020, but could grow to $26 trillion.
Key to attracting more money for adaptation is countries’ ability to structure impact bonds in such a way that investors are assured that the proceeds will be invested in interventions that yield the desired outcomes (i.e. avoiding greenwashing). Investors are already demonstrating a preference for thematic bonds related to climate change, such as Blue bonds (related to sustainable marine projects), Green bonds (to the environment and climate), and Resilience bonds (related to protecting assets from climate risk). Even more narrow in scope are bonds such as the recently issued Rhino bond. With this bond, investors receive their original capital and an additional payout depending on how much the rhino population has grown over five years. Indeed, the more specific the use of the bond, the easier it is to assess if the committed results have been achieved, reducing, in turn, the complexity and costs of establishing and monitoring impacts.
The lack of reliable assessments on the effectiveness of adaptation measures and the belief that adaptation offers low returns may in part be holding investment back for climate adaptation.
The IDB’s role in helping countries fund climate adaptation solutions
Institutions such as the IDB can help countries tap the necessary resources by serving as honest brokers that bring credibility to the negotiating table. They can also, through the issuance of policy-based guarantees, such as a recently issued one for Barbados, enhance the signal countries send about their commitment to the reforms needed to assure the investment yields the expected returns, in effect serving as a commitment device for politicians. Most importantly, multilateral banks can assist in the design of interventions with demonstrable effectiveness, thereby providing a framework for the use of the proceeds.
The IDB’s long experience with impact evaluations is a powerful asset in this regard. Over the past two decades, the IDB has been a leading producer and consumer of impact evaluations in Latin America and the Caribbean, with a total of 258 evaluations designed, approved, and completed between 1994 and June 2020. Another 385 are currently ongoing. This experience has led to greater knowledge and an expansion of studies in under-evaluated sectors while contributing to an international base of evidence as to what works in development. That knowledge can be tapped to help select investments for financing with bond proceeds.
Institutions such as the IDB, can assist countries in the design of interventions with demonstrable effectiveness, thereby providing a framework for the use of the proceeds of thematic bonds.
Potential beneficiaries include Small Island Developing States (SIDS) in the Caribbean, which are likely to face the brunt of the impacts of climate change through sea level rise and exposure to extreme weather events. The IDB can help these countries face this existential challenge by supporting the structuring of thematic bonds and identifying a portfolio of key investments that have been shown to be efficient and effective in fostering adaptation and increasing resiliency.
There is a growing body of evidence on the effectiveness of different climate adaptation investments to draw on, ranging from hard infrastructure to nature-based solutions. For instance, a recent evaluation of IDB-supported Barbadian efforts to use coastal infrastructure, such as seawalls and groynes, to limit beach erosion found that those measures not only bestowed resiliency to the shoreline but also led to economic growth in surrounding areas. Nature-based solutions, such as coral reefs and mangroves, can also be highly effective. Coral reefs, for example, have been found to bolster coastal protection because they are located in areas with powerful waves and can reduce wave heights. A recent study commissioned by insurance companies found that restoring coral reefs could lead to reduced premiums and a six fold return on initial costs over 25 years.
Thematic bonds must be part of the plan for climate adaptation
Countries must establish their priorities for negotiations as they head to Dubai for COP28. Notwithstanding the eventual funding of a “loss and damage fund” agreed to at COP27, having a plan B in place to invest in the adaption measures required to protect their way of life is essential, however. This is particularly so given that, as it is, developed countries have fallen way short of providing the $100 billion a year promised to help developing countries cope with climate change. Bond issuance, and especially Blue, Green, Resilience, or even Coral Reef and Mangrove restoration bonds, must be part of the plan.
At the IDB, we envision our work expanding from direct financing to supporting a government, that lacking the resources necessary to do coral restoration, for example, seeks funding from private investors through issuance of a coral reef bond. The bond could then be paid back from the money the government saved by having to spend less on damages generated by sea level surge.
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