In formulating and implementing adaptation actions, it is important to scrutinize what funding sources are available and develop a funding strategy. Rather than relying on a single source of adaptation finance, it is better to blend them as appropriate. As set out below, funding is categorized into domestic, international and private categories, including what specific funding sources are available.
Domestic Funding
Domestic budgets can be an integral part of the portfolio of adaptation projects that offer relatively stable and predictable sources of funding. Governments may be able to finance adaptation by distributing resources and strengthening the adaptation benefits of existing projects. Adaptation projects are, in many cases, inseparable from development projects, many of which are considered for the public good. This can be an advantage for governments as existing processes or institutional structures of development investments can be applied to adaptation projects. Furthermore, domestic funding induces finance from private sectors as it reduces investment risks on adaptation solutions where markets are unlikely to fully develop.
Revenue
Revenue can be raised through taxes, levies or other fees that are specifically designed to support adaptation actions. For instance, Fiji has introduced an Environment & Climate Adaptation Levy that charges a rate of 10% on the gross annual turnover of a prescribed service.
Financial Instruments
Governments can issue bonds tailored to raise capital for the implementation of adaptation actions. Debt swaps also provide countries with such opportunities. For example, the Seychelles issued a sovereign “blue bond” to invest in sustainable marine and fisheries projects.
Budget Allocation
Governments can allocate financial resources to support adaptation projects. The Philippines' government allocates national budget into a domestic adaptation fund called the People’s Survival Fund (PSF) that supports local government units and community organizations.
International Funding
International finance providers can be divided into bilateral and multilateral. These are implemented in various forms such as loans, grants, and technical assistance. Bilateral support is provided by development partners including ministries or agencies, usually as Official Development Aid to advance the development phase of the adaptation planning process. Meanwhile, the international community has established several multilateral funds that include funds mandated by the UNFCCC to specifically support the formulation and implementation of the NAP process, as well as climate change adaptation more broadly.
UNFCCC Climate Finance
- Green Climate Fund
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The Green Climate Fund (GCF) was established in 2010 to support Parties’ climate change projects, programs, policies and other activities from both mitigation and adaptation aspects. In 2015, the Readiness and Preparatory Support Programme was set up under the Green Climate Fund to facilitate the NAP process across the globe. This helps developing countries plan and attract larger scale finance from a diversity of sources to accelerate adaptation actions.
GCF Readiness and Preparatory Support Programme
- Special Climate Change Fund
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The Special Climate Change Fund (SCCF) was established under the UNFCCC in 2001 to finance projects relating to adaptation and mitigation and operated by the Global Environment Facility (GEF). SCCF contributes towards the preparation of the NAP process in developing countries that are not LDCs with the aim of facilitating “the creation of strong, climate-resilient economies and communities by helping countries address a range of barriers”.
- Least Developed Countries Fund
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Least Developed Countries Fund (LDCF),operated by GEF, was also launched in 2001 along with the SCCF. The LDCF mainly supports Least Developed Countries to prepare the NAP process. Its priority funding areas include agriculture and food security; natural resource management; water resources; disaster risk management and prevention; coastal zone management; climate information services; infrastructure; and climate change induced health risks.
- Adaptation Fund
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The Adaptation Fund was established in 2001 to finance adaptation projects and programmes in developing countries. The Adaptation Fund has committed more than US$ 850 million for climate change adaptation and resilience projects and programs to date, including more than 123 concrete, localized projects in the most vulnerable communities of developing countries.
Other climate- and non-climate-focused multilateral funds provided by broader multilateral financiers can also provide financing for the implementation of adaptation actions. There are also several multilateral funds outside of the UNFCCC designed to support climate change adaptation such as the Climate Investment Funds, launched in 2008. Since adaptation is likely to be integrated into the relevant areas of development associated with adaptation co-benefits (e.g. biodiversity, water resource management, and sustainable land management), non-climate-focused multilateral funds can also be potential sources of financing for the implementation of prioritized adaptation actions. Similarly, Multilateral Development Banks (MDBs) can potentially support adaptation actions.
Private Capital
The private sector has an extremely important role from the planning stages of adaptation implementation as an essential stakeholder. In general, the private sector engages in adaptation to address business risks, to capture new business opportunities, and thus contribute to solving social issues. There are several examples of financing mechanisms for the private sector to potentially support the implementation of adaptation measures.
Green bonds
Bonds (or loans) issued by corporations to raise funds for green projects are called green bonds. In recent years, the market for green bonds has significantly expanded and is expected to scale-up financing for adaptation and resilience. Other unique instruments have also emerged, exemplified by blue (water) bonds, resilience bonds and sustainable bonds.
Impact Investment
Impact investments refers to investments made with the intention to generate positive social or environmental impacts alongside a financial return. Climate change adaptation has been one of the major interests among investors according to a 2020 report published by Global Impact Investing Network.
Guarantees
Developmental guarantees promote social and economic development by backstopping project development in high risk sectors or relatively larger projects such as infrastructure. For insurance, the Green Guarantee Company supports climate mitigation and adaptation projects in developing countries.
Risk Financing
Risk financing such as catastrophe bonds and insurance, allows individual entities to transfer their financial risk associated with national disasters to a market. The InsuResilience Global Partnership has been working on risk financing solutions in response to climate change as a practical example.
How to finance adaptation at local scale?
Local authorities are increasingly seen as key actors in building resilience to climate change. However, in many cases climate change adaptation at the local level does not have sufficient awareness, capacity, budgetary allocation from national financial resources, or access to international climate finance. It is imperative to overcome these obstacles. Financing requires an understanding of community-specific climate change impacts in particular, and where scientific data availability is insufficient, observational community perceptions and observations can often play a useful role. Regarding the effective use of funds, the importance of giving more direct financial access to grassroots actors, such as local institutions and communities. This notion is gradually being recognised, given the recent growing interest in “locally-led adaptation”. As a notable practice, performance-based climate resilience grants (PBCRGs) provide technical and capacity-building support and facilitate financial flow to the local level.
Reference:
World Economic Forum, The Global Risks Report 2021
UNCDF: Performance-Based Climate Resilience Grants
Global Center on Adaptation: The Role of Domestic Budgets in Financing Climate Change Adaptation
International Institute for Sustainable Development (IISD): Financing National Adaptation Plan (NAP) Processes
- ADAPTATION PLAN DEVELOPMENT PROCESS
- Whether you’re looking to update an adaptation plan or are intending to start on one, engaging in the adaptation planning process is important work. Once you identify where your country is located in the process, you will find useful information such as tools and good practices.
- NAP PROCESS UNDER THE UN FRAMEWORK
- Understand why adaptation planning is necessary in the long run to implement the Paris Agreement. Learn about the latest trends in international adaptation negotiations and support systems for NAP formulation under the UN bodies.
- STATUS OF ADAPTATION IN THE ASIA-PACIFIC
- What adaptation plans are being developed in the Asia-Pacific? Learn some of the most distinctive features and best practices, and find the latest information on adaptation plans being carried out by your neighboring countries or countries facing similar challenges.
- Monitoring & Evaluation
- Once adaptation measures are implemented, Monitoring and Evaluation (M&E) is conducted to track and evaluate the effectiveness of adaptation measures. Find useful resources including the latest discussions and good practices here.
