Climate Change: We Need a New Approach to Financing Adaptation

Bangladesh has taken proactive steps to address climate change adaptation. Photo by ADB.
Bangladesh has taken proactive steps to address climate change adaptation. Photo by ADB.

By Arghya Sinha Roy, Nanki Kaur

To urgently close the adaptation gap, a new and innovative approach is needed in funding and financing climate change adaptation strategies.

Countries in Asia and the Pacific are facing the adverse impacts of climate change. This will increase many times over in the coming decades unless ambitious investments are made toward climate change adaptation.

 Developing countries recognize the urgent need to scale up investments in adaptation, and it is well represented in international climate discussions, but there remains a significant gap in funding. To date, adaptation is largely implemented through small-scale projects that primarily focus on addressing near-term risks by making incremental fixes at the margins of business-as-usual development.

The gap is due in part to lack of availability of finance. But the gap is equally due to the way financing is programmed. It often involves short-term planning, financing many small, separate projects that don't always work together, and mainly using a project-based approach that focuses more on what's put in rather than the results achieved.

There are several reasons for this. First, adaptation requires addressing longer-term climate risks across systems. This means that adaptation responses should be framed in the context of the long-term vision that a country, sector, or community has set for itself. Currently, adaptation financing is not typically programmed in support of the long-term vision to build resilience of systems.

Second, adaptation interventions need a certain level of sequencing, for example examining what comes now and what can come later. Adaptation finance needs to be programmed to support such sequencing. But currently, the lack of predictability of adaptation financing remains a key concern that hinders the adoption of such a “pathways approach” towards implementation.

Third, adaptation is a process with no definite endpoint. As climate risk changes, adaptation responses need to be adjusted to reflect experiences and learning. Adaptation finance currently remains largely project-based which limits the possibility of continuous engagement in strengthening institutions and their operating procedures.

These unique features need to guide how moving forward financing for adaptation should be approached.

To begin,  it will be important to support developing countries to articulate how adaptation responses will be critical to achieving their long-term development vision. A positive framing with appropriate metrics that articulates how investment in risk management can potentially unlock development opportunities is an important way of positioning adaptation within the wider development agenda.

It will be important to introduce policy, regulatory and institutional reforms that can address the system barriers to increasing the uptake of adaptation practices.

Ongoing efforts by developing countries in formulating their adaptation plans and strategies have started pursuing this direction to some extent. For example, the Mujib Climate Prosperity Plan sets a vision for the future prosperity of Bangladesh and identifies specific socioeconomic outcomes expected by 2030 through investments in climate actions.

For example, one expected outcome is the creation of new climate-resilient jobs through investments in climate actions. Such positive framing will significantly help to strengthen the case for investing in adaptation, especially given the limited fiscal space in developing countries. It will also help development partners to recognize that adaptation requires longer-term financing.

This needs to be followed by developing adaptation investment plans which identify strategic adaptation investments that collectively will help achieve the vision and the resources needed over a longer period. These investments need to be coordinated and sequenced in a pathway to identify which investments come first and which can follow later, based on a combination of factors including an understanding of climate tipping points.

They need to be appraised following wider climate-responsive public investment management processes to identify public, private, or blended financing. Establishing country-led project preparatory facilities or integrating adaptation priorities into annual and medium-term public investment frameworks can help.

This approach will allow developing countries to move away from ad-hoc project financing to allocating resources for adaptation in a programmatic manner. It will also help developing countries mobilize resources from different sources and articulate how the outcomes from individual investments will come together over time to achieve the longer-term outcome.

From the development partners' point of view, such adaptation investment planning process can help better align their climate programming to such plans and better articulate their longer-term commitment of support. This will in turn provide developing countries with a certain level of assurance that they will receive financing.

In parallel,  it will be important to introduce policy, regulatory, and institutional reforms that can address the system barriers to increasing the uptake of adaptation practices.

For example, local governments are guided by key performance indicators when it comes to delivering basic services. These indicators need to factor risks from extreme climate events as it will have an impact on the allocation of recurrent budget, thereby requiring for reforms in municipal budgeting processes. In addition, agriculture subsidies should encourage farmers to move away from unsustainable land and water management practices and promote resilience.

City governments are providing incentives for private developers and household owners to incorporate green building features to deal with heat stress. Identification of such policy, regulatory, and institutional reforms will help identify the most appropriate financing modality for supporting adaptation. Policy-based financing is increasingly being explored for financing climate actions and can play a critical role in introducing such reforms. So too,  results-based financing can play a powerful role in improving systems and processes with a focus on resilience outcomes.

If the adaptation gap is to be urgently reduced, we need a new approach for funding and financing adaptation.