The Need for Adaptation Nomenclature
Ujala Qadir, Director of Strategic Programmes at the Climate Bonds Initiative, explains why the organisation has expanded its green bond taxonomy to cover climate resilience.
As the impacts of climate change increasingly affect businesses worldwide, adaptation needs are mounting each year – but investments clearly labelled as incorporating adaptation and resilience remain limited.
The UN Environment Programme’s Adaptation Gap Report 2023 estimated the adaptation finance gap to be somewhere between US$194 billion and US$366 billion per year, with adaptation finance requirements in developing countries likely to be 10 to 18 times greater than current finance flows.
Despite a booming sustainable debt market – with aligned green, social, sustainability, sustainability-linked and transition bond volume expected to hit US$1 trillion by year-end – the focus has been primarily on mitigation efforts through ‘pure play’ green sectors and assets, with less emphasis on adaptation and resilience.
But according to Ujala Qadir, Director of Strategic Programmes at the Climate Bonds Initiative (CBI) – which recently launched its adaptation and resilience-themed taxonomy – this is set to change.
“The market has matured as investors, issuers and other market participants have become more familiar with labelled debt,” she told ESG Investor. “Therefore, expanding our green bond taxonomy [to address adaptation and resilience] is not only something that is desired; people are ready for it and have the capacity to bring in new types of investments into these issuances.”
Released during Climate Week NYC in September, the Climate Bonds Resilience Taxonomy (CBRT) aims to help channel private finance towards resilience and adaptation by providing clarity on what constitutes a ‘credible’ investment.
While many companies are taking actions to reduce climate risk and increase resiliency, these activities aren’t always labelled as such, Qadir argued.
“Analysing weather patterns and climate is already a part of risk management in many industries, such as the use of shipping forecasts in addressing supply chain risk. But it’s called ‘supply-chain management’ or ‘business continuity’ – not adaptation or resilience,” she said.
As such, issuers have been looking for a way to identify such opportunities, scale them up, and attract finance. “These are good investments and we should be doing more of them,” Qadir added.
Historically, there has been a lack of awareness and understanding of physical climate impacts and how those manifest in assets and investments, she explained. And while there has been much focus on modelling risk over the past decade, that the discussion needs to move forward.
“Whereas we’ve spent time on modelling, understanding and quantifying risk – perhaps imperfectly but it has been done – now we need to decrease that risk,” Qadir said. “The CBRT aims to provide a blueprint for reducing risk by investing in adaptation and resilience.”
A new approach
While the EU Taxonomy includes adaptation and other industry organisations have published specific guidelines or high-level principles, many of CBI’s stakeholders felt that the existing guidance was insufficient to build confidence in adaptation investments.
To address the issue, CBI released a whitepaper in 2023, and subsequently set up the Resilience Taxonomy Advisory Group – comprised of more than 30 members including development finance institutions, nonprofits and think tanks, investors and consultants.
“We wanted input from a broad base of stakeholders, who volunteered their time to meet every other week for seven months,” said Qadir. “At each meeting, we would break down different elements of the taxonomy ruleset and question whether they were usable, robust, credible, and science-based. We incorporated specific principles into each question, which culminated in the taxonomy.”
The CBRT is a classification system, with associated criteria, based on seven themes: agrifood systems, cities and settlements, health, industry and commerce, infrastructure, natural systems, and social systems. The themes are divided across 33 sectors and 77 sub-sectors, and then broken down into investments – which are at the “heart” of the taxonomy, Qadir explained.
“There are more than 1,400 investments listed in the CBRT, such as installing leak-detection equipment or designing buildings to reduce water loss in response to water stress,” she said. “In addition, hazards are layered into the taxonomy, so each investment corresponds to a particular climate risk – which is justification of why it is a resilience investment.”
Although the CRBT’s main purpose is to identify opportunities for integrating adaptation and resilience for investors, asset owners, asset managers and issuers, it can also be used to screen portfolios to understand what a business might already be doing. This gives an opportunity to tweak, upgrade or renovate portfolios to better meet the criteria – effectively creating a broader universe of investable assets to include in a green, or otherwise labelled, bond structure.
Governments can also use the taxonomy to examine and tag their budgets for adaptation and resilience opportunities, according to Qadir.
Carefully considered criteria is a central component of the CBRT. The core principles include ensuring that projects contribute substantially to climate resilience, managing maladaptation risks and not harming broader climate mitigation efforts.
“When looking at whether an investment makes a substantial contribution to resilience, we are trying to understand if it is reducing risk and vulnerability,” explained Qadir. “Sometimes it is possible to provide an answer without doing a heavy lift on a detailed asset-level risk assessment. The CBRT tries to bring nuance into this space, breaking things down and creating criteria that are fit for purpose, depending on the nature of the investment.”
The most difficult part of creating the taxonomy, she said, was determining how to break it down to expose the ‘low-hanging fruit, no-brainer, win-win’ solutions.
“We don’t want to erect barriers to investment in those areas,” Qadir added. “Where there is enough science-based evidence that those are good investments, we lower the criteria to be either automatically eligible, or enable simple checks to qualify it as a resilience investment. Our approach is to get progressively more robust in the criteria, depending on whether the investment is more complicated by nature.”
The second criterion examines whether the investment has the potential to inadvertently have a negative impact on an adaptation goal.
“We call it ‘maladaptation risk’ – when an organisation hasn’t robustly looked at different scenarios, either building for a scenario that is too extreme or too business-as-usual,” she explained.
The third criterion considers the potential of harming climate mitigation or other environmental and social goals. According to Qadir, this area still needs greater exploration and will be part of the next phase of development.
“We call these interim criteria because there’s more work to be done to validate them, which we will be undertaking in the new year,” she said.
The CBI plans to publish another version of the CBRT with updated criteria in time for Climate Week NYC 2025.
Market take-up
The initial market response to the CBI’s strategy change has been positive. Many different types of stakeholders have reached out, Qadir reported – including issuers asking how they can apply the taxonomy. However, she thinks it will take time and investment in capacity-building and engagement to see a surge in adoption.
Based on a keyword analysis looking at all the labelled bonds issued to date where adaptation activities are happening but aren’t labelled as such, she believes that early uptake will likely happen in the sovereign and multilateral development bank space.
“We found that the majority of activity was among sovereign issuers, followed by development financial institutions and multilateral institutions, then sub-sovereigns, financial institutions and non-financial corporates,” said Qadir. “While we want the financial institution and non-financial corporate pie to grow, our strategy is to start where there is existing appetite, and scale it up.”
Importantly, the CBI is not suggesting that issuers come to market with a specific adaptation bond – encouraging them instead to include adaptation across green, blue, orange, and other sustainability bonds.
“The reason we are promoting this approach is that adaptation is required for everything in society,” Qadir explained. “In terms of sectors, we are expecting early take-up in energy, transport and buildings industries, because that’s where we see the most issuance in the labelled market.”
She is also convinced that the CBRT will help fuel the current rebound in sustainable bond issuance.
“The supply of sustainability bonds is limited – especially issuances from emerging markets – but much of the pipeline could be focused on adaptation and resilience, particularly in China, India and other developing economies,” she said. “These countries are highly vulnerable to extreme weather events such as typhoons, hurricanes and heatwaves, which requires climate-resilient infrastructure investment. As such, CBI’s adaptation and resilience taxonomy could help build out the pipeline.”
The CBRT aims to bring together existing science-based tools, building on what has already been developed. To that end, the next phase of the taxonomy’s development will include proxies.
“As we bring together our technical working groups in each sector, proxies can help us to look at existing standards, tools and guidelines in the market – such as lead certification or the FAST-Infra label, which includes resilience,” explained Qadir. “We want to be able to bring all of these initiatives under the same umbrella and align our efforts, which will help to bring even greater scale [to the sustainable bonds market].”
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