The Value of Investing in Resilience
The Environmental Change Institute’s Dr Nicola Ranger reports a sea change in financial institutions’ attitude towards adaptation, which is helping to mobilise investment.
Financial institutions’ understanding of climate adaptation has accelerated over the past three years, according to Dr Nicola Ranger, Director of the Global Finance and Economy Group and the Resilient Planet Finance Lab at the Environmental Change Institute (ECI), University of Oxford.
Their awareness has come a long way since her joint presentation with Michael Mullan, Programme Lead, Climate Adaptation Finance and Investment at the Organisation for Economic Co-operation and Development, on how to align finance with climate resilient development “fell on deaf ears” at COP26 in Glasgow.
“[At that time] financial institutions saw adaptation as an issue for government, not the private sector, because adaptation is all about upfront costs and long-run benefits,” Ranger told ESG Investor. “However, their perspective has changed greatly in recent years.”
Several working groups have laid the groundwork in explaining adaptation, including those under the UN Environment Programme Finance Initiative and the UK’s Climate Financial Risk Forum (CFRF). As a result, financial institutions have progressed from risk assessment and management within their organisations to exploring potential market solutions and business opportunities.
The shift in perception has also been driven by mounting evidence demonstrating that adaptation delivers returns, according to Ranger. For example, the Global Finance Group at the ECI, Green Finance Institute and Impax Asset Management published a report in July 2023 on adaptation as an investable asset class.
In December 2023, BlackRock’s 2024 Private Markets Outlook highlighted investment opportunities in adaptation to climate hazards, as well as rebuilding after climate-related damage. “When BlackRock says there’s a business opportunity, then people start to listen,” Ranger said.
More recently, Goldman Sachs and Standard Chartered have added to the growing evidence base.
In addition, Ranger pointed to concerted efforts in developing adaptation taxonomies, which are lists of activities that can be classed as having a major contribution to adaptation. “The EU Taxonomy was one of the first to incorporate adaptation and now there are more than 30 adaptation taxonomies around the world, which has been important for financial institutions to see what an adaptation investment looks like,” she said.
The Climate Bonds Initiative, for example, recently expanded its green bond taxonomy to cover adaptation and resilience.
While there’s still a long way to go in terms of mobilising adaptation finance, financial institutions are proactively asking to be part of the solution. “They see an opportunity but need governments and policymakers to [create the right environment for investing],” according to Ranger.
Clear road map
A recent CFRF report, co-authored by Ranger, identified several challenges in terms of increasing efforts to mainstream adaptation and scale-up financing.
“Governments need to describe what ‘good’ adaptation looks like for their country and its industrial sectors,” she said. “Adaptation is much more complex than mitigation, where it’s easy to show that investing in a power plant with emissions below X is a good outcome, for example. Thus, well-defined guard rails are important to help financial institutions verify that specific activities are supporting adaptation.”
Fundamentally, mobilising finance for adaptation is all about policy, Ranger argued. “Financial institutions say that having that right policy environment in place will enable the finance to flow,” she said. “However, policymakers don’t fully understand how to engage with financial institutions around adaptation.”
For example, the UK government has focused on getting the private sector to fund flood defences. But while the private sector is unlikely to do so directly for “many good and economically sound” reasons, according to Ranger, financial institutions will support clients with their adaptation efforts, particularly in infrastructure and agriculture.
“Policymakers should ask financial institutions to use existing products to help their current client base adapt, effectively mainstreaming adaptation finance opportunities,” argued Ranger. “That would be a much more constructive dialogue.”
Several countries have taken the lead in developing policy road maps, including the US, which published a new resilience strategy in September that focuses on setting an enabling policy environment and investing in data. Rwanda has also set out clear goals in its Vision 2050 to support both mitigation and adaptation.
“There are a few examples of governments taking the right steps, but we need that enabling approach to become more widespread,” she added.
Global public goods
Blended finance facilities, combining public and private funds, reached a five-year high of US$15 billion in 2023, according to Convergence’s State of Blended Finance 2024 report.
In a recently released climate-focused update, Convergence reported just 32 adaptation blended finance transactions between 2021 and 2023, with a total value of US$3.5 billion and a median transaction size of US$32.5 million. In contrast, a total of six mitigation-focused blended finance deals exceeded US$1 billion in 2023 alone.
“We often talk about needing more blended finance in adaptation, as these types of investments tend to have a ‘public good’ aspect,” she said. “But while blended finance facilities are often allocated to infrastructure or agriculture, it’s difficult to find ones that prioritises adaptation.”
This missing piece in the financing architecture means that financial institutions aren’t receiving the appropriate incentives and support to get more involved in adaptation.
“This is a relatively simple thing to change – with hundreds of millions of dollars flowing through these facilities, it should be easy to add adaptation as a key goal,” Ranger said.
When looking at the role of multilateral development banks (MDBs), such as the World Bank, as intermediaries in blended finance, she believes that they need to review the areas where concessional climate finance – effectively cheaper loans for governments – is most needed. “A lot of mitigation technologies don’t necessarily need concessionary support today, whereas adaptation needs much more support,” she argued.
MDBs should also ensure that all their investments are resilient to climate, as well as help development finance institutions work with local banks. “Many are doing good work in these areas, but more needs to be done,” she added.
Ranger believes that nature should be fully integrated with climate adaptation. “If we are damaging natural capital, we will undermine adaptation,” she said. “Therefore, MDBs should think about how they can support countries to build nature resilience, in addition to ensuring that a new bridge is climate-proof.”
While acknowledging the World Bank’s progress in the adaptation space, such as Resilience Rating System and Country Climate and Development Reports that include adaptation, Ranger would like to see the MDB ensure that all its blended finance facilities prioritise adaptation. “Infrastructure facilities should highlight adaptation and nature as well,” she added.
Ranger also believes that it could be more innovative on the debt side. “The World Bank has innovated around sovereign financing instruments, such as Rwanda’s sustainability-linked loan, but most are based on mitigation,” she said. “[It would be a gamechanger] if the World Bank did the first adaptation sustainability-linked financing instrument.”
Adaptation leads to both regional and global public goods, according to Ranger. The Oxford Programme for Sustainable Infrastructure Systems, part of the ECI, has studied the UK’s dependence on global infrastructure systems and supply chains, and how the country is affected by disruption. These present significant risks to the UK, which have been brought to the attention of the Cabinet Office.
“When we invest in resilience in developing countries, the UK also benefits,” said Ranger. “That is one motivation for the country to invest in resilience, but it is also important for institutions like the World Bank and IMF to be putting more of their concessional finance into delivering these global public goods. There’s a clear rationale for adaptation, resilience and nature.”
Embedding nature
The ECI is pushing for more financial institutions to recognise the materiality of nature-related financial risks. It published a study in April with the Green Finance Institute and other partners that illustrated how the UK , for example, could potentially see a 6% to 12% decrease in GDP due to the deterioration of the country’s natural environment.
“Financial institutions haven’t internalised the nature risk message as fully as climate risk, although the research shows that nature can be at least as big a risk as climate,” said Ranger. “We need to get both financial institutions and policymakers to integrate nature and climate when they’re thinking about risk.”
The recent COP16 in Colombia was a key moment in addressing this issue, as it was the first time leaders came together since the historic signing of the Kunming-Montreal Global Biodiversity Framework two years ago.
While progress was made in some areas, including on voluntary levies on corporates that benefit from genetic information from plants and animals (the so-called ‘digital sequence information’) paid to a new fund to support conservation, there was disappointment at the lack of progress in other areas. By the summit’s end, only around 20% of the parties had come up with the new biodiversity plans that they had committed to producing.
In addition, finance was a key bottleneck in Cali, according to Ranger.
“With only six more years to 2030, we need a radically new approach to addressing the financing gap,” she said. “Fundamentally, we need to rewire our financial system to integrate nature-related risks, dependencies and opportunities into financial decisions, and this requires action not just from financiers but also from governments, regulators and international financial institutions.”
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