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The role of private sector investment in adaptation

Adaptation is critical for developing countries to protect against current and future impacts of climate change, but so far adaptation has generally been deprioritized in relation to mitigation during climate negotiations. Areas with high adaptation benefits that are ripe for private investment include infrastructure, agriculture, water management, and climate change tools, technologies and services.

Adaptation in context

Following COP26’s Global Goal on Adaptation, the Egyptian COP27 Presidency has defined one of the Conference’s key objectives as making “crucially needed progress” towards enhancing resilience and assisting the world’s most vulnerable communities. While mitigation efforts focus on reducing greenhouse gas emissions, adaptation means taking action so that we can withstand current and expected climate impacts. This includes preparing for challenges like rising sea levels, higher temperatures, extreme weather events, increased flooding in some areas and intensifying droughts in others, and similar outcomes that will impact crop yields, water resources, and public health and safety. 

Currently, however, investments in adaptation represent less than 10% of all climate finance, and only 1.6% of all adaptation funding comes from private investment. Analysts predict the adaptation market could be worth USD2 trillion per year within the next few years. 

Adding to this opportunity, climate change is likely to impact low-income countries the most, even though historically they have contributed the least greenhouse gases. Many cities and settlements have developed climate adaptation plans to some extent, but adaptation gaps exist in all world regions and for all hazard types.

Areas with high adaptation benefits

Significant enhancements are needed to identify, prioritize, and price adaptation investment across sectors and geographies. Promising areas for private investment include:

  • Infrastructure: Globally, most financial investment continues to be directed narrowly at large-scale engineering projects after climate events have caused harm. Proactive green infrastructure measures include constructed wetlands, riparian buffers, urban forests and woodlots, meadows and pastures, and community gardens. Green roofs, treatment lagoons and urban stormwater drains can be naturalized with human intervention. Investors should also be looking to back companies that upgrade electrical grids and transmission lines, develop erosion control and drainage systems, and manufacture weather-resistant building materials.
  • Agriculture and food security: Investors should consider financing cultivar improvements, like developing seedlings resistant to disease and extreme weather, as well as agroforestry, community-based adaptation, farm and landscape diversification, and urban farming. Water storage, soil moisture conservation and irrigation improvements on farms are effective to reduce drought risk and other climate impacts (although large-scale irrigation can have adverse effects, such as altering local and regional temperatures and precipitation patterns, depleting groundwater and increasing soil salinization). 
  • Water management and supply: The majority of all documented adaptation deals with water-related risks and impacts. Often these take the form of structural measures like levees for flooding, enhancing natural water retention by restoring wetlands and rivers, and land use planning such as no-build zones and upstream forest management; many of these are cases for public-private partnerships. Investors can also fund measures that improve and diversify water supplies and manage water demand, like water reuse, recycling, rainwater harvesting and desalination. 
  • Equipment and services: More support is needed for companies that provide climate forecasting and analytics data, improve flood and cyclone early warning systems, perform ecosystem services like pest control, pollination, buffering of temperature extremes, and carbon sequestration and storage, and implement strategies that reduce food loss and waste, and support balanced diets. 

Tools and technologies that support decisions and analytics for climate adaptation and climate risk management in different contexts are especially crucial. A recent IPCC Working Group report highlighted the challenge presented by information gaps; currently, very few nations have operational frameworks in place to track and evaluate adaptation responses and their results. This kind of information is critical for understanding extent to which adaptations are reducing climate risk, and for whom, as well as unintended consequences and side effects.

Investment initiatives

In recent years, a number of initiatives have launched that support private sector investment in adaptation. These include the Coalition for Climate Resilient Investment, which develops financial instruments and other tools to support climate risk decision-making, and the Global Adaptation and Resilience Investment Working Group, which publishes investor guides and other resources for navigating climate risk and resilience issues and opportunities.   

The Green Climate Fund also allocates 50% of its funding to adaptation projects, and the Global Center on Adaptation manages a Technical Assistance Program that focuses on accessing these resources for countries in Africa. The Global Environment Facility integrates climate adaptation strategies mainly through its East Developed Countries Fund and its Special Climate Change Fund. 

Looking forward

Legislative frameworks and governments will continue to be essential in assisting and encouraging private investment and, in turn, helping to drive adaptive action at scale. All parties must nurture public-private dialogue to determine who can and should do what, and where and how it can best be done.

Apart from finance, no company should overlook the role of internal adaptation. Climate-proofing one’s own internal operations and supply chains to address climate risks, and identify opportunities, ensures business continuity and profitability.