“It's quite sad, but there is actually money out there. But finding the quality projects can be a real problem,” said Louise Baker, managing director of the global mechanism at the United Nations Convention to Combat Desertification, or UNCCD. She was speaking during the second panel--“Climate change adaptation: meeting the untapped needs and addressing the consequences of climate change risks”--at Deloitte’s recent “Momentum” conference.
Baker explained that the UNCCD is the entity dealing with land and water and is developing with countries a “pipeline of bankable projects […] for both mitigation and adaptation.” Adaptation appears to be the poor relation in the budgets against the climate change, as 80% of the financing goes towards mitigation.
Yet, Baker insisted that we are already seeing the impact of climate change more severely in some areas than others. “It means […] falling food production, water scarcity, forced migration as areas of the planet become unliveable and it means conflict over a declining stock of natural resources” requiring an urgent adaptation for the people to survive.
Positively, Baker stated that the European regulations on deforestation will have a positive impact on adaptation strategies, but she acknowledged that a system of land tenure is key to secure private sector investments, a reality that many poor countries are confronted with.
Positive financial returns in adaptation
The UNCCD sees the degraded lands as “a sort of underperforming assets,” a concept very well known in the banking world. Baker explained that Mirova, a fund manager based in Paris, is running a “$300m Land Degradation Neutrality fund” with the support of Luxembourg, among other public entities, invests in 20 adaptation projects in 15 countries that deliver a good [positive] rate of return impact investment.
Baker explained the LDN fund takes advantage of a “technical assistance facility” whereby the UNCCD designs the projects with a comfortable risk profile. A challenge for the organisation is to “speed up the flows of public sector finance so we can de-risk private sector investments.”
Alessandra Nibbio, head of blended finance at Blue Orchard, thinks that initiatives whereby the public sector takes more risk with less return compared to the private sector give the latter “a good reason to be engaged on these initiatives.” Yet, more is expected, she stated at the conference. Nibbio expects the public entities to involve them when setting up the strategies and to provide a premium to investors reflecting the lack of liquidity as investors are normally locked-in for “a quite significant time” in not listed instruments.
Blue Orchard is pushing ahead with adaptation strategies by investing into insurance companies and in funds targeting adaptation strategies, in collaboration with Luxembourg’s ministry of finance.
It is difficult to make a revenue case out of an adaptation project […] and to measure the avoided or reduced effects on climate change […] and monetise that.
However, Nibbio admitted that there are few adaptation strategies in the market, which implies a short track record for funds in the business. Moreover, she noted that private investors tend to prefer global exposure for better diversification. So, asset managers will fund projects that fulfil the “political agenda of the public entities, [that are] appealing to the private sector in terms of returns, impact strategy and diversification.”
Steps undertaken to scale-up adaptation projects
“$880m was issued in sustainable bonds in 2022,” said Laetitia Hamon, head of sustainable finance at the Luxembourg Stock Exchange. She estimated that around 2,000 issues out of around 11,550 sustainable bonds are intended to finance climate adaptation and are largely issued by multilateral development banks.
“It is difficult to make a revenue case out of an adaptation project […] and to measure the avoided or reduced effects on climate change […] and monetise that,” said Hamon. Yet, she noted that through the issuance of “climate resilience bonds,” the European Bank for Reconstruction and Development has been closely tracking the resilience of infrastructures, businesses and agriculture.
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Despite the existence of several adequate financial products, Hamon admits that disagreements amongst market players persist. She explained that there are discussions on scaling up sustainable funding for low- and-middle-income countries by the European Commission’s High-Level Expert Group, or HLEG.
It is a slow process, but it is gradually gaining traction as one of their internal recommendations to the European Commission was “to create a specific legal framework for de-risked public-private transition funds.”