The private sector needs to wake up to the opportunity of investing in climate adaptation and resilience, as the benefit-cost ratio of such investments is in the range of two to 15 times, says Varad Pande, Singapore-based partner and director in Boston Consulting Group’s (BCG) climate & sustainability and social impact practices.
The year 2023 was marked the hottest year on record amid rising sea levels and the increased frequency and intensity of extreme weather. With economic losses from natural and climate-related disasters already costing more than US$300 billion ($446 billion) per year, the need to finance climate adaptation and resilience has never been more urgent.
Yet today, less than 10% of all climate finance is allocated to adaptation. Adaptation refers to the adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects. Financing adaptation can look like investments in early warning systems for natural disasters, better infrastructure like dams, as well as nature-based solutions like mangroves.
At present, the climate funding problem faces a few pressing issues. Not only is the world off by a factor of five from the estimated US$5 trillion a year needed from now until 2050 to address the worst effects of climate change, climate adaptation is often the “forgotten child” between mitigation and adaptation in the climate crisis conversation, says Pande.
“How do we safeguard our communities? How do we protect our supply chains? How do we ensure that we can minimise the human, social, and economic costs of what’s going to happen from climate impacts, which are already upon us? We need a lot more attention and money flowing to adaptation,” he continues.
The business case for investing in climate adaptation has already shown significant economic pay-off. Last December, a study released by BCG in collaboration with the Global Resilience Partnership (GRP) and United States Agency for International Development (USAID) titled “From Risk to Reward: The Business Imperative to Finance Climate Adaptation & Resilience” found that every dollar a company invests in implementing adaptation and resilience measures yields US$2 to US$15 in financial benefits from avoided losses in revenue and cost savings.
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The report details the business case for investing in adaptation and resilience, laying out three key opportunities for the private sector to secure value, and identifying the specific entry points for finance.
The first is the “protect” opportunity, where companies can safeguard value at risk and protect assets, supply chains, and operations by implementing and financing adaptation and resilience measures. Furthermore, lenders and investors can safeguard their portfolios by deploying capital toward resilient assets and companies.
The second is the “grow” opportunity in which investors can finance companies that develop adaptation and resilience solutions.
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Finally, the “participate” opportunity details how the private sector can collaborate with the public sector to finance and implement capital projects and deploy finance toward vehicles that support a portfolio of projects.
The same study also found that companies providing adaptation and resilience solutions can be worth nine times their current revenues – and sometimes as much as 77 times their revenues.
Despite these numbers, there isn’t enough climate finance flowing. In essence, Pande says that “not enough climate finance is happening on its own, there’s a market failure”.
First, there still exists a green premium for sustainable products, which keeps many consumers at bay and therefore businesses are often not keen to invest in green alternatives, further reinforcing the cycle of a lack of financing. “You need some sort of acceleration to bring down the green premium. Once these solutions scale, they become price competitive,” says Pande.
Then, the lack of a good carbon pricing system has led to the relative underpricing of non-green alternatives. While carbon taxes and carbon emissions trading schemes are growing around the world, most countries, especially in emerging markets, are still in the infancy stage of carbon pricing mechanisms.
Finally, Pande believes that there is a massive information gap on the cost of inaction, the value at risk, and even new emerging value pools, especially in adaptation & resilience. “Our work across countries, cities, and regions often starts with calculating and bringing to life the societal ‘cost of inaction’ — lives, livelihoods, and GDP at risk — which sets the basis for action. In the private sector, we are also seeing increasing ‘value at risk’ as their portfolios get exposed to climate risks, something we help estimate and address. And we are also seeing new ‘value pools’ for investors and businesses emerge. For example, solutions like ‘district cooling’ are likely to see accelerated adoption, given the increasing heat stress facing many of the world’s biggest cities. There is a growing set of such emerging adaptation solutions that we track, size and forecast.”
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Pande: We are seeing a lot more action amongst both companies willing to act and seeing investments in climate as a strategic lever for business in the future — this is what is giving me hope. Photo: Albert Chua/The Edge Singapore
How to turbocharge climate finance
Yet, Pande remains optimistic about the world’s chances of tackling climate change, fast.
He references the majority of the 90% of climate funding in climate mitigation projects that we are seeing today. Much of commercial capital is flowing in the direction where mitigation projects have a proven commercial case, such as renewable energy, which is now not only competitive but also cheaper than coal-based energy in most cases.
To the BCG partner, this is evidence that the world will start putting their money where their mouths are once the path to commercial viability of new solutions becomes clearer. “We are now beginning to see a similar change in sentiment in adaptation and resilience financing, with early champions seeing the business case,” he says.
To make that happen, much more innovative and creative solutions around partnerships and blended finance need to take place. While the concept of public-private partnerships in climate finance has been around for a long time, Pande believes that the world needs a new public-private-philanthropic partnership (PPPP) paradigm.
These different pools of capital need to come together to create a new paradigm shift, he says. Public government capital is critical as it signals the commitment of the government, while private capital is how many large projects get scaled.
Meanwhile, the third prong of philanthropic capital is important too — it’s more “nimble” and “unconstrained” in funding experimental ideas that nobody else can. “It can fund innovative research, lighthouse ideas, prove certain things, and be more comfortable with failure… which is what we need to spur more and faster innovation in climate technologies,” says Pande.
Finally, the last key to the tri-sector capital puzzle is capital from multilateral development banks such as the World Bank, which can channel large development capital to climate in emerging markets, where they have “boots on the ground” and teams that have earned the trust of governments. This capital needs to get more “catalytic”, bringing three to five times private capital to invest with it.
The good news, Pande says, is that examples of such public-private-philanthropic partnerships are already underway. In Singapore, Pentagreen Capital, a debt financing facility that is jointly backed by HSBC and Temasek, is funding “marginally bankable projects” that require initial capital to prove their commercial viability.
Lightspeed Group, a private equity venture capital fund from the US focused solely on adaptation financing, is providing capital to a portfolio of climate adaptation solutions, ranging from AI-based infrastructure monitoring, to water hareseting and precision agriculture.
Similarly, the Asian Development Bank’s Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) has a mantra of “one in five out”, which means that for every dollar they invest from their facility, it should unlock five dollars of commercial capital.
Pande says that while many more examples are popping up, such as Malaysia’s National Energy Transition Facility to support energy transition projects, most crucially, a mindset shift is required.
Through making national plans and strategies on both mitigation and adaptation financing, engaging with private and institutional investors in figuring out what products are needed in the market and where the new value pools lie, and working with large foundations on figuring out their climate finance strategies, BCG remains committed to supporting this new PPPP movement.
“Traditional approaches to financing projects are not going to work,” says Pande. “We need a different mindset, and that’s beginning to happen especially among CEOs and C-suites. I think we need now for that to translate into the next level in organisations. Processes need to change — loan approvals as well as multilateral development banks’ risk policies need to evolve, and organisational mindsets and capacities need to be enhanced.”
“To quote Charles Dickens: ‘It was the spring of hope, it was the winter of despair’. I could make an equally persuasive case of both. It’s a winter of despair in that we need a lot more financing. But there is also a spring of hope, as we are seeing a lot more action amongst companies willing to act and seeing investments in climate as a strategic lever for business in the future. This is what is giving me hope,” he ends.
