Mobilizing private sector investment for climate action: enhancing ambition and scaling up implementation

Private-sector finance has been widely seen as a step to scale up access to resources for ambitious climate action, given the limited availability of public resources. However, there is a knowledge gap about the risks, barriers, and opportunities associated with greater private investment. This paper analyses some important barriers that commonly inhibit private sector investment in climate adaptation action. The analysis draws on case studies of small and medium-sized business (SMEs), multinational companies (MNCs), B corporations and impact investors. Our analysis confirms that private sector actors are willing to invest in climate adaptation, but their investment decisions are constrained by risk profiles associated with climate adaptation projects, the lack of financially viable and bankable projects, and complete knowledge of climate risk that guide adaptation decision. A tailored approach is required to leverage private sector finance, and conducive public policy interventions wi

Mobilizing private sector investment for climate action: enhancing ambition and scaling up implementation

Climate change is the twenty-first century's main threat to achieving the sustainable development goals. The Intergovernmental Panel for Climate Change (IPCC Citation2018) projects that global warming from anthropogenic emissions is likely to exceed its pre-industrial average by 1.5C between 2030 and 2052. It is expected to persist for centuries to millennia and cause long-term changes in the climate system. Heavier precipitation and drought will become more frequent (IPCC Citation2014). Climate variability and changing temperatures will affect both developed and developing countries, disrupting the livelihoods of vulnerable populations and creating economic uncertainties in more vulnerable areas. Addressing these challenges will require an increased flow of climate finance, improved climate finance governance, as well as the transformation of global financial and energy systems (Buchner et al., Citation2015) and balancing economic growth and environmental quality (Gyamfi, Bein, and Bekun Citation2020). It is expected that the cost of climate adaptation is set to increase from $140 billion to $300 billion annually by 2030, with the potential increase to $500 billion by 2050 (UNEP Citation2016). Public climate finance alone will not be enough to meet the ambitious goals set by the Paris Agreement. As the climate finance flow is far behind the level needed to meet the target in the Paris Agreement, there is growing interest in how climate finance can be further mobilized, particularly from the private sector or private climate finance (Kawabata Citation2019), and in particular, private finance for adaptation. Private climate finance is significant for climate change adaptation in developing countries (Paw Citation2017), and in addressing the impact of climate change as it brings additional capital and innovation. However, the private sector's involvement in climate finance so far continues to be more inclined toward mitigation than adaptation (White and Wahba Citation2019; Echeverri Citation2018).

The most recent Climate Policy Initiative report (Citation2019) demonstrated that mitigation finance accounted for 93% of total flows of climate finance in 2017–2018 while adaptation finance made up only 5%. Pauw, Klein, and Vellinga (Citation2015) contend that the private sector is expected to increase engagement in adaptation because it is their interest to be climate resilient. But the reality is that there is limited information on the extent of contribution the private sector provides in adaptation, or what the factors are in influencing private sector investment in adaptation due to limited data or evidence. Globally, private sector engagement in climate finance is mostly driven by project developers accounting for %148 billion of finance in 2015 and $125 billion in 2016 (Buchner et al. Citation2017) spent within the same country (Buchner et al. Citation2017; Jin and Kim Citation2017). Most of these investments are in mitigation projects such as renewable energy and energy efficiency. To balance mitigation and adaptation climate action, it will be crucial for national governments as market regulators, and for international climate finance funding organizations, to identify business models that enable private investment at scale, and design appropriate policies and incentives that link private adaptation to private sector strategies to achieve the desired climate=resilient outcomes (Urwin & Jordan, 2008 in Buso and Stenger Citation2018; CPI Citation2019). Public and donor financial institutions are exploring ways to leverage additional capital for climate action in adaptation. But this has so far been very challenging, as there is limited understanding of what influences private sector actors to invest in adaptation action.

We ask the question: Under what conditions can private sector actors be mobilized to invest in climate adaptation? The paper presents case studies of climate finance adaptation actions of four types of private sector actors: small-medium sized enterprises (SMEs), certified B or ‘Benefit’ corporations, multinational companies (MNCs), and impact investors with operations in Asia, Latin America and Sub-Saharan Africa that focus on private sector climate finance in a wide range of adaptation activities, including agriculture & agri-business, urban adaptation, water and sanitation, micro-finance, renewable energy, tourism, forestry & eco-system services, adaptation products & services, and those that demonstrate innovative methods to engage private sector support for climate adaptation. Our analysis is limited to case studies from a portfolio of projects on mobilizing private sector investment in climate adaptation, which was funded by Canada's International Development Research Centre (IDRC). Nevertheless, it provides relevant insights on the nature of private sector climate finance for adaptation. We define adaptation investment actions as activities that improve the resilience of an investment portfolio to the physical impact of climate change. These include adaptation investments on existing infrastructure, business models and assets at risk (Bender, Bridges, and Shah Citation2019).

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Authors : Bhim Adhikari, Lolita Shaila Safaee Chalkasra
Publisher : Journal Of Sustainable Finance & Investment
Publication Type : Journal Article
Country : Global
Language : English
Year : 2021