Blended Finance Offers the Best Approach to Climate Change Adaptation

With so little time left, we must prepare for the colossal climate challenges yet to come. We hope our approach to public-private blended finance will inspire other multinationals, investors and climate funds to support protective measures that ensure the climate resilience of their supply chains and the global economy.

Sponsored Content | / This article is sponsored by South Pole | By South Pole | Published 2 years ago | About a 5 minute read

Image: Rodolfo Clix/Pexels

Mitigation has been the focus of most climate change work for the last two decades, but efforts are not happening fast enough globally. It’s time to also focus on adaptation. We no longer have the luxury of time to address climate change only by lowering greenhouse gas emissions. Our new reality forces us to quickly protect vulnerable communities before they are severely impacted by the tremendous consequences of a warming planet.

Public-private partnerships that can finance adaptation in places where communities are most vulnerable to floods, droughts and other climate-related risks can be part of the solution. Recently, in partnership with WWF, the Global Environment Facility (GEF) and luxury brand Chanel, South Pole launched the Landscape Resilience Fund. The Fund uses a blended finance (using public and philanthropic finance to mobilize private capital flows) approach, which may be the most effective way to galvanise leaders to take on the huge task of global climate change adaptation — and, more importantly, close the yawning adaptation finance gap.

Both private and public sectors benefit from investing in adaptation

In most cases, adjusting to climate change creates direct private benefits. Farmers and companies are already adapting agricultural practices and operations to changing temperatures and rainfall patterns, simply because it makes business sense: smallholder farmers, especially those in developing countries, are the most vulnerable to the effects of climate change; yet they produce 80 percent of agricultural output, putting many supply chains at risk.

In the words of Andrea d'Avack, Chanel’s former chief sustainability officer: “Chanel’s involvement in the Landscape Resilience Fund provides an opportunity to explore different approaches and methodologies that could help advance changes in our own supply chain and business practices as we progress on our own business transformation.”

At the same time, adaptation measures will also create public benefits. For example, investments in adapted, early-warning systems against floods or in more accurate weather data provide a value-add to the overall economy and society. Germany, for example, would have been able to better prepare for this year’s catastrophic flooding with improved flood alert systems.

Finally, there are plenty of situations where investments in adaptation — in the form of climate-smart agriculture, climate-resilient infrastructure or better climate-monitoring technology — create both private and public benefits. This is when blending finance is so important: Commercial capital can unlock private goods, soft capital unlocks public goods, and blended finance can enable solutions and investments that benefit both businesses and the public.

Blended finance allows for better risk management

Blending finance is a proven approach for optimised risk management. The private sector is well-equipped to manage project implementation risks, but it may not be best suited to take on policy risks or investments in innovative approaches that competitors can easily replicate.

The Landscape Resilience Fund is an example of how blended finance can optimise risk management. The private small and medium-sized enterprises (SMEs) take on the implementation risks of projects with cocoa growers and rattan harvesters that help them access better farming materials, such as drought-resistant seeds, as well as training. In addition, public and philanthropic funding from the Landscape Resilience Fund absorbs risk through technical assistance, and provides venture debt with favourable conditions, turning risky investments into good business cases.

Public finance is woefully insufficient to meet adaptation finance needs

The third reason for favouring blended finance is a practical one: We simply need it! To begin with, just 5 percent of overall climate finance goes towards climate adaptation — and virtually none of it comes from the private sector. Of the tracked adaptation finance, over 95 percent or around $30 billion per year is public. And this is less than 25 percent of the projected costs for adequately financing adaptation over the next decade, with a projected $140 billion to $300 billion per year required in 2030 for developing countries alone.

Public finance for adaptation is expected to increase over the next decade, but so will the scale of adaptation challenges. Financing needs can only be met if scarce public finance is spent in a way that helps mobilise scalable sources of capital from the private sector.

The Landscape Resilience Fund is a great example on how to achieve this: an initial commitment of $1.3 million by the GEF helped mobilise $25 million of private finance from Chanel, which in turn is now catalysing even more private investments from SMEs and other investors.

Blended finance can nudge the private sector to invest in adaptation

Blended finance can address multiple barriers holding back private sector investments in climate change adaptation: Not all innovations can be protected with patents, and so private actors cannot harvest all returns — which leads many to underinvest without public finance backing. Many businesses also prefer to follow industry standards, and need pioneers to blaze the trail on adaptation-related investments. Under the Landscape Resilience Fund, Chanel — supported by public finance from the GEF — has already taken that leadership position by committing to financing adaptation in 2020.

With so little time left and so much to gain, we need to learn about how to prepare for the colossal climate challenges that are yet to come. We hope our approach to public-private blended finance will inspire other multinational companies, development banks and climate funds to invest in protective measures that ensure the climate resilience of their supply chains and the global economy.