The problem: a shortfall in adaptation investments
Many public and private assets will need to adapt to withstand the effects of climate change. However, global investment in climate adaptation is broadly acknowledged to be inadequate in much of the world, leaving individuals and property unnecessarily exposed to the effects of extreme weather, natural disasters, and other impacts exacerbated by climate change.
Existing mechanisms, instruments and frameworks to finance climate adaptation measures are not currently meeting either market appetite or the needs of the beneficiaries of adaptation. The scale of climate adaptation investment requirements suggests that financial intermediation will be required to help channel capital towards these projects.
The challenge: dramatically increasing investment in climate adaptation
While the past decade has seen a great deal of innovation in financing methods for climate change mitigation – that is, ways of reducing greenhouse gas emissions, such as energy efficiency measures and renewables – we need to think differently to dramatically increase the flow of investment into adaptation projects.
The impacts from climate change are diverse; from subtle and acute (such as heat stress) to catastrophic (such as cyclones). Hence the measures to respond to these threats are also diverse; from large infrastructure projects to small alterations to ecological/biological projects (such as restoring mangroves). Projects are often highly location- and context- specific. They tend to have their value in avoided costs and risk reduction, rather than easily identifiable savings and revenue. They often create “positive externalities” – where benefits are diffuse and cannot always be captured by the project proponent. These challenges mean new mechanism are required to dramatically increase the flow of investment to adaptation projects.
Who’s involved, and what do we plan to do?
Climate-KIC Australia has convened a unique combination of partners from the private, public and research sectors who are motivated to find concrete ways of addressing the adaptation finance gap. Our project partners are drawn from general insurance, state governments’ environment and treasury departments, institutional banking, pension funds, legal and climate vulnerability analytics. Leveraging our partner’s capabilities, Climate-KIC proposes to test possible solutions to the adaptation finance challenge and demonstrate how to deliver a monetised return to investors.
To do this, innovative and collaborative approaches are clearly needed. Any large, scalable adaptation project will necessarily involve complex interplay between policy, different levels of government, industry, finance and communities. The outputs of this project will be co-designed by all participants, drawing on the diverse expertise and experience of our partners and advisors. Not having a pre-determined outcome means we can test multiple approaches and identify the best.
But really, what do we plan to do?
The Climate-KIC “innovation process” will intentionally canvass a wide array of possible approaches to climate adaptation finance. These will likely include, but will not be limited to: risk transfer (an established mechanism used in insurance), debt instruments, insurance-linked securitisation (such as those used for catastrophe, longevity etc risk), public-private collaboration, collaboration across jurisdictions and levels of government, value capture via levies, public funding at state or local level, leveraged catastrophe bonds (“resilience bonds”), value capture via retail insurance premiums or a combination of any of these.
