For the past decade, annual temperature records have been broken with disturbing regularity. Climate change is expected to adversely impact economies around the world, especially those in developing countries, and risks pushing 100 million people into extreme poverty by 2030. Making climate-vulnerable sectors such as agriculture, health, and infrastructure more resilient is critical to reducing the negative economic and social impacts of climate change. But the costs to make this happen are expected to run billions of dollars a year, of which public funds will only be able to cover a small fraction.
The private sector - ranging from individual farmers to small and medium enterprises to large companies across a variety of sectors – will likely shoulder the vast majority of these costs. But with these costs also comes unique opportunities. Companies with the foresight to properly assess and address their climate risks can protect future revenue streams and potentially create a competitive advantage.
A new report 'Private Sector Investment in Climate Adaptation in Developing Countries', published by the Climate Investment Funds (CIF) examines how development finance institutions can play an important role in helping companies overcome the barriers to making their assets and operations more climate resilient and to help close the financing gap. The report looks at what Multilateral Development Banks (MDBs), in particular, are doing in the climate adaptation space, with a goal to help provide practitioners and private companies with a deeper understanding of how they can better support climate resilience projects in the future.
Here are four key takeaways from the report:
1. Addressing Knowledge Gaps in the Private Sector Matters
Tools such as feasibility studies, business risk assessments, technical assistance and market studies can help address private sector knowledge gaps. In other words, most companies are not fully aware of the risks that they may face due to a changing climate, as well as the technological and investment opportunities available to address those risks. This is particularly true for sectors such as agriculture, infrastructure, and water management. Often, making the link between climate impacts and business risk can help drive companies to consider measures to make their operations more climate resilient.
For instance, an IFC project in Mozambique conducted a feasibility study to demonstrate the technical and financial viability of irrigating agricultural blocks for field crops, vegetables, and tree crops to help smallholder farmers overcome barriers to investment in irrigation technologies. And an EBRD project in Bosnia and Herzegovina conducted a business risk assessment for a pulp and paper company to stress test local water availability under future climate scenarios. These tools can help businesses properly assess the climate risks that could affect their operations, helping decision makers apply the necessary resources to mitigate those risks.
2. Concessional Financing When Returns are Uncertain is Important
Concessional finance is an important financing tool where returns are long and/ or uncertain. Concessional finance – funds provided at below market rates and/or with longer repayment periods - can be critical to reducing the real and perceived risks facing these investments. They can also help align incentives to push projects over the finish line that wouldn’t otherwise be feasible.
MDBs have reported on the effectiveness of using concessional financing to minimize first mover costs when piloting innovative projects. The Inter-American Development Bank, for example, offered a $5.75 million loan on concessional terms from the Pilot Program for Climate Resilience (PPCR) to the Jamaica National Building Society in order to on-lend funds to housing developers and construction firms for water efficient products. This concessional loan was necessary to move the project forward as it came at a time when dedicated lending for water efficient technologies was non-existent in the market.
3. Intermediated Financing Can be Effective for Engaging Small Businesses
Bringing in smaller, local financial institutions can be a necessary step to effectively engage micro, small, and medium enterprises (MSMEs) in climate adaptation. Intermediated Financing can be an effective way to engage MSMEs in climate adaptation activities. MSMEs often face challenges with regards to lack of capacity to address climate risks to their business. And they face an additional hurdle as these companies are often too small to be directly engaged with development finance institutions (DFIs).
DFIs can overcome this barrier by providing local financial institutions with on-lending/credit line products or credit enhancement (e.g. first loss provisions or guarantees for default risk). These local banks can then engage with their MSME clients to help finance climate resilience products. For example, EBRD’s CLIMADAPT financing facility offers credit to local banks to provide financing to small businesses in Tajikistan for sustainable technologies. The local banks are able to leverage their client relationships and expertise in order to effectively identify and support climate resilience investments for SMEs.
4. Scaling Investments through Collaboration Can Help Mitigate Project Risk
Intensive collaboration with other stakeholders can help mitigate project risk and scale investments. Even though many DFIs have gained some experience in the market, the challenge for private sector adaptation investments can prove difficult for one organization to implement on their own.
Long term and patient collaboration with clients and partner DFIs can often be necessary to move private sector adaptation investments forward. For instance, IFC and IDB have worked with Ecom Agroindustrial Corporation (ECOM), one of the world’s biggest coffee traders, on a combined six investments worth close to $200 million. These existing relationships helped build the trust necessary to undertake the first in a series of climate resilience projects benefitting small holder farmers in Latin America. This project combines concessional finance, guarantees, and company contributions along with private sector commitments to buy the crops, helping ensure that the project makes financial and business sense for all stakeholders.
This report will be discussed further at an upcoming BBL event, happening Thursday, January 26th from 12:30 – 2:00 pm at the World Bank headquarters in Washington, DC. For additional information, including how to register for the event, via this link.
Download the Report here.