I’m the Private Sector Specialist with the Climate Investment Funds, an $8.3 billion portfolio of four climate finance programs working in 72 developing and middle income countries to drive climate-smart investments in renewable energy, energy efficiency, climate resilience, and forestry.
In November, thousands gathered in Marrakech for the UN climate summit. This was a follow-up to the historic Paris talks of 2015. And one of the biggest takeaways was the need to ‘crowd in’ the private sector in climate-smart investments
But why is the private sector needed for reaching the goals set under Paris? Why not just rely on public and government funding?
The short answer is there simply isn’t enough public funding to meet the scale of the climate challenge.
We really need trillions - not billions - to cover the gap.
In 2014 there were approximately $62 billion in public funds going to support climate investments in developing countries. But research shows that we need to invest around $50 trillion in sustainable infrastructure in those markets by 2030. And the clock’s ticking.
Scaling up private sector clean energy investments in solar, wind, and energy efficiency, for example, will be critical to meeting the goals of the Paris agreement. And these technologies deserve a lot of attention.
Another sector that needs both more attention AND more funding is climate resilience and adaptation.
Why is this important? Simple. Climate change poses a significant business risk in many markets. Climate shocks such as prolonged droughts and intense floods can destroy crops, equipment and other goods the private sector relies on to generate income. Major climate events can set back entire economies and have effects that reverberate around the globe, such as increased conflict and migration.
Businesses that are resilient to the effects of climate change can be better equipped to withstand damaging weather events. And they can bounce back faster.
This doesn’t come cheap. The annual adaptation costs in developing countries is expected to be about $150-300 billion a year by 2030. This is much higher than the $25 billion that was made available to these countries last year from public sources.
So the questions are:
- How can we help businesses make their assets and operations more resilient to the expected effects of climate change?
- And how can small amounts of public money help catalyze the early, pioneering investments so that sectors most vulnerable to climate change – such as infrastructure or agriculture - can eventually do this on their own? How do we make this a best practice?
To figure this out, I think we need to talk about risk.
Both assessing risk and addressing risk.
Let’s start with assessing risk and about mindset.
Here’s what I mean: Unlike investing in, say, a wind farm, making a business more climate resilient does not usually generate revenue.
But what it can do is reduce losses, in addition to increasing operational efficiency.
So the bottom line is climate resilience is an issue of assessing risk. Are you as a business owner susceptible to a changing climate? How, and what does that look like?
So first, we need to communicate to companies across all sectors in developing countries that climate change may pose a risk to their future operations and revenue streams. And we need to help them figure out how to assess this.
Let me explain how I’ve seen this work in practice, in Nepal, a country that is highly vulnerable to climate change. It also has huge potential for generating energy through hydropower, which is the world’s largest source of renewable energy.
Harnessing water responsibly can help get electricity to millions of people. That’s especially true in South Asia where lack of access to power is acute.
But climate events such as, increased glacial melt, more intense floods and increased runoff can all damage turbines and other hydro infrastructure. These events can make a hydropower plant repeatedly go down for maintenance, reducing revenues for the company and increasing costs down the line. And it can reduce the amount of clean power available in a country that very much needs it.
So the Climate Investment Funds - in partnership with IFC, the World Bank Group's private sector arm - are working with hydropower developers to carry out climate risk assessments. These look at how climate change is expected to affect a specific hydropower plant in a specific location.
This information can then be presented to decision-makers, along with the costs to make an asset more climate resilient – such as better turbines and improved water control systems. This helps companies to make informed decisions on the costs and benefits of climate action in their businesses. So that is Step One – assessing risk.
Step Two is about addressing that risk. Specifically, how providing concessional financing can help address climate risk.The main idea is, from a risk mitigation standpoint, a relatively small investment now to make operations more climate resilient can save a large amount of money down the road. And if many companies and SMEs that make up whole sectors are better prepared for climate change events, this can make entire economies more climate resilient.
But implementing these measures can be risky for a few reasons, such as:
- A lack of capacity to implement these measures for many businesses, especially in least developed markets, and
- In most years, these measures may not increase revenue or reduce costs; because there’s a chance a climate shock doesn’t occur in that time period.
In other words, if you are running an SME or large agribusiness company, why spend the extra money on climate adaptation measures? There are a lot of things to invest in that can help grow your business here and now, and spending limited money to protect against a future weather event that may or may not happen…well, that’s often not high on the list. So how can we help move it up the list?
One way is by providing long-term, low-cost concessional financing, which can help early adopters pay for these investments and address these risks.
For example, in the Sertao region of Brazil; in the past 50 years:
- Average temperatures have increased by 2 degrees
- Rainfall has decreased by nearly a third
Many farmers are responding to these events by shifting from growing crops to clearing more space for animal herds. But this:
- Leads to deforestation
- Increases soil erosion; and
- Harms local water resources
All of which can lead to a vicious cycle of environmental degradation and poverty.
So the Inter-American Development Bank (IDB) is working with farmers to overcome this challenge using a method called the ‘Climate-Smart and Sustainable Agricultural Production System.’ It sounds technical, but essentially it boils down to looking at how new technologies and processes – such as efficient farming equipment or drip irrigation technology – can help farmers better adapt to the changing climate without harming the environment.
To address the risk in investing in new areas like this, IDB is working with a local bank. Because of their expertise, IDB can help them get up to speed on this market and show them that lending to SME clients for climate resilient technologies can be a profitable, and sustainable business line.
These loans are made possible through a credit line to the farmers on concessional terms, and can be critical to building the business case to farmers and SMEs that these technologies can make economic sense, and eventually, as a best operational practice.
The Sertao project has already led to some solid outcomes. For example 30% of the vegetable farmers in the program have seen net income gains of about 30%, with about the same number showing very substantial improvements in their quality of life.
So whilst climate resilience investments are not the world’s sexiest topic or the best dinner party conversation-starter, they do matter.
Because making the business case for companies to take a closer look at their exposure to climate risks will help us all in the long-term. And addressing risk through providing concessional financing will help sectors throughout developing economies in the short-to-mid-term.
By assessing and addressing climate risk, businesses can deliver a triple win of being good for their company, good for citizens and good for the planet. Or, as they say across the pond, ‘an ounce of prevention is better than a pound of cure.’