At Africa Climate Week 2023, governments are meeting with climate experts, civil society, businesses and financial institutions to address Africa’s climate challenges — the most pressing of which is to strengthen economies and societies to the impacts of climate change. In order to direct greater capital to build resilience to our changing climate, private investors need to better understand the adaptation and resilience impact of their investments. To scale up adaptation finance, the Adaptation and Resilience Investor Collaborative (ARIC) is leading collaboration between development finance institutions to improve information flows with the support of UNEP FI and Cadlas.
It has never been more urgent to mobilise private investment for adaptation and resilience
Our changing and more volatile climate is undeniably affecting the lives of billions around the globe. Whether it’s lethal extreme heat in US cities, unprecedented devastating floods in Pakistan, or food inflation in an increasingly water-stressed Europe, the need to build resilience to a changing climate is no longer just tomorrow’s problem – it’s today’s as well. This requires deep systemic change in the way that our economies and societies attempt to cope with an increasingly harsh and unpredictable climate.
Yet the financial flows to build resilience and meet these daunting challenges do not yet appear to be in place. UNEP’s 2022 Adaptation Gap Report estimates the adaptation and resilience financing needs to be USD 340 billion per year by 2030, while recorded financial flows are currently only a fraction of this amount, at around USD 46 billion per year over 2019-20. This gap can only be filled by mobilising much larger volumes of private finance, which currently represent less than 1% of reported A&R finance flows, according to the Climate Policy Initiative. This means mobilising private finance for public investments in A&R, as well as for the vast A&R needs of the private sector itself. Private entities – and the markets in which they operate – that are exposed to climate change impacts need to invest in A&R solutions to maintain their productivity in the face of a changing climate, while pursuing new business opportunities through the provision of innovative A&R solutions, technologies and services.
Why does information on adaptation and resilience impacts matter?
Private investors need information that enables them to make informed decisions about capital allocation. In the context of A&R, this means information about the risks posed by physical climate change impacts, and about opportunities associated with building climate resilience. There have been important advancements in recent years regarding the availability of physical climate risk information for investors, with a growing range of providers from ratings agencies to open-source tools and databases. However, investors have significantly less information about the positive contributions that their investments make towards A&R goals and lack clear, widely accepted methodologies and approaches to obtain this kind of information. This situation results in asymmetric information flows for investors in relation to A&R, as they currently have more information on reasons not to invest because of physical climate risks than on reasons for investing in a resilient future. The lack of information and metrics on adaptation finance could discourage investment in highly climate-vulnerable emerging markets or sectors, which is exactly where investment is urgently needed to shift current practices towards climate-resilient business activities. Poor or partial information may even drive investment away from where it is most needed – a phenomenon known as capital flight. Investors themselves recognise the need for better information about the positive impact of investments on A&R; in 2022, a survey conducted by the Global Adaptation & Resilience Investment (GARI) Working Group found that 67% of its members strongly agreed and 30% somewhat agreed with the urgent need to develop metrics for resilience investments, and 53% agreed that clear metrics for climate resilience impacts would contribute towards supporting investment in A&R.
The Adaptation & Resilience Investor Collaborative recognises the need for better information about the impact of investments
The eighteen members of the Collaborative have identified the lack of clear and consistent information about the positive contributions of investments towards A&R – and of the methodologies and tools to generate this information – as a major barrier to engaging private investment in A&R. In response, the group is developing an approach for measuring these positive contributions in ways that are consistent and comparable to enable investors to understand, assess and manage the positive A&R impacts of their investment, and to structure investments that build climate resilience.
Recent studies have shown that there is no shortage of A&R-related metrics and measurement frameworks – in fact, there are many. However, very few, if any, of these focus on the operations and needs of investors. To be relevant for investors, A&R metrics need to be applicable within the investment process and be comparable across different types of investees and investments. Crucially, they also need to be practical, meaningful and based on data that is accessible and material to investors and investees alike.
Towards better, consistent and comparable adaptation & resilience impact measurement
The Adaptation & Resilience Investor Collaborative is bringing together a working group of development finance institutions and private investors to develop and test an approach for the consistent and comparable measurement of A&R impact in private investment operations, with technical support from Cadlas, a consultancy firm specialised in climate resilience financing. This group is currently developing, testing and refining a focused and practical approach to the measurement of A&R impact that draws upon best practices in impact management, physical climate risk assessment and the integration of climate resilience into business and financing operations.
What will be the key issues and questions that ARIC and its partners will seek to address through this initiative? How will this work complement and build on existing market practices for impact management, such as the Operating Principles for Impact Management and the Impact Management Platform’s Five Dimensions of Impact?
Firstly, contextualisation is fundamental. Climate change impacts are highly localised and dependant on each region’s specific context. This means that A&R impact measurement must recognise this diversity, while aiming for meaningful comparability and – where appropriate – aggregability, so that investors can manage A&R impact strategically across their portfolios. Secondly, ‘impact’ needs to be clearly defined in the context of A&R. To build wider climate resilience, an investment should deliver a positive externality that addresses a specific physical climate risk. The Collaborative will examine how this could be measured in terms of people, nature and economic activity. Finally, the scale of an investment’s A&R impact should be assessed. This means quantifying the breadth of the A&R impact – for example, the number of people benefitting from a specific project. This should also cover the qualitative depth of the A&R impact by assessing the improvement in climate resilience of those beneficiaries.
The direct link between the finance committed to the investment and the A&R impact will also be considered. In some cases, this may be very direct and clear, for example an investment in coastal defences that reduces a community’s exposure to flood risk. But there may be other cases where the causal link between the investment decision and the real-life impact is more complex to establish, such an investment in a climate tech company that provides physical climate information to a diverse array of entities across sectors. This illustrates how the measurement of A&R impact requires an understanding of the impact pathways by which an investment will help communities prepare, respond, withstand, or recover from climate-related shocks and stresses. Lastly, the guidance that ARIC is developing will be designed for a wide range of private investments across diverse regions and markets, many of which may have little access to data – especially in emerging markets where climate resilience investments are urgently needed – which makes it particularly important for the group to identify the kind of information needed to measure A&R impact, as well as where and how investors can access it.
Following an initial piloting exercise from July to September 2023, ARIC’s emerging findings and recommendations on A&R impact measurement in private investment operations will be shared towards the end of the year in a first report on integrating A&R metrics into direct investments, stay tuned!