sustainability

Article
Financing Climate Change Adaptation: International Initiatives
Govinda R. Timilsina

Senior Economist, World Bank, Washington, DC 20433, USA; gtimilsina@worldbank.org

Abstract: Climate change adaptation is one of the main strategies to address global climate change.
The least developed countries and the small island states that lack financial resources to adapt to
climate change are the most vulnerable nations to climate change. Although it would be more
economical to adapt to climate change compared to the anticipated damage of not doing so, the
demand for capital is estimated to range to hundreds of billions. The crucial question is how
to manage investments to adapt to climate change globally. This study provides an overview of
existing international provisions on climate finance for adaptation. It includes provisions through
international financial institutions, United Nations agencies, bilateral and multilateral channels, and
the private sector. It also explores how private sector finance can be further attracted to invest in
climate change adaptation.

Keywords: climate change; climate finance; climate change adaptation; climate resilient economic de-
velopment



1. Introduction


The debate on climate change risks and adaptation has intensified in recent times.
Citation: Timilsina, G.R. Financing In the past, international negotiations on climate change, particularly at the Conference
Climate Change Adaptation: of Parties (COP) to the United Nations Framework Convention on Climate Change (UN-
International Initiatives. Sustainability FCCC), focused more on limiting the growth of greenhouse gas (GHG) concentrations.
2021, 13, 6515. https://doi.org/ In the past, climate change adaptation did not get much attention because of numerous
10.3390/su13126515
uncertainties related to timing and levels of impact. However, two recent phenomena have
taken much attention from policymakers and climate negotiators. First, global emissions
Academic Editors: Adriana Del
and, therefore, the concentration of GHGs have increased continuously despite the fact that
Borghi and Michael McAleer
climate change negotiation started 30 years ago, and the UNFCCC has urged the global
stakeholders to act urgently since its formation in 1992 [1]. Second, initial indications of
Received: 23 March 2021
climate change are visible—extreme weather events are on the rise both in terms of fre-
Accepted: 3 June 2021
Published: 8 June 2021
quency and intensity [2–4]. Therefore, there exists a consensus among most policymakers
around the world that both climate change mitigation and adaptation should go hand in
Publisher’s Note: MDPI stays neutral
hand. It is also crucial to incentivize all countries worldwide to participate in efforts to
with regard to jurisdictional claims in
combat climate change. Many countries, which are severely affected by climate change, do
published maps and institutional affil-
not contribute much to it. For example, small island states are most vulnerable to climate
iations. change, but their GHG emissions are insignificant compared to global emissions. On the
other hand, countries (or groups of countries), which are large GHG emitters (e.g., China,
United States, India, Brazil, Russia, Saudi Arabia, European Union), are also vulnerable to
climate change.
Climate change is happening, as reflected by several weather- and climate-related
Copyright: © 2021 by the author.
events, such as the increased frequency and intensity of hurricanes and forest fires, and the
Licensee MDPI, Basel, Switzerland.
This article is an open access article
high frequency of droughts causing loss of agriculture productivity in various parts of the
distributed under the terms and
world. In order to minimize the losses from these impacts, measures should be undertaken
conditions of the Creative Commons that help the ecosystem to adjust to these impacts, such as drought-resistance crop varieties.
Attribution (CC BY) license (https:// At the same time, new infrastructure (e.g., bridges, hydropower plants), settlements in the
creativecommons.org/licenses/by/ coastal areas, and developments in the low-lying areas should adopt measures to ensure
4.0/). their resilience against climate change-induced severe activities.

Sustainability 2021, 13, 6515. https://doi.org/10.3390/su13126515 https://www.mdpi.com/journal/sustainability

Sustainability 2021, 13, 6515 2 of 19

The importance of climate change adaptation has also increased due to the pace of
economic growth and urbanization both in new emerging economies and developing
countries. Infrastructure development (e.g., roads, bridges, power plants, and transmission
lines) and urbanization (i.e., compact building structures) are irreversible; once they are
built, it would be too expensive to change. It creates an infrastructure lock-in. Therefore,
climate change adaptation should be taken into account when infrastructures are being
built for the first time. The development of climate-resilient urban infrastructure, along
with the rapid rate of urbanization, is a critical challenge in the developing world at present.
Some recent studies such as Hallegatte et al. (2019) [4] also economically justify climate-
resilient infrastructure investment, claiming that the economic benefits of climate change
adaptation would be four times as high as its costs.
One key challenge to climate change adaptation is financing. Lack of finance is one
of the main factors behind slow economic growth in developing countries. While many
developing countries are striving to get the necessary funding for their basic infrastructural
and human needs, how can they afford climate-resilient infrastructure, which requires
higher upfront investment? This implies that developing countries need the increased
financial resources for climate change adaptation to come through additional funding (i.e.,
in addition to the traditional overseas development assistance).
The recent trends of climate finance indicate that much of the climate finance (more
than 80%) committed to date has gone towards climate change mitigation activities (see,
e.g., MDB, 2019 [5]). The smaller share of climate finance going towards adaptation can be
attributed to two reasons. First, results from mitigation investment can be realized now;
for example, investments in energy efficiency improvements offer immediate energy cost
savings. On the other hand, the results of investment in climate change adaptation might be
beneficial in the future but not necessarily immediately, although some investment benefits
can be seen in the short-term as well. For example, investments in flood control or drought-
resistant seeds can be realized now because these are existing problems. The second reason
is that public sector climate finance for climate change mitigation also leverages private
sector finance. The private sector financing of clean energy technology is ever increasing.
However, climate change adaptation is a public good; the private sector does not have
an incentive to finance climate change adaptation unless it is directly impacted. We will
discuss this issue later in this paper. For these reasons, generating enough financing for
climate change adaptation is challenging. However, the private sector is being encouraged
through various means to contribute to climate change adaptation financing. For example,
international financial institutions, bilateral and multilateral development agencies, and
philanthropic organizations have made commitments towards climate change adaptation
and resilience financing. The Green Climate Fund under the UNFCCC has committed to
allocate half of its finances to climate change adaptation and resilience. The World Bank
has developed its action plan on climate change adaptation and resilience [3], under which
it plans to spend USD 50 billion over the next five years (2020–2025). In a third-round
survey conducted by Heinrich Boll Stiftung North America in 2018 to track climate change
adaptation funding, Watson and Schalatek (2019) [6] reports that the World Bank’s Pilot
Program for Climate Resilience (PPCR) is the largest window to finance climate change
adaptation and resilience. In its new plan to contribute to international climate finance,
the UK government has decided to balance mitigation and adaptation when allocating
its international climate finance commitment [7]. Yet, climate change adaptation has not
become common practice in infrastructure projects in many countries.
This paper aims to reflect on how climate change adaptation and resilience financing
is unfolding globally. Currently, the information on climate change adaptation financing
is scattered among various sources. There does not exist a comprehensive document that
can provide an overall picture of the status of climate change adaptation and resilience
financing—who is providing the funding, who is executing/administrating it, and where
the funding is going. This situation creates an inefficiency through an overlapping of
funding for the same sort of activities from various donors, while critical areas are not
Sustainability 2021, 13, 6515 3 of 19

getting access to it. The contribution of this paper is that it brings this information together
and provides a comprehensive picture of the current status of climate change adaptation
financing. The paper is expected to be informative and useful to an audience that is not
familiar with climate change adaptation financing.
The paper is organized as follows. The next section presents some estimations of the
financial need for climate change adaptation based on existing literature. Section 3 presents
the sources of climate change finance, various funding windows/mechanisms/facilities,
and agencies to execute climate change finance. It includes financing through Multilateral
Development Banks, United Nations Agencies, bilateral and multilateral channels, and
the private sector. Section 4 further explains the private sector’s role in financing climate
change adaptation. Finally, Section 5 draws the key conclusions.

2. Financial Need for Climate Change Adaptation

How much investment would be needed and who will finance it are crucial questions.
Answering them, however, is difficult because of the huge uncertainty with regard to
climate change impacts and the required level of adaptation. There have been attempts
to estimate the amount of investment needed to finance climate change adaptation. IPCC
(2014) [8] presents some earlier estimations of the global costs or investment needed for
climate change adaptation. However, these estimates vary significantly because of different
methodologies used for the estimations, different sectors covered in the estimations, and
also different time-horizons considered for the estimations. Moreover, the wider variations
of costs also reflect uncertainties involved with climate change impacts and adaptation.
One early study to estimate the investment needed for climate change adaptation or
building climate change resiliency is (UNFCCC, 2007) [9]. This study estimates that the
global investment demand to adapt to climate change in 2030 could amount to between
USD 50 billion and USD 170 billion (2005 price). Of this amount, the study estimates,
USD 14 billion is required for agriculture, forestry, and fisheries, USD 11 billion for water
supply systems, USD 5 billion to cope with increased diseases due to climate change, USD
11 billion for coastal area protection, and USD 8–130 billion for building climate change
resilient infrastructure. These estimates are indicative only; the sectoral estimates are not
comparable as they use different IPCC scenarios for the baseline.
Another early study that estimates investment needed to adapt to climate change is
World Bank (2010) [10]. This study estimates that the world would need USD 70–100 billion
annually between 2010 and 2050 to adapt to climate change even if the temperature rise
is maintained at 2 degrees Celsius warmer than the pre-industrial period. This amount is
relatively low if compared to global economic output (GDP), which is 0.17%. On a regional
basis, for both climate scenarios, the East Asia and Pacific Region would need the highest
costs because the region is projected to be the most vulnerable to climate change. Three
most vulnerable areas in this region—climate resilience infrastructure in the coastal zone,
and water supply and flood protection—require the highest levels of investment to adapt
to climate change. In relative terms (i.e., climate adaptation cost as the percentage of GDP),
the cost of building climate resiliency would be highest in Sub-Saharan Africa.
A study commissioned by the United Nations Environmental Program (UNEP, 2016) [11]
estimates that the annual requirement for climate change adaptation and resilience investment
could vary between USD 140 and 300 billion by 2030.
More recently, the World Bank estimated investment demand for building climate-
resilient infrastructure [4]. The study estimated that building climate-resilient infrastruc-
ture in the power, water and sanitation, and transport sectors in low- and middle-income
countries will require between 11 to 65 billion USD a year by 2030. Building climate-
resilient basic infrastructure would increase the total investment need in these sectors
only by 3 percent. The study also showed that investing one US dollar in these sectors for
climate resiliency would benefit four US dollar by avoiding the potential damages faced by
a lack of climate change adaptation.
Sustainability 2021, 13, 6515 4 of 19

Please note the variations in the estimates of financial need for climate change adap-
tation made at various points in time. Whether the estimates were made in the 1990s or
recently, large variations in each estimate exist. This indicates the level of uncertainty
surrounding climate change impacts and adaptation. Further investigations and analyses
are needed to narrow down these variations.
As mentioned above, the estimations of investment needs may not be precise, but all
these estimations indicate one indisputable conclusion: the investment required for climate
change adaptation is large. Since the most vulnerable countries to climate change are those
low-income or poor countries, these countries will not be able to generate the necessary
finances to address the challenges caused by climate change. This fact is acknowledged
by international communities. This is the main agenda of negotiations and agreements
in the several annual meetings of the Conference of Parties (COP) of the UNFCCC. There
is an understanding under the UNFCCC negotiations or in any other global discussions
(such as World Economic Forum, G20 meetings) that industrialized economies need to help
developing countries to finance climate change adaptation. Therefore, international com-
munities have developed a large number of windows to finance climate change adaptation
activities in developing countries. This study presents these financial windows briefly.

3. Climate Change Adaptation: Sources, Institutions, and Mechanisms

This section underscores sources of finance for climate change adaptation, the insti-
tutions that administer the funds and vehicles or mechanisms through which the funds
are distributed to climate change adaptation activities. As far as the sources of funding
are concerned, the ultimate sources are governments, international development agencies,
and the private sector, which contributes either for business or philanthropic purposes.
There exists much overlapping between these sources, and determining the actual flow
of climate change adaptation finance originating from particular sources is complex. For
example, multilateral development banks (MDBs) use their resources or specific trust
funds created by their donors for climate financing. Note, however, that their resources
can consist of their earnings or contributions by their board member countries. Similarly,
the private sector also contributes to these organizations’ funding, and it is difficult to
attribute whether their funding should be attributed to the private sector or the MDBs.
Keeping these issues in mind, we discuss the climate change financing in the following
categories: (i) multilateral development banks and other similar international financial
institutions, (ii) United Nations agencies including the Global Environmental Facility, (iii)
bilateral and multilateral government funding and (iv) the private sector (private citizens
and corporations and philanthropic organizations).

3.1. Multilateral Development Banks and Other International Development Finance Institutions
Multilateral Development Banks (MDBs) are the main sources of climate change
adaptation financing as well as the main agencies to implement or execute the financing
in their client countries. MDBs include six development banks: the World Bank Group
(WBG), the Asian Development Bank (ADB), the Inter-American Development Bank (IDB),
the African Development Bank (AfDB), the European Bank for Reconstruction and De-
velopment (EBRD), and the European Investment Bank (EIB). Table 1 presents a brief
introduction of these MDBs.
In 2018, MDBs committed almost USD 13 billion for climate change adaptation, of
which USD 12.162 billion (more than 94%) was from MDBs’ own accounts [5]. Figure 1
presents commitments from each MDB for climate change adaptation in 2018. Of the total
MDB adaptation financing in 2018, 70% was investment loans, 9% were grants, another 9%
was for policy-based financing, and 8% was result-based financing. Thirty percent of the
total allocation went to Sub-Saharan Africa, 24% to South Asia, 15% to Latin America and
the Caribbean, 13% to East Asia and the Pacific, and the remaining went to the rest of the
developing world. Of the total commitment, 22% was allocated to energy, transport, and
other built environments and infrastructure, 18% to water and wastewater systems, 17%
 the total allocation went to Sub-Saharan Africa, 24% to South Asia, 15% to Latin America
and the Caribbean, 13% to East Asia and the Pacific, and the remaining went to the rest of
Sustainability 2021, 13, 6515 the developing world. Of the total commitment, 22% was allocated to energy, transport, 5 of 19
and other built environments and infrastructure, 18% to water and wastewater systems,
17% to crop and food production, 13% to other agricultural and ecological resources, 23%
to cross-cutting issues, and 5% to institutional capacity support or technical assistance [5].
to crop and food production, 13% to other agricultural and ecological resources, 23% to
cross-cutting issues,
Table 1. and 5%
Multilateral to institutional
Development Bankscapacity
(MDBs). support or technical assistance [5].

Year of Development Banks (MDBs).

Table 1. Multilateral
MDBs Introduction Headquarters
Establishment
Year of
MDBs A global, development
Introduction financ- Headquarters
Establishment
World Bank (WB or IBRD) 1946 ing institute, 189 member coun- Washington, DC
World Bank World Bank A global, development financing
1946 tries Washington, DC
Group (WBG) (WB or IBRD) institute, 189 member countries
World Bank GroupInternational Financial Private sector wing of the
(WBG) International Financial 1956 Private sector wing of the World Washington, DC
Corporation (IFC)(IFC) 1956 WorldBankBankGroup
Group Washington, DC
Corporation
Regional development Bank for
Regional development Bank for
Asian Development
Asian DevelopmentBank
Bank(ADB)
(ADB) 19661966 Asia and Asia
the Pacific, 67 member
and the Pacific, Manila,
Manila, Philippines
Philippines
countries
67 member countries
Regional
Regional developmentBank
development Bankfor
for
African Development
African DevelopmentBank
Bank(AfDB)
(AfDB) 19641964 Tunis,
Tunis, Tunisia
Tunisia
Africa, 80 member countries
Africa, 80 member countries
Regional
Regionaldevelopment
developmentBankBankfor
for
Inter-American
Inter-American DevelopmentBank
Development Bank (IDB)
(IDB) 19591959 Latin America and
Latin America and the Carib- the Washington, DC
Washington, DC
Caribbean, 48 member countries
bean, 48 member countries
Regional development Bank for
European Bank for Reconstruction & Regional development Bank for
European Bank for Reconstruction & De- 1991 Eastern Europe and Central Asia, HQ-London
Development (EBRD) 1991 Eastern65Europe
velopment (EBRD) memberand Central
countries HQ-London
Asia, 65 member countries
International lending
European Investment Bank (EIB) 1958 International lending organiza- Luxembourg
organization of the EU
European Investment Bank (EIB) 1958 Luxembourg
tion of the EU

12,936

7891

1286 1601 1274

452 432

ADB AfDB EBRD EIB IDBG WBG Total

Figure 1.
Figure 1. MDBs’
MDBs’ commitments
commitments for
for climate
climate change
change adaptation
adaptation in
in 2018.
2018. Source:
Source: MDB
MDB (2019)
(2019) [5].
[5].

MDBs use various funding windows or mechanisms or facilities to finance climate climate
change adaptation.
adaptation. Table
Table22presents
presentsexamples
examplesofofthese windows
these windows or or
mechanisms
mechanisms or facilities.
or facili-
MDBs
ties. havehave
MDBs launched a large
launched number
a large of windows
number to finance
of windows climate
to finance risk reduction
climate and
risk reduction
adaptation activities. In most cases, the sources of the funds are contributions from
and adaptation activities. In most cases, the sources of the funds are contributions from various
governments in the form of trust funds to the MDBs. Usual financial instruments of MDBs
(grants, soft loans, technical assistance, guarantees, and equity) are also used for climate
change adaptation financing. These trust funds leverage additional funding from the
MDBs’ own budget or from national governments and in some cases the private sector too.
Sustainability 2021, 13, 6515 6 of 19

Table 2. Main funding windows under the MDB for climate change adaptation and resilience.

Administrating Financing
Name of Fund
MDB Instruments
Global Facility for Disaster Reduction
World Bank Grant
and Recovery (GFDDR)
Global Index Insurance Facility (GIIF) World Bank and IFC Worldwide
IDB Regional Fund of Agricultural
IDB Grant
Technology (FONTAGRO)
IDB’s Infrastructure Fund IDB Loan, TA
IDB’s Sustainable Energy and Climate
IDB Grant, TA
Change Initiative (SECCI)
IFC Partial Credit Guarantees IFC Loan, Guarantee
Climate Investment Funds (CIF) World Bank Different for individual funds
IFC Risk Sharing Facility (IFC RSF) IFC RSF
International Development Association World Bank Grant, loan
Korea Green Growth Trust Fund World Bank Grant, TA
MDB Pilot Program for
MDB Grant, loan, TA
Climate Resilience
Multilateral Investment Fund (MIF) of
IDB Grant, loan, equity, TA
the IDB Group
Partnership for Market
World Bank Grant
Readiness (PMR)
Pilot Program for Climate
World Bank Grant, loan
Resilience (PPCR)
Public-Private Infrastructure Advisory
World Bank Grant, TA
Facility (PPIAF)
World Bank Group Catastrophic Weather hedges contingent
World Bank
Risk Management financing
ADB Climate Change Fund (ADB-CCF) ADB Co-financing, grant, TA
Africa Climate Change Fund(ACCF) AfDB Grant
Co-financing, grant, loan risk
Africa Water Facility (AWF) AfDB
management
ASEAN Infrastructure Fund (AIF) ADB Co-Financing, loan, TA
Source: [12].

Among the MDBs, the World Bank Group (WBG) leads in terms of the number
of financial windows/mechanisms, number of projects, and size of the fund dedicated
to climate change adaptation. The Inter-American Development Bank and the African
Development Bank have also executed some programs to finance climate change adaptation.
However, the Asian Development Bank is lagging behind the other MDBs in terms of
climate change adaptation financing; most of ADB’s climate finance has gone to climate
change mitigation.
Below we highlight some of these funding windows/mechanisms/facilities for the illus-
trative purpose of understanding their role in financing climate change adaptation activities.

3.1.1. Global Facility for Disaster Reduction and Recovery (GFDDR)

The Global Facility for Disaster Reduction and Recovery (GFDRR) is a funding mech-
anism of the World Bank that finances activities to understand, manage, and reduce risks
from natural hazards which are being exacerbated due to climate change. It was established
in 2006 and it has provided financial support to over 400 local, national, regional, and
international entities to execute climate change adaptation and resilience in developing
Sustainability 2021, 13, 6515 7 of 19

countries more vulnerable to natural disasters. The fund has been contributed to by 37
countries and 11 international organizations. Most of the GFDRR resources are provided
as grants to countries to support the implementation of the Sendai Framework. Besides
supporting climate change resilience, it also supports enabling gender equality. The GF-
DRR has been supporting activities in the following eight areas: (i) using science and
innovation in disaster risk management, (ii) promoting resilient infrastructure, (iii) scaling
up engagements for city resilience, (iv) strengthening hydromet services and early warning
systems, (v) deepening financial protection through disaster risk financing and insurance,
(vi) building social resilience, (vii) deepening engagements in resilience to climate change,
and (viii) enabling resilient recovery. By June 2018, the GFDRR has an active portfolio of
USD 252 million, financing 394 activities and 136 countries addressing a range of issues
including flooding, earthquakes, and landslides [13].

3.1.2. The Pilot Program for Climate Resilience (PPCR)

The Pilot Program for Climate Resilience (PPCR) was conceived in 2008 and has been
operational since 2012 (https://climatefundsupdate.org/the-funds/pilot-program-for-
climate-resilience-2/ accessed on 30 September 2020). Its primary objective is to finance
the preparation of climate-resilient national development plans. To achieve its objective,
the PPCR provides financing for pilot and demonstration activities and capacity building
to enable developing countries to build upon existing national work to integrate climate
resilience into national and sectoral development plans. It also provides co-financing
to public and private sector investments identified in national or sectoral development
plans. Other eligible funding activities include enabling learning-by-doing and knowledge
sharing at the country, regional, and global levels. It gives priority to highly vulnerable
Least Developed Countries eligible for MDB concessional funds. The PPCR funding
instruments include a grant to prepare the Strategic Program for Climate Resilience, a
grant up to USD 1.5 million for the preparation of single country pilots, and grants and
concessional loans for additional costs necessary to make a project climate-resilient. The
World Bank Group is the trustee of the PPCR and all MDBs (except the European Investment
Bank) are its implementation agencies. Since it began operations (July 2012), the PPCR
has committed USD 985 million for 60 projects in 20 countries or regional groups of
countries [14].

3.1.3. The Global Index Insurance Facility (GIIF)

The World Bank Group (including the International Financial Corporation, the private
sector wing of the World Bank Group) launched the Global Index Insurance Facility
(GIIF) in 2009 with funding from the European Union, and the governments of Germany,
Japan, and the Netherlands. (https://www.ifc.org/wps/wcm/connect/industry_ext_
content/ifc_external_corporate_site/ accessed on 30 September 2020) The purpose of this
index-based insurance facility is to protect smallholder farmers and micro-entrepreneurs
against the catastrophic risks of natural disasters, which are expected to be exacerbating
due to climate change. This insurance facility is one of the first innovative approaches
to address climate change risks. It is different from traditional insurance services as it
pays out benefits based on a pre-determined index or loss of assets and investments
resulting from weather and catastrophic events, without requiring intermediating entities
to assess the claims, thereby making the claims settlement process quicker. This facility
also finances activities to promote the concept of innovative insurance solutions, capacity
building, technical advice on products and pricing, and to encourage public policy dialogue
and regulatory environment facilitation. The GIIF has facilitated more than 4.6 million
contracts, with USD 730 million in sums insured, covering approximately 23 million
people, primarily in Sub-Saharan Africa, Asia, Latin America, and the Caribbean. (https:
//www.indexinsuranceforum.org/overview accessed on 30 September 2020)
Sustainability 2021, 13, 6515 8 of 19

3.1.4. African Water Facility (AWF)

The African Water Facility (AWF) was established in 2004 to mobilize resources to
finance water resources development activities in Africa. The main purpose of this fund
is to support the equitable and sustainable management of water resources in Africa for
economic growth, poverty alleviation, and regional cooperation. The African Development
Bank (AfDB) is the implementation or administration agency of this fund. The fund is
contributed to by multilateral financial institutions, foundations, and African governments.
During the 2006–2018 period, it committed approximately GBP 162 million to 117 projects
in 52 countries.

3.2. UN Agencies for Climate Change Adaptation Finance

Various UN organizations are either the source or implementation agency for climate
change adaptation financing. The Global Environmental Facility (GEF) and the UNFCCC
serve both roles. Other UN organizations, such as the United Nations Development
Program (UNDP), and the United Nations Environmental Program (UNEP) serve more as
implementation agencies of climate change adaptation financing. These institutes utilize
different funds created under the UNFCCC (e.g., LDC Fund, Strategic Climate Fund, and
Green Climate Fund) and the fund generated by the GEF. Other UN organizations, such
as the World Meteorological Organization (WMO), Food and Agriculture Organization
(FAO), International Fund for Agricultural Development (IFAD), and the United Nations
Capital Development Fund (UNCDF), also finance climate change adaptation activities.
Below we briefly introduce these funds and institutions.

3.2.1. Global Environmental Facility (GEF)

The Global Environment Facility (GEF) was established in 1992 during the Rio Earth
Summit. It provides financial support to almost all international environmental agreements,
including the UNFCCC. It is still the sole financial mechanism of the UNFCCC. Besides cli-
mate change mitigation and adaptation, the GEF also covers areas related to the protection
of forests, biodiversity, land and landscapes, ecological systems, and the management of
water resources and wastes. The financial resources under the GEF are contributed to by
183 countries, international financial institutions, non-governmental organizations, and
the private sector. The GEF finances only the agreed incremental costs of eligible project
activities. Under climate change adaptation and resilience, the GEF finances various activi-
ties, including capacity building, demonstration (i.e., pilot) projects, adaptation technology
transfer, the development of national adaptation plans, and vulnerability and adaptation
assessments. It serves as the secretariat of the climate change adaptation fund established
under the Kyoto Protocol. By the year 2018, the GEF had provided over USD 18.1 billion in
grants and mobilized an additional USD 94.2 billion in co-financing for more than 4500
projects in 170 countries. (https://www.thegef.org/about-us accessed on 30 September
2020) On climate change adaptation activities alone, the GEF has financed over USD 1.5 bil-
lion as grants, and co-financed USD 7 billion with other partners for 330 adaptation projects
in 130 countries since 2001. (https://www.thegef.org/topics/climate-change-adaptation
accessed on 31 August 2020.)
The GEF has adopted the following three strategies to finance climate change adapta-
tion in developing countries:
• Reduce vulnerability and increase resilience through innovation and technology trans-
fer for climate change adaptation;
• Mainstream climate change adaptation for systemic impact (i.e., climate change activi-
ties also address other environmental and sustainable development challenges);
• Foster enabling conditions for effective and integrated climate change adaptation by
supporting developing countries to prepare and implement national adaptation plans
under the UNFCCC.
The GEF, in fact, contributes funding to various funds, such as the Least Developed
Countries Fund (LDCF) and the Special Climate Change Fund (SCCF) discussed later in
Sustainability 2021, 13, 6515 9 of 19

this section. Under the LDCF, it had financed the preparation of NAPAs in 51 countries
and provided more than USD 1.16 billion to implement urgent adaptation measures under
NAPAs and to assess medium and long-term adaptation needs by 2017. Similarly, under
the SCCF, the GEF has financed USD 350 million in 77 projects in 79 countries [15].

3.2.2. United Nations Framework Convention on Climate Change (UNFCCC)

The UNFCCC has established various funds to finance climate change activities,
including climate change adaptation. Among these, the chief funds for financing adaptation
and resilience are the Green Climate Fund (GCF), Adaptation Fund, Special Climate Change
Fund and the Least Development Country Fund. The Global Environmental Facility (GEF)
has been serving as the financial mechanism of the UNFCCC since the UNFCCC became
operational in 1994. The GCF, established in 2011, now acts as an operating entity of
the UNFCCC financial mechanism. These funds are briefly discussed in this paper later.
A Standing Committee on Finance has been established to govern the funds under the
UNFCCC [16].

3.2.3. United Nations Development Program (UNDP)

The UNDP is another main UN organization for executing climate finance programs.
Its focus, in term of climate change adaptation, is on promoting equitable and pro-poor
approaches to build climate-resilient livelihoods. It finances activities to enhance communi-
ties’ capacity to adapt to the changing climate by contributing to the creation of robust and
responsive state institutions, capable public and private sector management, and skilled
human resources. It is done through regional, national, subnational, and community-
based programs. To date, it has supported 75 countries, leveraging more than USD 800
million, of which USD 300 million is grants and USD 500 million is co-financing. (UNDP
Fact sheet. https://www.undp.org/content/dam/undp/library/corporate/fast-facts/
english/FF-Climate-Change-Adaptation.pdf accessed on 30 September 2020) The UNDP
has created several windows to finance climate change adaptation, including the following:
• Community-Based Adaptation (CBA), to finance projects in local natural resource
management to address climate risk and validate adaptation measures in vulnerable
regions and communities;
• The Africa Adaptation Program (AAP), to contribute to increasing resilience to climate
change across the African continent;
• National Adaptation Programs of Action (NAPAs), to support the design and imple-
mentation of NAPA under the LDC Work Program of the UNFCCC;
• Climate Change and Development—Adapting by Reducing Vulnerability (CC-DARE),
to support sub-Saharan African countries to create opportunities for integrating cli-
mate change adaptation into national development;
• Climate Change and Disaster Risk Reduction (CC/DRR), to support activities for the
strengthening of national capacities to manage climate change risks and adaptation
measures, such as the preparation of disaster management legislation, risk assessment,
and reduction plans, and the establishment of emergency preparedness networks and
early warning systems;
• Adaptation Knowledge Management and Methodology Support, to strengthen the
capacity to make decisions under the inherent uncertainties of climate change.

3.2.4. United Nations Environmental Program (UNEP)

The United Nations Environmental Program (UNEP) implements several activities for
climate change adaptation in developing countries. It finances the following activities [17]:
• Developing methods and tools to help adaptation planning and decision-making, and
improving the science-policy interface in adaptation policies and planning;
• Helping countries overcome barriers to implementing their adaptation solutions by
improving access to information, facilitating policy development, and easing access
to finance;
Sustainability 2021, 13, 6515 10 of 19

• Enhancing climate resilience through planning, piloting, and testing ecosystem-based

adaptation (i.e., restoration and sound management of ecosystems and biodiversity);
• Facilitating developing countries’ access to climate finance to implement their NAPAs
and help advance their adaptation planning and institutional development.
The UNEP’s climate change adaptation activities are mostly funded through the
Global Environmental Facility (GEF).
The major financial programs that support climate change adaptation through the UN
agencies are listed in Table 3.

Table 3. Main funding windows under the UN Agencies for climate change adaptation.

Caribbean Catastrophe Risk Insurance Short-Term

CCRIF SPC CARICOM Members
Facility (CCRIF) Liquidity
NGO/CBO working GEF
GEF Small Grants Program (GEF SGP) UNDP Grant
focal areas
GEF Trust Fund—Climate Change focal Countries eligible for WBG
GEF Grant
area (GEF 6) UNDP financing/TA
All developing country parties to Grant, concessional loan
Green Climate Fund (GCF) UNFCCC
the UNFCCC guarantees Equity
In accordance with IFC
IFC Partial Credit Guarantees (IFC PCG) IFC Loan guarantee
investment guidelines
Least Developed Countries Fund (LDCF) GEF All LDC parties to UNFCCC Grant
Pilot Program for Climate
SCF supplement ODA-eligibility Grant, Loan
Resilience (PPCR)
All developing country parties
Special Climate Change Fund (SCCF) GEF Grant
to UNFCCC
UNFCCC Adaptation Vulnerable developing country
UNFCCC Grants
Fund (UNFCCC AF) parties to the Kyoto Protocol
Adaptation for Smallholder Agriculture Co-financing
IFAD Smallholder farmers
Program (ASAP) Grant
Source: [12].

3.2.5. UNFCCC Adaptation Fund

The Adaptation Fund was established under the Kyoto Protocol of the UNFCCC.
The primary source of the fund is the two percent share of proceeds of the Certified
Emission Reductions (CERs) issued under CDM projects. National governments and
the private sector also contribute to this fund. The principal objective of the Adaptation
Fund is to finance climate change adaptation activities in the vulnerable communities of
developing countries. Since 2010, USD 564 million has been committed from this fund
to 84 climate adaptation project activities. (https://www.adaptation-fund.org/about/
accessed on 30 September 2020) The World Bank Group (WBG) has been serving as the
interim trustee for the Adaptation Fund. Most of the projects financed by this fund,
however, have been implemented through the UN agencies. The Adaptation Fund has
also launched a ‘Readiness Program for Climate Finance’ to help strengthen the capacity
of national and regional implementing entities to receive and manage climate financing.
(https://www.adaptation-fund.org/readiness/ accessed on 30 September 2020).

3.2.6. UNFFC’s Least Developed Country Fund (LDCF)

This fund was established in 2001 under the UNFCCC to support its least developed
country parties for their specific needs related to climate change adaptation. It is used for
mainly two purposes: (i) to implement urgent adaptation measures in countries vulner-
able to climate change, and (ii) to help least developed countries prepare their National
Adaptation Programs of Action (NAPAs), which consist of the identification and implemen-
Sustainability 2021, 13, 6515 11 of 19

tation of strategies to adapt to climate change. It fully finances or co-finances adaptation

activities which are focused on community-level activities. The LDCF is contributed to
by 194 governments around the world, international institutions, and the private sector.
It is administered by the GEF. At present, the LDCF finances the major climate change
adaptation project activities in the most vulnerable countries in the world. By 2017, the
LDCF had financed NAPAs in 51 LDCs [18].

3.2.7. UNFCCC’s Special Climate Change Fund (SCCF)

The Special Climate Change Fund (SCCF) was established by the Seventh Confer-
ence of the Parties (COP7) to the UNFCCC held in Marrakech, Morocco in 2001. It fi-
nances both long-term and short-term activities to improve climate resilience in water
resources management, land management, agriculture, health, infrastructure development,
fragile ecosystems, which include mountainous ecosystems and integrated coastal zone
management areas [17]. The financing is provided through two windows: the Adapta-
tion window (Special Climate Change Fund-A) and (ii) the Technology Transfer window
(Special Climate Change Fund-B). While the first window is relevant to climate change
resilience activities, the second window can also be used if technology transfer is related
to climate change adaptation. The fund also finances activities to improve climate re-
silience in the healthcare sector by providing funding for the monitoring of diseases and
vectors affected by climate change. It also finances activities to develop early warning
systems. Capacity building for preparing and preventing climate change-related disas-
ters (e.g., droughts and floods) is also covered by this fund. It also finances capacities
to develop catastrophe risk insurance systems. The technology transfer component does
not only cover implementing already proven technologies but also developing new tech-
nologies through research and development. It also funds demonstrations of project
implementation (pilot projects) and knowledge hubs (e.g., regional centers and networks)
working in the field of climate change adaptation. The priority areas of funding are deter-
mined by the GEF based on the guidance provided by the UNFCCC. The total size of the
SCCF funding by 2018 was USD 350 million, and it has financed 77 projects in 79 coun-
tries. (https://www.thegef.org/topics/special-climate-change-fund-sccf accessed on 30
September 2020).

3.2.8. UNFCCC’s Green Climate Fund (GCF)

The Green Climate Fund (GCF) was established by the UNFCCC during the 10th
Conference of Parties (COP 10) held in Cancun, Mexico in 2010. Its main objective is
to help developing countries limit or reduce their GHG emissions and adapt to climate
change. After the Paris Climate Accord agreed in Paris in 2015, the GCF has been seen as
the main financial vehicle to achieve the Paris Agreement. GCF initially gathered pledges
worth USD 10.3 billion, mostly from developed countries but also from some developing
countries, regions, and one city (Paris); by 2020, the size of the fund is expected to be
USD 100 billion [17]. The UNFCCC directly administers the fund through a Standing
Committee on Finance (UNFCCC SCF). The activities eligible for GCF funding are those
aligned with the priorities of recipient countries and fully owned by recipient countries.
National and sub-national entities can directly access the fund without needing to go
through international intermediaries. The GCF balances its portfolios (50:50) between
climate change mitigation and adaptation. It pays particular attention to the needs of
countries that are highly vulnerable to climate change (e.g., the Least Developed Countries,
Small Island Developing States, and the African States). Fifty percent of the total adaptation
portfolios will be implemented in these vulnerable regions.
Financing for the GCF can be in the form of grants, loans, equity, or guarantees. While
the fund has been initially contributed by the public sector (governments), it aims to
generate financing from the private sector by stimulating them to directly participate in
climate change projects through equity or by other means. It will create a Private Sector
Facility (PSF) for this purpose.
Sustainability 2021, 13, 6515 12 of 19

3.2.9. UNCDF’s Local Climate Adaptive Living Facility (LoCAL)

The UN Capital Development Fund (UNCDF) established the Local Climate Adaptive
Living Facility (LoCAL) in 2012 to integrate climate change adaptation into the community
or local development of developing countries [17]. It contributes to local governments’
planning and budgeting systems to incorporate awareness and improve resilience to
climate change. By nature, these are typically small- to medium-sized investments for
climate change adaptation and resilience. The main financial instruments under the LoCAL
are performance-based grants. The fund finances several activities, such as (i) enabling
local authorities to assess climate risks, (ii) integrating adaptation into local development
planning and budgeting, and (iii) implementing selected adaptation interventions. The
LoCAL is co-financed by the Global Climate Change Alliance of the European Union
(GCCA-EU), and by the Swedish International Development Agency (SIDA). Since its
establishment in 2012, it has financed about USD 9 million in 64 local governments in
13 countries around the world [19].

3.3. Bilateral and Multilateral Financing by National Governments

National governments, particularly developed countries, are the key sources of climate
change adaptation finance in developing countries, through bilateral and multilateral
channels. Since this paper deals with international financing for climate change adaptation
focusing on developing countries, it does not address the financing of climate change
adaptation through national funding in developed countries. Some developing countries
have also established national funds for climate adaptation, but those funds are contributed
to by developed countries through bilateral or multilateral channels. For example, Rwanda
established its national climate fund, FONERWA, through contributions from the UK’s
Department for International Development (DFID), KfW Germany, the Green Climate
Fund, World Bank, and African Development Bank. Domestic sources such as dedicated
government revenues collected through environmental fines and fees (e.g., forestry and
water usage fees) also contributed to this fund. Similarly, Ethiopia created its Climate
Resilient Green Economy Facility (CRGE Facility) through contributions from the UK DFID,
Adaptation Fund, Green Climate Fund, and also from bilateral contributions from the
governments of Norway, Austria, and Denmark.
It should be noted here that developed countries are the major contributors to the
climate change adaptation funds established and administrated by international organiza-
tions, such as UN organizations and MDBs, among others. These funds were discussed
earlier in this paper; here our focus is on bilateral or multilateral funds directly provided by
donor countries for recipient countries. This means that government or non-governmental
organizations of the recipient countries directly access these funds. There are a large num-
ber of bilateral or multilateral funds established by developed countries to finance climate
change adaptation activities in developing countries. Table 4 presents some of these funds.
Note that this table does not present an exhaustive lists of such funds; it presents key funds
for illustrative purposes.
Sustainability 2021, 13, 6515 13 of 19

Table 4. Key Bilateral and Multilateral Funds Established by Developed Countries to Finance Climate Change Adaptation
in Developing Countries.

Name of Fund Administered by Focus

Canada Fund for African Climate
Canadian government Sub-Saharan Africa
Resilience (CFACR)
Caribbean Catastrophe Risk Insurance
CCRIF SPC CARICOM members
Facility (CCRIF)
Climate and Development Knowledge Governments of Netherlands and
Developing countries
Network (CDKN) United Kingdom
Qualified insurance and
Climate Insurance Fund (CIF) KfW, BlueOrchard
reinsurance companies
Investment Fund for Developing Activities that contain a Danish
Danish Climate Investment Fund (KIF)
Countries (IFU) economic interest
Energy and Environment NGOs, public and private companies,
Finland—Ministry of Foreign Affairs
Partnership (EEP) research and education institutions
Japan’s Fast Start Finance (JFSF) Japanese Ministry of Finance Developing countries
Public and private entities
KfW Development & Climate Finance KfW
Depending on contract
Germany’s International Climate
Ministry for the Environment Projects in IKI’s areas of support
Initiative (IKI)
Global Climate Change 73 LDCs or SIDS that are recipients of
European Union
Alliance+ (GCCA+) official development assistance
Projects consistent with the DAC
International Climate Fund (UK)(ICF) DFID, DECC, Defra
definition of ODA
International Climate Initiative Developing and newly industrializing
Ministry for the Environment
(Germany) (ICI) countries, countries in transition
Entities registered in Denmark, Finland,
Nordic Climate Facility (NCF) NEFCO
Iceland, Norway or Sweden
US Global Climate Change
USAID and the U.S. Treasury Developing countries
Initiative (GCCI)
Source: [12].

3.3.1. The Global Climate Change Alliance Plus (GCCA+)

The Global Climate Change Alliance Plus (GCCA+) was established in 2008 by the
European Union to help the world’s most vulnerable countries to increase their resilience
to climate change by reducing climate change risks and by adapting to climate change
impacts (http://www.gcca.eu/about-gcca accessed on 30 September 2020). Small Island
Developing States (SIDS) and Least Developed Countries (LDCs) are the priority recipients
of this fund. It funds multi-year programs with an average contribution of EUR 5 million
per project, in line with national priorities for climate-resilient actions identified by EU
Delegations with local development agents. It also finances facilities that support EU Dele-
gations and development partners to implement GCCA+ projects. Moreover, also eligible
for GCCA+ financing are regional and multi-country programs that supplement existing
project activities. The fund is accessible to local level communities and local authorities.
For example, it complements funding of the United Nations Capital Development Funds’
LoCAL initiative. Since it began operation in 2008, the GCCA+ fund has supported over
70 national programs in LDC and SIDS. Since 2016, the GCCA+ fund has also started to
support middle-income countries. GCCA+ commitments amounted to EUR 750 million
for the 2007–2020 period. (http://www.gcca.eu/funding/how-does-gcca-funding-work
accessed on 30 September 2020).
Sustainability 2021, 13, 6515 14 of 19

3.3.2. Germany’s International Climate Initiative

The International Climate Initiative (IKI, German abbreviation) was established by the
German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety
(BMU) in 2008 to finance climate change and biodiversity projects in developing, newly
industrializing countries and economies in transition. (https://www.international-climate-
initiative.com/en/ accessed on 30 September 2020) Initially, part of the proceeds from EU-
ETS auctioning allowances contributed to this fund. Later Germany’s Special Energy and
Climate Fund started to contribute to it. It is Germany’s main funding window to finance
Germany’s commitments under the UNFCCC and the UN Framework Convention on
Biological Diversity. It funds climate change mitigation and adaptation to climate change,
conservation of natural carbon sinks through reducing emissions from deforestation and
forest degradation (REDD+), and conservation of biodiversity. Like other international
funds for financing climate change adaptation, it also prioritizes activities in vulnerable
countries and regions. The key areas supported by this fund are ecosystem-based adap-
tation, climate-related extreme event risk management (e.g., insurance solutions), and
the development and implementation of national adaptation strategies. By 2017, it had
financed more than 100 climate change adaptation projects.

3.3.3. The ClimDev-Africa Special Fund (CDSF)

The CDSF is a multi-donor trust fund established to support African countries,
institutions, and communities to build climate change resilience. It has been opera-
tional since 2014. It provides financing for (i) the development, dissemination, and
utilization of high-quality information related to climate change risks; (ii) capacity de-
velopment of policymakers and support institutions; (iii) pilot adaptation practices that
demonstrate the integration of climate change adaptation into development planning
and practices. (https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-
Documents/CDSF_at_a_glance_web.pdf accessed on 30 September 2020). It has been
jointly implemented by the African Union Commission (AUC), the African Development
Bank, and the United Nations Economic Commission for Africa (UNECA). The CDSF
has financed EUR 33 million in national and regional projects in areas such as effective
weather monitoring and early warning systems in several African countries, building
disaster resilience to natural hazards at the Sub-Saharan African Region, country, and
community levels.

4. Private Sector and Financing Climate Resiliency

The private sector is another important source of financing for climate-resilient projects.
International organizations, including the UNFCCC, have urged and encouraged the
private sector to finance climate-resilient projects. The public–private partnership schemes
launched by various countries and supported by international development partners could
provide a strong platform for the private sector to finance climate resiliency [20]. Several
studies, such as Micale et al. (2018) [20], Agrawala et al. (2011) [21], Atteridge (2011) [22],
Venugopal et al. (2012) [23], Pauw (2014) [24], and UNEP (2016) [25] discuss how the private
sector could finance climate change adaptation and resilience-related activities and projects.
Micale et al. (2018) highlight the barriers to the private sector actively participating in
adaptation financing. These barriers include uncertainty regarding returns on investment,
high upfront costs of technology, and a lack of technical and institutional capacities in the
project hosts [20]. Agrawala et al. (2011) explore new business opportunities for private
companies to motivate them for their engagement in adaptation financing [21]. Atteridge
(2011) argues that private sector financing for adaptation often does not match developing
countries’ most pressing needs [22]. Venugopal et al. (2012) examine the ways of leveraging
private finance for climate change adaptation through public funds [23]. Pauw (2014) finds
that the evidence for private sector engagement in climate change adaptation is weak in
developing countries [24]. UNEP (2016) illustrates various mechanisms for enhancing
Sustainability 2021, 13, 6515 15 of 19

private sector financing for climate change adaptation and also highlights policies needed
to incentivize the private sector [25].
Before going deeper to analyze how the private sector could or should finance climate
resiliency, it is important to understand the incentives and obligations that can encourage
the private sector to finance climate change adaptation and resilience. By definition, the
private sector is a profit-making economic entity. Its actions are mainly driven by financial
incentives or regulatory mandates/obligations. To some extent, their actions are also
driven by social obligations (goodwill hunting). A private sector entity finances a project
if it expects the project to deliver a certain rate of returns to its investors. However, most
project activities that will be impacted by climate change produce public goods (e.g., roads,
bridges, parks, irrigation systems, electricity supply systems). Normally, the private sector
may not find adequate incentives to invest in these public goods and services in a normal
or business-as-usual situation. When these systems become more vulnerable due to climate
change, this provides further disincentives to the private sector to invest in them.
Nevertheless, the private sector might invest in climate change resilient activities if it
has enough confidence the assets it owns are vulnerable to climate change. For example, a
private firm making a large-scale investment in agriculture farming could be interested in
reducing weather-related risks (drought, flooding). It could invest in reducing this risk.
Now, if the firm has reasonable confidence that climate change might aggravate risks, it
may be interested in making an additional investment to reduce these risks, provided that
the return from its farming is still meeting its expectations. If the private sector finds that
the investment is too high for mitigating these risks and it fears not making a reasonable
rate of return from the farming, it will move away from this business and invest somewhere
else where it sees lower risks and reasonable returns.
The private sector finances climate change adaptation and resilience through various
channels. It directly contributes to the UN funding windows, such as the Adaptation Funds
and LDC funds. It also co-finances climate change adaptation and resilience activities
along with the MDBs. The UNFCCC’s Green Climate Fund is planning to leverage private
investment in climate change adaptation. The private sector also contributes through
philanthropic organizations or institutions. Bill Gate is a co-leader of the Global Commis-
sion on Adaptation created in 2018 to catalyze global climate financing in climate change
adaptation and resilience. Thus, an appropriate methodology does not yet exist to track
and report private financing of climate change adaptation and resilience [20]. Moreover,
no regulations that require the private sector organizations to monitor and disclose their
actions related to climate change exists [25].
Accounting for the private sector’s contribution to climate change adaptation is also
complex because some might argue that most climate change adaptation is coming from
the private sector. This is because when governments finance these activities directly
or through international development institutions, the source of funds ultimately comes
from the taxation of private households or businesses. Moreover, ultimately it would
be the private sector that purchases various financial instruments (e.g., green bonds or
any other climate change-oriented bonds) or that makes equity investments in climate
change adaptation project activities. Below we present two examples of the private sector’s
participation in climate change adaptation financing.
It is also argued in some existing studies (e.g., [20]) that small-scale private sector
entities (e.g., smallholder farmers, small-and-medium-sized firms) and large-scale entities
(multinational firms with complex supply chains) will finance climate change adaptation
and resilience activities, particularly in vulnerable sectors such as agriculture. This is true;
they have been doing so to reduce weather- or disease-related risks, and they have to
increase their investment to reduce the relevant risks if climate change aggravates these
risks. While large-scale private firms might be able to afford to invest against climate risks,
small-scale private firms may not able to do so. They need help from the public sector
(governments) or from the private firms who supply their products (e.g., smallholder coffee
farmers who supply cocoa to large coffee manufacturing firms). If larger firms do not
Sustainability 2021, 13, 6515 16 of 19

provide finances to smallholder farmers, there could be a huge risk of disruption in their
supply chains, which might cause huge losses.
The private sector (individual or firm) does not have an alternative to invest in climate
change resiliency for the assets it owns if the government makes this obligatory through
policies and mandates. For example, if governments have different standards for buildings
in more vulnerable areas (e.g., coastal areas), a private building owner will make the extra
investment to follow these standards. In the absence of incentives and regulations, it may
not be reasonable to expect the private sector to invest in climate resiliency. There are many
methods governments or international communities can use to provide incentives for the
private sector to invest in climate resiliency [20,24,25].

4.1. Financial Instruments

While the private sector may not be interested in investing in climate-resilient projects
that produce public services, governments can develop financial instruments for private
funds and utilize those funds for climate change adaptation and resilience. For example, a
government or an international financial institution can issue a bond dedicated to climate
change adaptation and resilience to attract private finance, and then use these for climate-
resilient project activities. If private entities (households, firms, institutions) find the bond
attractive to invest in, they will. For example, the World Bank has issued more than USD
13 billion equivalent in Green Bonds through more than 150 transactions in 20 curren-
cies. (https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-
of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets accessed
on 30 September 2020). Of the total investment (commitment) during the 2008–2018 period,
22% went to climate change adaptation and resilience projects in developing countries
around the world [26]. A large number of countries, including the UK, USA, France, China,
India, Indonesia, Russia, Germany, and South Korea, have issued green bonds for financing
climate change activities, including adaptation and resilience activities. CPI (2018) [27] re-
ports that by the year 2018, the total size of the climate-aligned bond was USD 1.45 trillion.
While green bonds or any other bonds dedicated to climate finance attract private finance,
they are issued by international financial institutions (e.g., the World Bank’s green bonds)
or by governments; they might, therefore, be interpreted as climate financing by the issuing
institutions or governments rather than actual investors (private sectors).

4.2. Co-Financing/Guarantees
Co-financing/guarantees is another mechanism that attracts the private sector to
invest in climate change adaptation and resilience projects. For example, if governments
or development partners, such as MDIs, cover part of the funding of a climate-resilient
project (e.g., a hydropower project with adaptation measures for climate-related risks), the
private sector would not have difficulty in financing climate change adaptation activities
in the same manner it does for any normal project (i.e., a project without climate change
adaptation). Such a project would be more attractive to a private investor because climate
change-related risks are covered by the public sector (governments or international donors).
The question, however, is if such investment can be interpreted as climate change resilience
investment from the private sector. There is a tradition in most existing studies discussing
climate change adaptation financing that the entire investment in a project that faces climate
change-related risks is attributed to climate change adaptation finance. Climate change
adaptation finance is the additional finance (not the entire finance) that is needed in the
project due to climate change risks. For example, an investment to control damage from a
monsoon flood that occurs each year in South Asian countries cannot be interpreted as a
climate change adaptation investment. Climate change adaptation investment would be
an incremental investment to control the damage from increased monsoon floods caused
by climate change. However, that is not the practice used to interpret climate change
adaptation and resilience investment and financing reported to date.
Sustainability 2021, 13, 6515 17 of 19

4.3. Insurance
Although climate change is bad for society as a whole, it can provide business oppor-
tunities to some. This is similar to the fact that some natural disasters provide business
opportunities to some entrepreneurs. For example, when a flood destroys a road or bridge,
cement manufacturers might see that their demand goes up. Climate change risks could
provide an incentive to insurance companies covering natural disaster damages or weather-
related crop damages. There are many types of insurance products that cover climate
change risks. The most commonly used in the agriculture sector is weather-index insur-
ance. This insurance system first develops a weather index, say, based on rainfall. If there
occurs a loss of crops due to heavy rainfall, farmers can claim compensation through
their insurance policy. Under climate risk scenarios, insurance providers could increase
the premium. Problems of moral hazard (false claims) can be avoided through a high
deductible. This type of insurance policy can protect farmers from climate risks; at the same
time, it attracts private investors to new types of insurance businesses (climate insurance
businesses). The private sector’s participation in climate risk insurance has already started
in developing countries. Guy Carpenter LLC, one of the leading global risk and reinsur-
ance private firms with 60 offices around the world, provided weather index insurance to
smallholding cotton and maize farmers in Mozambique [25].
There exists some private funds that finance climate change adaptation through
insurance. One of such funds is the InsuResilience Investment Fund. It was formerly known
as the Climate Insurance Fund and was established in 2015 by the German Development
Bank, KfW, to contribute to climate change adaptation and resilience by providing an
innovative solution in the field of climate risk insurance. It aims to reduce the vulnerability
of micro, small and medium enterprises (MSME) and low-income households to extreme
weather events. It has been formulated under a public-private-partnership setup. The
private sector has two windows: debt and equity investment windows. It also provides
technical assistance on insurance product design and development. Moreover, it also
provides subsidies on premium payments for the end-clients, but the subsidy provision is
temporary and the amount is limited. The fund is meant for existing or new insurance or
reinsurance companies interested in insurance solutions to help clients mitigate climate-
related risks. The fund is managed by BlueOrchard, which is a leading global impact
investment manager which has invested across 80 emerging and frontier markets around
the world. Technical assistance under this fund is managed by CelsiusPro, which is a
Swiss-based weather and climate change insurance specialist.

5. Conclusions
Adapting to climate change or marching towards a climate-resilient development
path is the main strategy to address global climate change. The importance of this strat-
egy is based on two factors. First, despite more than 30 years of negotiation on climate
change, there is still no concrete agreement to reduce GHG emissions and stabilize their
concentration. While the Paris Climate Agreement has set a goal to stabilize the concen-
tration at the level that does not allow the earth’s mean surface temperature to increase
above 2 degrees Celsius or even 1.5 degrees Celsius from the pre-industrialized level, the
agreement itself is voluntary. Moreover, major emitters such as the United States, Brazil,
and Australia have either stayed out of this agreement or do not seem that serious about
the agreement. After all, the Paris Agreement is a voluntary deal; there is no guarantee
that climate change mitigation pledges made by various countries under this agreement
will be met. Second, recent trends or patterns of extreme weather events in terms of their
intensities or frequencies indicate that climate change might have already started to show
its impacts (USGCRP, 2018, World Bank, 2019).
One of the big challenges of adapting to climate change is that the countries which
are most vulnerable to climate change (i.e., least developed countries, small island states)
neither have the financial resources nor technical and institutional capacities to adapt
to climate change. Existing studies estimate that climate change adaptation will require
Sustainability 2021, 13, 6515 18 of 19

hundreds of billion dollars of investment each year in the next decade. While this amount
is small when compared to global economic output (GDP), the asymmetric distribution
of climate change impacts (i.e., higher impacts on countries with a lower capacity to cope
with it), does not leave an alternative to building a globally cooperative action to finance
climate change adaptation activities. In this regard, the international development financial
institutions, relevant agencies of the United Nations, donor countries, and even the private
sector or philanthropic organizations, are playing a role in establishing various funds to
finance climate change adaptation project activities.
Among international development financial institutions, multilateral development
banks have launched a large number of funding windows by blending their finances with
donor countries’ contributions and, to some extent, the private sector’s contributions. In ad-
dition to MDBs, various funds or financial facilities have been developed under the United
Nations to support climate change adaptation activities. Chief among them is the Global
Environmental Facility, the principal financial mechanism to support the implementation
of environmental agreements reached since the Rio Earth Summit in 1992. Other UN funds
include the Green Climate Fund, Least Developed Country Fund, Adaptation Fund, and
the Special Climate Change Fund, all set up under the UNFCCC. UN organizations, partic-
ularly the United Nations Development Program and the United Nations Environmental
Program, are actively involved in mobilizing these funds to implement climate change
adaptation programs and policies. Many countries, especially developed countries, are
directly contributing, through their overseas development agencies, to financing climate
change adaptation activities in developing countries vulnerable to climate change. They are
also the main development partners that contribute to the funds set up by the multilateral
development banks and UN agencies to finance climate change adaptation.
Since the private sector is the primary source of finances, development communities
are exploring innovative ways to engage the private sector to finance climate change
adaptation activities. One of the big challenges to engage the private sector on climate
change adaptation finance is that the private sector is a profit-making entity and climate
change adaptation falls under the good public category. Therefore, unlike in climate change
mitigation activities (e.g., clean energy projects), climate change adaptation activities do
not offer direct incentives to the private sector. Nevertheless, some innovative solutions or
instruments to address this issue are being developed. Climate change bonds attractive to
the private sector but dedicated to climate change adaptation could be a solution to channel
private finance to climate change adaptation and resilience. Innovative insurance products
against climate change impacts, such as weather index insurance, could be developed by
private sector-owned insurance companies. Like in the clean energy project activities, the
private sector might be interested in financing infrastructure project activities (e.g., power
plants, transmission lines, roads, ports, bridges) as long as governments or donors provide
guarantees on their expected rate of return on their investments.
This paper presents an overview of various funds available for climate change adapta-
tion in developing countries. There are a large number of issues related to the financing of
climate change adaptation. Some of them are the distribution of the funds, the mechanisms
of fund allocations, the performance of the funds, and the impacts of adaptation financing.
There might be many other issues. Each of these issues deserves separate in-depth analysis.
Some of these analyses already exist and many more are expected to come in the future.

Funding: This research received no external funding.

Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Informed consent was obtained from all subjects involved in the study.
Data Availability Statement: Not applicable.
Conflicts of Interest: The authors declare no conflict of interest.
Sustainability 2021, 13, 6515 19 of 19

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