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Can private sector finance support adaptation?

Barry Smith

Barry Smith

Barry Smith is an independent consultant working with the Climate Change Group at IIED, and primarily focuses on areas relating to adaptation financing mechanisms.

4 February 2014


Author Bios

Saleemul Huq

Dr. Saleemul Huq is the director of the International Centre for Climate Change & Development, as well as a a senior fellow at the International Institute for Environment & Development (IIED) in the Climate Change Group.

Barry Smith

Barry Smith is an independent consultant working with the Climate Change Group at IIED, and primarily focuses on areas relating to adaptation financing mechanisms.

Flooded rice field - World Bank (Creative Commons licensed via Flickr)

The ideal split between public and private sources of climate finance has been left deliberately ambiguous in the major meetings on the subject. In this blog, Saleemul Huq and Barry Smith argue that the promised $100bn should all come from public funds, rather than split with the private sector, and suggest how governance arrangements could be made most effective and legitimate. This blog is part of our financing progress series.

The developed countries have promised to provide up to $100 billion each year from 2020 to tackle climate change in developing countries. This money is supposed to be split between climate change mitigation and adaptation, with the Green Climate Fund (GCF) set up to channel a major portion of the funds.

When the developed country governments are asked where the money will come from, they argue that much of it will come from the private sector. The role of the limited public sector funds from governments will be to leverage the far larger amounts expected to flow from the private sector.

However, there are two good reasons to question this assumption.

First, the smallest and most vulnerable countries will always need public funds. While there may well be a logic and indeed opportunity to direct private investment flows from developed to developing countries, this only holds true for mitigation investments in the larger developing countries such as Brazil, China, India, South Africa and a few others.

But the more than 100 poorer and more vulnerable developing countries in Africa, Asia and Latin America need international funding to help them adapt to the adverse impacts of climate change, rather than investment to reduce their (already small) greenhouse gas emissions.

Second, and related to this, while there may be some opportunities for private sector investments in adaptation (for example, in the insurance sector) these will be extremely limited. The vast proportion of funds allocated for adaptation in the poorest and most vulnerable developing countries will have to rely on public-sector sources from the governments of the developed world.

These concerns should be recognised early: we cannot wait until 2020 for the mechanisms to allocate and deliver funding for adaptation to be put in place. And that leads us to two clear conclusions on where the money needed for adaptation should come from, and how it should be managed.

First, the issue of where the public funds will come from to meet the $100 billion target has to be resolved at the UN Climate Summit in September, and this will determine levels of private investment. It is clear that private climate finance will be needed eventually, given the gap between the price tag for adaptation and the current levels of public money flowing through official channels. 

Nevertheless, the promised $100 billion should be made up entirely of public money, at least initially. This will allow a clear focus that creates positive conditions for future financial input, and galvanise the private sector into action.

Second, we believe that a suitable institution already exists to manage and deliver funding for adaptation, namely the Adaptation Fund (AF) under the United Nations Framework Convention on Climate Change (UNFCCC). For this reason, we propose that the GCF should be encouraged and enabled to adopt the AF as its adaptation funding window.

The mandate of the GCF Board (GCFB) gives it full responsibility for GCF funding decisions and its operations. Rather than re-inventing the wheel to construct new modalities and institutional architecture for adaptation funding, there is a strong case that the AF manage and deliver the GCF’s adaptation funding.

According to an ODI report on Climate Finance Fundamentals, the GCF is intended to become the main channel through which international public climate finance will flow, raising questions about the future of other multilateral funds. It could be argued, therefore, that the AF may be incorporated into the GCF. Embracing the current AF framework could be seen as a prudent move that would be acceptable to both donors and recipients, given that the AF is already well established and operational. What’s more, it has already had recognition from some donor countries for its effectiveness, and from recipient countries for its legitimacy.

The GCFB has yet to present the details of the resource allocation system, but is planning to do so this year. The decision-making apparatus of the AF could help here. Developing countries hold most of the seats on the AF’s Board, and its composition – in effect – passes control of the AF from developed countries to developing countries. This could enable the GCF to identify urgent and immediate adaptation needs of developing countries with greater accuracy and, therefore, ensure targeted allocation that is in line with the decisions of the GCF Board.

Both the GCF and the AF seek to enhance direct access. The AF already allows recipient countries to access its funding through a multilateral implementing entity or directly through a national implementing entity (NIE) of their choosing. This improves the delivery of funding that is in line with national needs and priorities, and promotes a more balanced partnership between contributors and recipients. The GCFB is also discussing how to fast track the accreditation of implementing entities, and the GCF Interim Secretariat has drawn up a list of those that are already channelling climate funds, some of them NIEs already accredited by the AF.

Accreditation of NIEs for the GCF could follow the path already laid down by the AF. Indeed, the Accreditation Panel that has been established under the AF could be used by the GCFB; it already has considerable experience in ensuring fiduciary standards are adhered to by the organisations that receive funding. This could also help more developing country-based institutions to receive and use GCF money. And developing countries have been clamouring for just such access and utilisation.

How the AF architecture is recalibrated and integrated effectively by the GCFB will be a matter for major and on-going elaboration throughout 2014, but given that the AF machinery is already in place, it should be considered. Essentially, it could ‘hit the ground running’ once the GCF becomes operational.