Innovative Financial Instruments for Climate Adaptation

Closing the gap between available financing for climate change adaptation The Intergovernmental Panel on Climate Change (IPCC) defines adaptation as “the process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities. In some natural systems, human intervention may facilitate adjustment to expected climate and its effects.” Source: IPCC. (2014). Synthesis report Annex II: Glossary. https://www.ipcc.ch/site/assets/uploads/2019/01/SYRAR5-Glossary_en.pdf, p. 118. and the needs of developing countries requires looking beyond traditional sources of finance—i.e., grants and (concessional) loans—to innovative financial instruments and mechanisms that can unlock (private) investment. These instruments are increasingly viewed as a means to scale up the investment needed for countries to achieve their climate adaptation goals.

“Innovative financial instruments for adaptation” include mechanisms and approaches that can be used to acquire, structure, govern, and allocate financial resources towards adaptation priorities. They can enable access to financial resources from financial institutions, private investors, institutional investors (such as pension funds), impact investors, foundations, and other philanthropists, and may be blended with traditional sources of financing.

This inventory provides information on a range of innovative financial instruments that have been used, or potentially could be used, to finance the implementation of climate adaptation measures. It includes:

• Mature instruments – instruments that have been used for many years for other purposes that could be adjusted to finance climate adaptation.
• Emerging instruments – newer instruments that may or may not have been developed, in part, to finance climate adaptation.
• Pilot instruments – instruments that are currently being developed to finance climate adaptation and may be applied in the near future.

It is intended to inform governments, project developers, and financiers about available instruments and how they have been used, or could be used, to increase resilience to climate change. It:

• Describes each of the instruments
• Identifies sectors in which the instruments currently or potentially could be used to support the implementation of climate adaptation measures and actions. These are measures and actions that intend to reduce the vulnerability of human or natural systems to the impacts of climate change and climate-related risks by maintaining or increasing adaptive capacity and resilience. Adaptation measures and actions address physical climate risks such as heat stress, water stress, soil degradation, and extreme weather events. The actions to address climate risks and lead to expected climate resilience outcomes such as maintained renewable electricity production, maintained or increased agriculture production, reduced weather-related damage and disruption, increased or maintained water availability, and improved human health.                                                                                                    Informed by: European Bank for Reconstruction and Development. (2022). Focus on environment. https://www.ebrd.com/focus-on-environment.pdf, p. 27.
• Presents considerations for their use (by developing countries)
• Provides illustrative examples of how they have been used to support climate adaptation.

A summary provides an overview of the included instruments, the sectors in which they have or might be applied, and where they have been used.