As the world continues to heat up and suffer from a greater number of increasingly severe weather- related events like flooding, wildfire and hurricanes, the need for adaptation is becoming more of a focus. While this need is recognized, adaptation finance flows are not keeping pace. This article explores what it will take to close that gap.
The Bottleneck Isn't Capital Alone
Climate adaptation does not primarily suffer from a shortage of capital. It suffers from a shortage of investable opportunities.
Sourajit Aiyer
The Monetary Authority of Singapore (MAS) launched a blended finance initiative, FAST-P (Financing Asia’s Transition Partnership), in 2023 with the goal of unlocking the flow of private capital. When a key part of that initiative, Singapore’s Green Investments Partnership (GIP), closed its first funding round after raising USD 510 million last year, it signaled more than progress in narrowing Asia’s climate finance gap.
The transaction reflected a broader shift across Asia towards making climate resilience projects more attractive through better project design, risk sharing, and project preparation. That shift should strengthen the case for investing in climate resilience across Asia, where flood damage, volatility in agricultural yields, infrastructure disruption, and rising insurance losses are creating fiscal and balance sheet pressures.
Yet adaptation finance still struggles to attract capital despite the case for investing in resilience growing stronger. In the past, public resources were the main source of financing. However, they are unlikely to be sufficient in the future given the rising demand.
More long-term private investment is needed to fill the gap. This is pushing financial markets towards redesigning financing solutions for climate adaptation and resilience, while operating within the risk-adjusted returns criteria of private sector capital.
The ability to scale this financing will depend on four shifts already under way across the region: bundling fragmented projects into investable pools, sharing risk through guarantees and insurance, strengthening project governance, and building better metrics to measure resilience outcomes.
Bundling Projects Can Improve Bankability
The first shift is project bundling: unlike conventional infrastructure or real estate projects, many adaptation and resilience projects are small, dispersed, and involve numerous borrowers. This makes them harder to finance despite their long-term value.
Adaptation finance has often been approached as isolated projects rather than aggregated investment opportunities. This is partly why blended finance platforms, including Singapore’s FAST-P framework, increasingly focus on bundling projects together to improve bankability. Investors are generally more comfortable financing a large and diversified pool of projects than a single high-risk project.
In India, climate-linked rural lending supported by institutions such as the National Bank for Agriculture and Rural Development (NABARD) demonstrate how projects become more investable through bundling. For example, one of NABARD’s subsidiaries deployed ~USD 7 million through a Pooled Loan Issuance (PLI) bundling debt investments in microfinance and SME finance from five financial institutions. This was backed by a guarantee from Northern Arc.
Risk Sharing Can Unlock More Private Investment
The second shift is risk sharing: institutional investors are often willing to finance adaptation-related projects if risks can be redistributed into forms that match the risk vs. return investors are looking for.
Guarantees, insurance, and other risk-sharing arrangements could be used to scale up institutional capital investments in sectors that conventional project finance has historically struggled to finance.
Instead of leaving climate risks concentrated on a single lender, insurer or sovereign balance sheet, it can be distributed across different instruments and layers of capital. Public or concessional funding, guarantees, insurance-linked structures and catastrophe bonds transfer portions of climate volatility away from borrowers and primary financial institutions to capital markets, insurers, and reinsurers.
For example, the Women's Livelihood Bond Series (WLB), structured by Impact Investment Exchange (IIX), is a series of seven gender-lens bonds pooling capital to be lent to microfinance institutions and impact enterprises that target women-focused small businesses and livelihoods in developing markets. The structures reduced risk through partial guarantees — from the United States International Development Finance Corporation (U.S. DFC) and the Swedish International Development Cooperation Agency (SIDA) —, a debt service reserve account to cover 6-months interest payments from the portfolio’s largest client, and first loss capital absorption by philanthropies such as Minderoo Foundation, thereby making it easier for institutional investors such as Nuveen, APG and IFC to participate. The same approach has wider relevance for adaptation finance.
Governance and Management of Adaptation Projects is Key
The third shift is governance: many resilience-related investee projects continue to struggle because governance systems, operational capabilities, financial reporting standards, and the ability to develop investment-ready projects remain insufficient for institutional participation. Lack of project preparation may make investors unwilling to deploy capital.
Technical assistance from programs such as Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)’s Climate Adaptation and Finance in Rural India (CAFRI) initiative focused on enhancing project preparation via climate vulnerability analysis, capacity building of agriculture producer stakeholders, and market-linkage support across the medicinal plant value-chain.
Such technical assistance for project preparation is often what makes projects investable, through improved risk analysis, implementation capacity and linkages to downstream value-chain measures.
Better Metrics and Data Are Making Adaptation Investable
The fourth shift is better metrics: adaptation finance has long lacked metrics to measure progress and outcomes. That made it difficult to compare projects, benchmark performance or integrate resilience into financial analysis.
Aligning metrics to specific hazards can help monitor progress and outcomes, which increases the appeal of adaptation-linked investments to investors:
- for flood risk — kilometers of coastal defense upgraded, operational days lost, and percentage decline in home value;
- for water scarcity — liters of water storage capacity or water lost, and water-use efficiency per crop output; and
- for agriculture and drought — crop yield maintained, farmer or household adoption rates, and areas restored, etc.
The Future of Adaptation Finance May Ultimately Be a Structuring Question
As climate-related losses grow across Asia, sharing climate-related financial risks in ways investors accept will become increasingly important for financing adaptation to the new environment.
The challenge to achieve the scale required lies in designing financing approaches that private investors are willing to back.
Doing so will require continued innovation in project aggregation, greater use of risk-sharing mechanisms, stronger project preparation, and better ways of measuring resilience outcomes.
Countries that make resilience projects more attractive to investors will be better placed to mobilize capital at scale for climate resilience. Those that move first are likely to secure this capital on better terms, before pricing and competition for adaptation finance tighten.
Sourajit Aiyer is an Independent Consultant in Sustainable Finance in the UK. He has worked across traditional finance and sustainable finance, in technical advisory, training and research projects. He has written two books, more than 180 articles, and has spoken at 30+ universities and conferences. He holds certifications from GARP, CFA Institute, Chartered Banker and CISL.
Topics: Green Finance & Sustainable Business, Climate Risk Management
