By Caroline Fouvet
How can the finance sector pave the way towards a more resilient world? This is one of the questions raised by the Global Commission on Adaptation (GCA), launched by the United Nations (UN) in October 2018 to accelerate adaptation action and support in the world. In the run-up to September’s UN Climate Summit in New York City, during which it will present its recommendations, the GCA has organised its work around six action tracks. Each of them have targets aimed to address current adaptation challenges, and include: food security and rural livelihoods, cities, infrastructure, nature-based solutions, empowering locally-led action and finance.
Although the finance sector has heightened its focus on climate risk disclosure and climate change broadly ever since the publication of the Task-force on Climate-related Financial Disclosures (TCFD) recommendations, few actionable plans have set out the ways in which the financial services industry can contribute to fostering global climate resilience. As part of the GCA’s finance action track, the United Nations Environment Programme Finance Initiative (UNEPFI) has been commissioned to work on a background report focusing on adaption finance, entitled “Driving Finance Today for the Climate Resilient Society of Tomorrow”, which was published last week.
The report, prepared by US firm Climate Finance Advisors and reviewed by an expert group including Acclimatise’s co-founders John Firth and Dr. Richenda Connell, acknowledges that aligning global adaptation needs with the 2015 Paris Agreement’s commitments constitutes “the biggest investment opportunity of this generation”. Reaching such goals, however, entails unlocking the necessary private and public capital both that can support investment in adaptation and resilience. With this objective, the report reviews barriers and opportunities for financing resilience and adaptation by all actors across the financial system, although it predominantly targets financial system constituents, including policymakers and financial actors, while highlighting actions required from each.
The following barriers are found to be in the way of embedding climate risk and resilience into the financial system:
- Inadequate support for action on adaptation/resilient investment: the report states that on the one hand, there are currently no sufficient incentives for private finance investments in adaptation, while on the other hand, public finance, that can catalyse private investments, has been historically insufficient and needs to be scaled up.
- Weak policies and conventions in the financial industry: there is currently a gap in enabling adaptation policy and practice in the financial industry. Guidelines surrounding climate risk and resilience in the financial sector have been weakly established and have achieved limited adoption into practice.
- Market barriers: there is an overall market perception that investments in resilience address public problems, such as water management or coastal flooding, and as a result lack profitability.
- Nascent application of climate risk management practices: although there is a growing general awareness of climate risks from corporates and financing institutions, there is still a need to actually integrate physical climate change into operational risk management practices. This is currently hampered by a lack of access tobetter decision-relevant tools from an early stage on.
- Low capacity in policy and finance for climate risk management: both financial system governance bodies and financial actors have a low capacity to understand climate risks at a level that enables financial decision-making.
As a result of its analysis, the GCA report sets out six recommendations targeting financial system governance bodies and financial actors to overcome the aforementioned barriers and facilitate and accelerate financing for adaptation and resilience:
- Accelerate and promote climate-relevant financial policies;
- Develop, adopt, and employ climate risk management practices;
- Develop and adopt adaptation metrics and standards;
- Build capacity among all financial actors;
- Highlight and promote investment opportunities; and
- Use public institutions to accelerate adaptation investment.
The authors conclude that policymakers and financial institutions need to address the resilience issue hand-in-hand. They also state that behind climate risks also lie opportunities for the financial sector. Last but not least, the finance sector needs to go beyond disclosures, as the ultimate objective of such process is to undertake effective risk management.