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Another Adaptation & Resilience Financing Framework, the Implications of *That* $38trn Climate Risk Study, and More
UNEP FI-backed initiative focuses on assessing and measuring A&R impact
Louie Woodall
April 22, 2024
AI-generated via DALL-E
UNEP FI and Adaptation & Resilience Investors Collaborative debuts impact assessment framework for climate-proofing investors, the A&R takeaways from a headline-grabbing climate change study, and a new Risk Centre for financial institutions is Innovation of the Week.
Last week, Climate Proof interviewed Deb Parsons of ImpactAsssets on the role of donor-advised funds in the A&R finance landscape. Read the article HERE and become a premium subscriber to receive features like this every Thursday.
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UN Initiative Dives Into Adaptation Metrics
Oh look, it’s another adaptation and resilience (A&R) financing framework. Climate Proof is barely five months old, and it’s already covered a cacophony of A&R finance taxonomies, guidance, and yes — frameworks. We most certainly are in the midst of an extended, collective brainstorm on how to best funnel capital into climate-proofing the economy.
This latest contribution — ‘Adaptation & Resilience Impact: A measurement framework for investors’ — comes from the United Nations Environment Programme Finance Initiative (UNEP FI), and to be fair it is somewhat different from the commercial investor-focused offerings from the Climate Bonds Initiative (CBI) and Standard Chartered (to name two A&R taxonomy drafters).
First of all, it’s the brainchild of the Adaptation & Resilience Investors Collaborative (ARIC), a working group of development finance institutions (DFIs) including USAID, British International Investment, and the Global Innovation Fund, among others. This means the framework is tailored to the interests of DFIs and other public finance institutions.
Second of all, it’s less focused on sorting out which existing and future investments could be sorted into the A&R bucket, and more on working out how to define A&R impact. To further this end, the framework proposes a “conceptual model” for evaluating investments based on their A&R impact and recommends a series of metrics for tracking their, well, impactfulness.
Adaptation and resilience investments improve the climate resilience of people, the planet, or the economy, assessing their impact in terms of the social, environmental and economic benefits that they confer
The “conceptual model” calls on institutions to undertake a four-step process when considering A&R investments. First, they should set the boundaries within which the investment’s A&R impact will be assessed, be it a region or business activity, and determine what physical climate risk — for example flood, fire, drought, or similar — is relevant for the assessment. Second, they should define a “credible impact pathway” that links the investment’s outputs with a change in outcomes. For instance, committing capital to a sea wall should produce flood protection that results in rarer, and less damaging, inundations of one or more properties.
Third, institutions should select appropriate A&R metrics to gauge the investment’s contribution to the chosen outcomes. Fourth, they should translate what these outcomes mean in terms of improved resilience of people, planet, or the economy.
If this sounds simple, don’t trust your instincts. The framework says investors “may” embed the A&R impact assessment across the investment cycle — from origination to exit — by layering on the nine ‘Impact Principles’ set out by the Operating Principles for Impact Management; an investor-led impact initiative. And if adding in these nine principles wasn’t enough, the framework further leans on the ‘The Five Dimensions of Impact’ to provide the “organizing logic” for assessing A&R impact.
For those counting, that’s a four-step process incorporating nine principles and five dimensions. It’s enough to make a quantum physicists’ head spin.
The complexity, however, reflects how the framework borrows and builds on existing approaches. For example, ‘The Five Dimensions of Impact’ model is a rubric created by the Impact Management Project. The Project is an offshoot of the US nonprofit The Bridges Impact Foundation, which is in turn the product of UK-based Bridges Fund Management, a specialist private equity investor.
The framework’s guidance on A&R metrics also has shades of earlier taxonomy-focused efforts. For example, it recommends investments be defined as “enabling” or “adapted”, in line with terminology used in the recent Guide for Adaptation and Resilience Finance and CBI Climate Resilience Classification Framework.
However, the framework goes into additional depth on how to select metrics that suit the specific investment and impact objective. The ‘right’ metric, for instance, depends on the desired A&R outcome — whether it be a increase in climate-resilience infrastructure or improved human health in the wake of disastrous climate shocks — and what “aspect” of A&R impact, be it people, planet, or economy, is addressed.
This approach may help investors choose better metrics for their investments going forward, which in turn could help prove the utility of A&R financing and tempt more players into a space crying out for capital.
Big numbers, bad headlines
There was no shortage of heart-stopping headlines last week touting a scary new study on the economic cost of runaway climate change. “Climate crisis: average world incomes to drop by nearly a fifth by 2050”, The Guardian screamed. The New Republic opted for the slightly less alarming, but no less impactful: “Climate Change Will Cost $38 Trillion a Year. Who Will Pay for It?”
The paper prompting these headlines was published by scientists financed by the Potsdam Institute for Climate Impact Research (PIK), who came up with the hair-raising number of US$38trn a year after analyzing data from 1,600 regions over a 40-year period.
That headline number, though, is somewhat misleading and makes the estimated impact sound worse than it could be, of which more below. Still, there’s no sugarcoating the core message — climate change will be a major drag on economic growth, underscoring the financial logic behind increased financing today for A&R.
Let’s dive into the specifics. The paper says the world is already on course for “an income reduction of 19%” by 2050 because of climate change relative to a hypothetical world where no warming takes place. Put simply, global income will continue to grow as the world heats up, but more slowly than it could have. The paper is not saying global GDP will be one-fifth lower than it is today.
Still, the foregone economic growth means current and future generations will be less well-off than they could have been. This in turn means more people grappling with poverty, unemployment, and financial hardship. The income drag will also force certain populations to cope with thinner financial buffers against unexpected climate shocks.
The projection may have practical implications for policymakers and A&R investors. For one, the paper finds that estimated damages “arise predominantly through changes in average temperature.” In other words, heat is the major drain on future income, because of the way it crimps labor productivity and eats into agricultural yields. This insight could focus A&R investment efforts on heat mitigation and advanced cooling technologies to keep the economy humming.
The Committed Economic Damages of Climate Change by Sub-National Region and Climate Component
The study also provides a regional breakdown of the climate-driven income drain, revealing how developed countries are in for a world of pain as the world heats up. North America and Europe face median income reductions of around 11%, for instance. This could alert lawmakers in rich nations to the importance of adaptation and help them frame A&R investment measures as “pro-economic growth”, which could help with rallying political support.
However, the new projection has blindspots. As Madison Condon, associate professor at Boston University, pointed out on LinkedIn, the study does not account for the potential impact of extreme climate shocks, meaning the topline drag on global income could be drastically understated. Elsewhere, Jakob Thomä of Theia Finance Labs found that the paper also shied away from looking into second- and third-order climate impacts, like resource wars, mass migration, and the breakdown of political stability. A&R financiers should consider these risks in scope of their activities as well as direct physical risks.
💡Innovation of the Week💡
Financial institutions longing for a one-stop-shop to fulfill their climate, nature, and general sustainability risks have had their prayers answered.
Last week, UNEP FI’s Risk Centre officially launched. The new initiative offers members access to the tools and expertise needed to tackle these knotty risks, plus opportunities to canvass climate-nature experts, regulators, and peers on the evolving threats posed by environmental breakdown.
The Risk Centre consolidates a bundle of climate-nature resources put together by UNEP FI over the years, while also providing ground-floor access to “market-leading risk management tools and guidance.”
Members can also tune into monthly webinars on climate-nature risk issues and attend “skill-building workshops” to sharpen their expertise.
The Risk Centre is open to paid-up UNEP FI members, which include most major banks, asset managers, and asset owners. As referenced above, the Finance Initiative is engaged in plenty of A&R work, which may make the Risk Centre a useful resource to all those financial institutions getting to grips with adaptation finance.