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USAID Chief Riffs on Ending Climate Shocks, Post-COVID Spending Harmed Adaptation & Resilience, and More

Researchers claim 28% of 'build back better' spending may hurt countries’ climate readiness

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USAID Administrator Samantha Power urges a change in business attitudes to adaptation, researchers analyze state spending policies using new Climate Resilience and Adaptation Financing Taxonomy, the UN offers recommendations on adaptation finance as relates to disaster risk reduction, and Innovation of the Week!

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Adaptation Financing Gets a Power up

President Biden’s foreign aid chief plotted a course to ending “climate shocks” in a speech at John Hopkins University last Tuesday.

Samantha Power, administrator of the United States Agency for International Development (USAID), made clear that financing climate adaptation and resilience is key to a secure future — but that the current allocation of resources is far short of what’s needed.

“Despite the fact that we know these disasters will continue, despite the fact that we all expect them to get much worse, the world is still not investing in preparing our communities for these disasters at anywhere near the scale that we need,” she said.

The End of Climate Shocks: USAID's Samantha Power at the Hopkins Bloomberg Center

“Climate shocks” are the climate-related natural disasters that have come to haunt our television screens. Think of the unprecedented Pakistan floods in 2022 and last year’s devastating Canadian wildfires, which polluted skies across the northern hemisphere. Power said these catastrophes are “massively shocking our systems [and] destroying crops and infrastructure and livelihoods.”

While she acknowledged that total global climate investments have more than doubled over the last five years, “the vast majority of this growth” came from investing in clean energy and climate mitigation, not from “equipping countries and communities to avoid the most harmful impacts of higher temperatures.”  Furthermore, only a fraction of private sector climate finance is going into adaptation – just 2% of the overall tracked amount, Power said.

To change this, Power made the case for financial innovations that de-risk early stage adaptation technologies. “It can be tough for innovators to find investors, particularly when their solutions are designed for low-resource environments. So donor governments have to play a role in offering catalytic grants that help companies prove their concepts and get them past the earliest, riskiest stage of innovation,” she said.

Tried and tested adaptation technologies then need access to public and private finance at scale, Power explained. Multilateral development banks (MDBs) can lead the way here, while “blended finance tools” also have a role bearing some of the risk of investing in emerging markets. She also argued that encouraging governments to develop resilience projects with “openness, transparency, and community buy-in” should make them “far less risky for investors.”

People are very uncomfortable, I've found, in the business world talking about making money off climate resilience.

Administrator Samantha Power

On private investment, Power said people in the business world are “very uncomfortable … making money off climate resilience,” which may be one blocker to increased finance flows. “If I were on a panel with CEOs … who do see the business case for such investment, they talk more like a USAID Administrator, and I talk more like a CEO in the sense that they talk about their duty, and the sense of obligation,” she said.

Changing this attitude is essential to scaling up adaptation finance. If businesses talk about adaptation as an investment type that can yield above-market returns, that will speak to outside investors’ self-interest and help unlock much-needed capital. Power herself seems keen on taking mortality out of the investment calculus and getting companies instead to think about how adaptation can help their bottom lines.

“The more we can harness ideas and capital from around the world to help jump start innovations … the faster we can build affordable solutions to keep climate disasters from shocking our systems,” she said. 

CRAFT-y Public Spending

Remember ‘Build Back Better’? US readers may recall the phrase being used to describe President Biden’s first 100 days agenda. UK readers may recognize it as the brand assigned to the government’s 2021 economic growth plan. Almost everywhere it’s been used, the phrase has referred to state efforts to invigorate national economies in the wake of the COVID-19 pandemic – a global shock unprecedented this century in its ferocity and duration.

Stimulus packages like those introduced by President Biden and then-Prime Minister Boris Johnson had similar objectives: to enhance their respective economies’ resilience and prepare them for future shocks. However, a new paper suggests that the tide of post-COVID state investment has done little to harden countries against the unique shocks unleashed by climate change.

The paper’s authors analyzed around 8,000 post-COVID policies introduced in 88 countries using a brand new Climate Resilience and Adaptation Financing Taxonomy (CRAFT, geddit?) This maps fiscal policies — like tax cuts, deficit spending, and business subsidies — into categories based on their potential impact on climate adaptation and resilience (A&R). 

Global spending (US$bn) during the COVID-19 pandemic, broken down by phase of spending and potential impact on adaptation & resilience

The CRAFT analysis concluded that barely 2% of government spending went on policies with an expected positive direct climate A&R impact. This rises to 4.5% - 6.8% including indirect positive impacts.

Unsurprisingly, those policies classified as having high positive A&R impacts were typically focused on disaster resilience, natural infrastructure, and green retrofitting programmes. Those with indirect positive impacts included communications infrastructure, education, and healthcare.

The relatively small amount of climate A&R positive spending would be depressing enough, but much worse are the authors’ findings that a whopping 28% of post-COVID spending has the potential to negatively impact countries’ climate readiness. What gives?

The authors classify anti-A&R policies as those that “lock-in” spending on “non-resilient infrastructure” or which cause “maladaptation” – ie, policies that increase risk and vulnerability instead of reducing it. It turns out a lot of post-COVID spending went toward these kinds of projects. Huge investments in infrastructure were intended to yield economic multiplier effects and stimulate growth, but it appears that few of these checks came with the condition that developers consider their ability to resist climate shocks.

What’s the upshot? Well, if we assume CRAFT is an effective identifier of pro- and anti-A&R investments, then it appears that governments have spent billions on roads, bridges, and other essential infrastructure that may break on contact with a wilder climate. This represents a huge missed opportunity, and of course means more spending will be needed in future to close the adaptation financing gap.

In addition, it suggests that policymakers need to be educated further on the importance of A&R in spending decisions. In the midst of the COVID storm, legislators had to act fast to prevent their national economies from collapsing, a circumstance which led to a “spray and pray” approach to public spending. If A&R considerations had been hardcoded into government spending processes, however, more emergency funds may have gone toward climate-proofing.

As a sidenote, I can see the CRAFT schema being picked up by public and private investors looking for ways to classify their adaptation and resilience investments. As I’ve written before, efforts to produce adaptation taxonomies are underway at financial institutions and NGOs – but CRAFT stands out for its granularity and broad applicability. With the heft of leading climate finance thinkers behind it, I would bet CRAFT builds a broad and engaged audience.

DRR-iving Climate Adaptation Finance

Financing climate adaptation has myriad spillover benefits. One big one is disaster risk reduction (DRR). Ameliorating the impacts of natural catastrophes can help affected economies back on the rails and, in developing countries, ensure development progress isn’t reversed. It’s an important enough area that the United Nations has an entire agency dedicated to it. 

Last week, this agency published 2030 Recommendations of the United Nations Senior Leadership Group (SLG) on Disaster Risk Reduction for Resilience, which is intended to guide “UN system-wide support on disaster risk reduction, climate change adaptation and resilience building until 2030.” 

Of the five recommendations, number three is of most interest to Climate Proof readers. This calls on UN entities and member states to “Support efforts related to investing in disaster risk reduction for resilience and reforming the financial system to better consider climate change, the environment and other risks.”

On the public finance side, this means refocusing international aid so it’s less reactive and more preventive. In other words, financial support should go toward risk management as well as disaster response. The SLG also says access to public finance should be improved, for example by disbursing funds in the form of grants rather than loans.

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On the private finance side, the recommendation calls for “developing incentives and financial structures … in both risk reduction and risk-informed investments.” The guide singles out blended finance, resilience bonds, and impact investment bonds as three such structures. Practically, the recommendation urges UN entities to “build on the momentum in capital markets for sustainable investing” (as evidenced by the growing uptake of climate risk disclosure) and to partner with the financial sector to promote “DRR investments and tools.”

Interestingly, one DRR investment type highlighted are nature-based solutions. The recommendation notes how these “yield multiple dividends for mitigation, adaptation and resilience.” It’s another signal that the climate-nature nexus is moving to the fore of the climate finance conversation. 

The SLG also wants the UN to get in on the investment taxonomy game (come on in, the water’s fine!) Specifically, it supports the development and application of a “global taxonomy and methodology for risk reduction-related public expenditure” and says the UN system “will support the development of a resilience taxonomy and other mechanisms that can enable the scaling-up of capital market investments.” It sounds to me like the folks behind the CRAFT taxonomy should reach out! 

More broadly, the SLG recommendations reflect the UN’s desire to bring some semblance of order and structure to the adaptation finance game, with the understanding that doing so should both speed up and scale up capital flows into the space.

💡Innovation of the Week💡

The Bank for International Settlements (BIS) is a think-and-do-tank for the world’s monetary authorities. Part of its mission is using technology and cross-border collaboration to improve central banks’ ability to tackle emerging challenges.

Cutting-edge work on these challenges is the province of the BIS Innovation Hub, which exists to “enhance the understanding of financial technology, and aid development of innovative solutions to benefit and enhance the financial system.”

Its 2024 workplan just came out, and one forthcoming project should be of special interest to climate-focused investors. This is Project NGFS Data Directory 2.0, a full-scale overhaul of the Network for Greening the Financial System’s data directory platform.

The first iteration was a curated library of data items for assessing climate-related risks and opportunities in the financial sector, and was intended to help financial institutions and their supervisors identify and map climate-related data gaps.

The revamped version, in contrast, aims to streamline searching and browsing through data sources — so it can be more useful as a public resource.

Undoubtedly the current interface is somewhat clunky, and it’s not the easiest thing to trace which climate metrics (like “banking sector losses due to physical risks”) rely on which data items (in this example, there are 13 separate relevant items!)

The overhauled version could be very helpful to investors and their advisors when choosing which metrics and data items to inform their climate risk analyses. It could also prove useful for constructing indicators that show how aligned given portfolios are to adaptation and resilience priorities.

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