Stimulating private sector engagement in climate change adaptation

MOHAMMAD ABU YUSUF | Wednesday, 18 May 2022

Climate change poses a fundamental threat to places, species and people's livelihoods. The impacts of human-induced climate change have already become a reality and it is occurring on a global scale.  It is disrupting national economies and affecting lives. Increased heat waves, droughts, and floods stemming from climate change are exceeding plants and animals' tolerance thresholds, driving mass mortalities in species such as trees and corals. Sea level rise is forcing people in vulnerable areas to leave their homes. Although Bangladesh is not least liable for climate change (contributes less than 0.47 per cent of global emissions), it is one of the most vulnerable countries adversely affected by climate change.

The Government of Bangladesh (GoB) showed its commitment to undertake both adaptation and mitigation efforts as part of its plan for sustainable development. Bangladesh established "The Bangladesh Climate Change Trust Fund" (BCCTF) in 2009 for adaptation, mitigation and research. Up to 2020-21, the GoB allocated US$ 480 million to this fund from its own resources. Between 2015-16 and 2021-2022, Bangladesh doubled its climate-related expenses. In our Annual Development Plan (ADP), allocation for climate cause has doubled, raised from about US$ 1.44 billion in FY16 to about US$ 2.96 billion in FY22 for climate adaptation and resilience-building. Bangladesh currently spends US$1 billion a year, around 6 to 7 per cent of its annual budget, on climate change adaptation (CCA).

Although Bangladesh has been allocating resources to deal with climate change, the allocation is not adequate to undertake needed adaptation measures. The World Bank estimates that the country would need US$5.7 billion as adaptation finance by 2050, which is more than five times higher than the current expenditure for CCA.

Adaptation projects are essential to help climate victims earn their livelihoods (due to increased sea level and salinity, flood, drought, surge storms etc.) and have shelters. Investment in adaptation are also inevitable to prepare for the enhanced level of adverse impacts (or to moderate potential damages) induced by climate change. An estimate to implement 15 programmes identified in the draft Bangladesh NAP needs US$ 84 billion. Annual adaptation costs in developing countries alone will be in the range of $70 billion, which is expected to reach $140-300 billion in 2030 and $280-500 billion in 2050. Such huge financing needs for adaptation can only be met if scarce public finance is supplemented by scalable sources of finance from the private sector. Bangladesh's Nationally Determined Contributions (NDC), 2021 echoes the prominent role of the private sector: "The implementation of the proposed mitigation and adaptation actions to address climate change requires substantial financial resources …The private sector and NGOs can also contribute significantly to these climate change-related activities through public-private partnerships". Considering the critical role of adaptation, UN Secretary-General António Guterres called for 50 per cent of the total share of climate finance to be spent on building resilience and adapting to the effects of a warming. Countries, governments and stakeholders are increasingly looking to the private sector in filling the adaptation finance gap.

SOURCES OF CLIMATE FINANCE: Bangladesh, being one of the most vulnerable countries, has the scope to raise climate finance from funds such as GCF (US$2 billion annually), Global Environmental Facility-GEF (through the SCCF and LDCF) and the Adaptation fund under UNFCCC. Multilateral development banks (MDBs), bilateral donor governments and their agencies, and private sector also provide climate funds. There are also climate funds outside the UNFCCC process. Climate Investment Fund (CIF) is such a fund; its investments are mainly for mitigation e.g., clean technology, renewable energy programme, CIF smart cities, forests and industry decarbonisation (G20 or G8) and resilience. CIF's programmes fall under two individual trust funds-- the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF).

However, Bangladesh will have to compete with other eligible countries to get funds from these funds e.g., from GCF. Moreover, accessing these funds are challenging (requirements imposed on national authorities associated with accessing the funds under the UNFCCC process) and it entails a lengthy process. The process of getting projects approved and implemented is lengthy even when it is channelled through a direct access entity.

FINANCE DEDICATED TO ADAPTATION: UNFCCC report finds in the period 2015-16, the amount allocated for adaptation was much lower than the amount devoted to mitigation for all sources of finance. Bilateral finance providers allocated 29 per cent of climate finance, multilateral climate funds provided 25 per cent and MDBs allocated 21 per cent for adaptation.

Despite commitment by MDBs and other development partners to increase investments in adaptation, public spending alone cannot meet the demand (Climate Investment Funds, 2016). The private sector engagement in adaptation and climate resilience is still inadequate. Most businesses perceive consideration of climate risk in their investments and business plans to be unnecessary, technically difficult, and perhaps premature. Lack of robust short-to medium-term projections of localised climate impacts commensurate with the scale of business activity is one of the reasons for private sector to continue business as usual. Despite the barriers for private sector to invest in climate cause, private sector has some engagement in climate change and less than 10 per cent of climate finance is directed towards adaptation. As public sector finance is limited, enhanced private sector's role across adaptation and mitigation investments is necessary.

ADAPTATION IS VITAL FOR VULNERABLE COUNTRIES: Major share of climate investments by private sector is for mitigation in the clean energy sector and renewable energy. Although mitigation is considered as the best form of adaptation (as conceived in Article 7.4 of the Paris Agreement) and both are equally important, private sector engagement in adaptation in adversely affected countries such as Bangladesh is critical, especially taking into consideration its socially connected stakeholders. But attracting private sector funding for adaptation projects is a challenge as adaptation projects are often not profitable.

EXAMPLE OF ADAPTATION PROJECT: Bangladesh's coastal regions often face more frequent storm surges and tidal floods as a result of climate change. The University of Alabama at Birmingham teamed up with Bangladeshi researchers on home foundations and frames built of a lightweight composite material that bends but does not break in a hurricane. And the same can float on the rising tide of a coastal surge. Fibres from jute, were woven with recycled plastics to form an ultra-strong building material. Jute production is environment friendly and it is biodegradable.

POTENTIAL AREAS AND MEASURES TO ENGAGE PRIVATE SECTOR IN CLIMATE CHANGE ADAPTATION: Policy supports and incentives may play critical role in attracting private sector. Such incentives may be tax holiday on operators of cool chain/cold storage, building of cyclone/flood shelters under CSR activities, exemption of CD/VAT on import of early warning equipment/rainwater harvesting equipment, desalinisation plant by private sector. The private sector must recognise the climate change risks that adversely affect their infrastructure, production, supply chain and affect their economic returns. A single extreme weather incident, such as flood can reduce a country's GDP, loss of tens of thousands of jobs, and disrupt global supply chains for manufacturing products from cars to computers. It is expedient for the private sector to invest for climate change to continue their operations uninterrupted. Potential private sector-led adaptation options may also include cold storage in high temperature for potatoes and tomatoes and mechanisation of agriculture.

Water management, sanitation and hygiene (WASH) is another potential area for private sector engagement. Private actors may promote drinking water and sanitation in partnership with Local Government Institutions (LGIs) and NGOs in flood prone areas and coastal areas in Bangladesh. Taxing positive externalities in adaptation is another option to induce private sector investment. For instance, modest water tariffs by local beneficiaries of water supply projects can finance operation and maintenance of the projects, while tax incentives, grants and concessionary loans may incentivise the private sector.

De-risking of adaptation investments by the public sector can help attract private sector finance in adaptation projects. De-risking involves activities such as directly investing in adaptation initiatives, supplying early-stage funding for emerging adaptation technologies to help bring them to market, providing credit enhancement, mitigating currency fluctuations, and providing concessionary loans for climate-resilient infrastructure projects. A combination of grants or concessional loans with de-risking interventions is found effective to mobilising private finance in a number of cases. Similarly, adoption of a large climate project having multiple components for mitigation and a separate component for adaptation may stimulate private sector investment.

Another measure to mobilising private sector investments is the provision of blended finance. Blended finance is the strategic use of concessional and non-concessional public (or commercial funds) and/or philanthropic capital to catalyse additional private capital that would otherwise not be available for climate investments in developing countries. However, blended finance's record of leveraging additional capital has been mixed. Although most blended finance has been channelled towards mitigation activities within the energy sector, the use of blended finance for adaptation is getting increased due to the involvement of development assistance organisations. For example, 48 per cent of the Global Environment Facility's (GEF) blended finance projects during 2014-2018 went toward land use and biodiversity and 11 per cent to fisheries. These sectors contribute significantly to adaptation.

Development of climate friendly goods and services such as input supply for climate resilient agriculture, seed development for drought resilient crops create business opportunities for entrepreneurs. Private sector can invest in adaptation activities such as development of irrigation equipment and provisioning of stress-tolerant plants with revenue streams. BASF is supplying customers with stress-tolerant plants, which in turn helps improve local yields of food crops like corn, soy and wheat that are exposed to extreme weather conditions. PepsiCo's has developed a direct seeding machine for Indian farmers to help savings of water.

BOOSTING ADAPTATION IN COLLABORATION WITH INTERNATIONAL FUNDS: The private sector (e.g. commercial banks/financial intermediaries, businesses and large conglomerates) interested in investing in climate-relevant goods and services can access international funds namely GCF, GEF and adaptation fund. In principle, GCF gives not more than 5 per cent as grants (with exceptions); the rest goes as loans to private sector. GCF has set up the Private Sector Facility (PSF) to directly and indirectly finance private sector investments. The objective of the PSF is to reduce barriers to private sector investment in adaptation and mitigation activities by providing loans, grants, and equity. Under the GCF, such private finance is defined as all financial resources that flow into projects/programmes of entities that are more than 50 per cent owned and/or controlled by private shareholders. GCF also provides debt, equity, guarantees, and grants via its AEs to de-risk investments. The GEF LDCF Council approved a $50 million grant for 11 projects in May 2012 for Climate observation and local-level warnings of storms and extreme events in least developed countries. The private sector accounts for 85 per cent of all investments worldwide. As such, private sector engagement in adaptation is crucial, not only to close the financing gaps of National Adaptation Plans (NAPs), but also to ensure the long-term financial sustainability of these investments.

Dr Mohammad Abu Yusuf is a Climate Change Analyst and an Adjunct lecturer, Faculty of Business Studies, University of Dhaka.

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