Adaptation and its financing
Communities and businesses must adapt to mitigate these risks. Adaptation efforts can be divided into strategies to reduce vulnerability or exposure to acute and chronic risks. These efforts will vary by region and will be influenced by factors such as settlement patterns and the mix of sectors—including agriculture and industry—along with their size and employment structures. For example, adaptation strategies can differ greatly across regions, although some common approaches may emerge. One such instance is the design of homes incorporating rainwater harvesting features under the PM Awas Yojana in India, effectively addressing water scarcity while considering regional and climatic conditions with several different house designs.
A well-known example of adaptation is observed in the Netherlands, where a dyke system is employed to safeguard against ocean encroachment and land erosion. Meanwhile, in the Sundarbans—the largest delta—efforts are primarily focused on reforesting mangrove areas to reduce the intensity of ocean flooding caused by events such as cyclones. Financing for the adaptation activities is called adaptation financing. Broadly it refers to the targeted allocation of financial resources specifically aimed at building resilience against the impacts of climate change. This includes investments in infrastructure, ecosystem restoration, technology, and community initiatives that reduce vulnerability and enhance the capacity to cope with climate risks. However, the diversity of adaptation strategies, combined with the public benefit they provide, poses challenges in converting them into cash flows, resulting in frequent shortfalls in adaptation financing.
The Challenges
One of the most significant challenges facing India is securing funding for adaptation. According to India’s initial Adaptation Communication to the UNFCCC, the country’s adaptation needs are projected to reach INR 57 trillion between 2023 and 2030 under conservative estimates. This marks a substantial increase from the INR 13.35 trillion allocated in FY22 alone. A recent report highlighted the funding for adaptation in the country comes from state budgets, with some additional support from philanthropic or multilateral development banks. Moreover, globally, only 4% of reported climate finance is directed towards adaptation, with 98% originating from public sources. Given these challenges and the increasing demands for adaptation, the financing gap in developing countries is expected to range from USD 194 to INR 366 billion annually, 10 to 18 times the current flows. Beyond the weak business case for these projects, the gap can be attributed to a lack of
appropriate financial delivery mechanisms for adaptation in emerging economies. Furthermore, the absence of insurance options in these regions exacerbates costs, transforming physical risks into credit risks that complicate the financing landscape.
Need for Network
Developing countries will require more substantial commitments from developed nations to secure increased funding for adaptation, as their domestic financial structures are often limited and must compete with more pressing needs. Second, making insurance against climate risk affordable and accessible to everyone will be crucial in mitigating the impacts of climate-related disasters and enhancing the resilience of the financial sector. Finally, establishing a foundational finance network that offers guarantees, in conjunction with more efficient capital markets, will be essential in attracting private capital, which is lacking now.
By Vaibhav Pratap Singh, Executive Director, Climate & Sustainability Initiative (CSI).
(Views are personal).
