Climate adaptation is particularly critical in Asia due to its vulnerability to climate change impacts, amplified by its dense populations, widespread poverty, and reliance on climate-sensitive sectors like agriculture. The region faces diverse challenges such as water scarcity, extreme weather events, and rising sea-levels, which threaten food security, infrastructure stability, and public health. Moreover, Asia's rapid urbanisation exacerbates these risks, necessitating robust adaptation strategies to enhance resilience and sustainable development across the continent.
SFi recently hosted a conversation on climate adaptation solutions with experts from Invesco and the IFC, who discussed the wide-ranging impacts of climate adaptation and how investment solutions can play a part in tackling this important thematic.
Read on for three key takeaways that private investors should know in order to tackle this thematic.
The Importance of A Multi-Sector Approach
Climate adaptation offers theme diversification including areas like agriculture and food productivity, water sanitation and health, improving urban infrastructure and green buildings and notably that of nature-based solutions. Key things for investors to know include:
Water, Food, and Agriculture: These sectors are crucial for climate resilience, ensuring that communities can withstand and adapt to climate impacts.
Built Environment: The need for resilient infrastructure is critical, and the IFC's resilience test for built environments underscores this importance.This is a new tool developed by IFC to help green building developers evaluate climate risks and identify steps to address them. It assists in making buildings more resilient to climate change impacts
Nature-based Solutions: (NbS) is one important solution-space for investors to focus on. NbS can leverage natural processes to provide essential ecosystem services such as carbon sequestration, water purification, and soil stabilisation. For instance, planting mangroves in coastal areas can reduce storm impacts and coastal erosion while supporting biodiversity. NbS can also mitigate the impacts of natural disasters like floods, landslides, and droughts. By enhancing natural ecosystems, NbS helps communities adapt to changing climate conditions. This includes measures like reforestation, which not only sequesters carbon but also stabilises the soil and reduces landslide risks.
2. The Role of Flexible Capital
With less than 2% of adaptation finance being funded by private capital, the role of governments and development finance institutions continues to be critical in bridging the funding gap in this space
Blended Finance: Blended finance is often needed to create bankable solutions for investors. In the adaptation space, the IFC bridges this financing gap by working with both the public and private sector to create opportunities in adaptation finance. Examples of their work include efforts in Kerala and Colombia. Closer to home, blended finance continues to be needed especially in countries such as Indonesia and Vietnam. The renewable energy sector exemplifies the success of blended finance: initially, this financial approach was crucial in attracting investments to the industry. The sector has now reached sufficient maturity where it can generate sufficient returns without relying on blended finance strategies.
Concessionary Capital: There is a pronounced need for concessionary capital to de-risk investments and bridge financing gaps, especially for climate adaptation projects which have longer time horizons (nine months to two years) and require patient capital.
Private investors should therefore consider deploying flexible and innovative financial approaches– first-movers who invest in these themes can benefit from enhanced returns from such blended financing vehicles.
3. Investment Gaps and Opportunities
Climate mitigation focuses on solutions and technologies driving decarbonisation, through adoption of green technologies and business models, while adaptation focuses on solutions that increase climate resiliency. The panel highlighted important points on financing adaptation vs mitigation and underscored the important role of debt as an effective tool in adaptation finance.
Adaptation vs. Mitigation: With the majority of climate finance today focused on mitigation, there is a 10x financing gap between capital required and financed.
The Important Role of Debt: Debt is an important and needed asset class in the adaptation finance toolkit. The panel also discussed how Sustainability-Linked Bonds (which include KPIs for achieving specific outcomes such as water efficiency), can be effective tools to drive positive environmental impacts and incentivise performance.
We are grateful to Alexander Chan, the Head of ESG for APAC Invesco and the team for their thoughtful collaboration on framing this important conversation.
Thank you to all of our speakers for sharing their expertise and insights:
Norbert Ling, Portfolio Manager - Sustainable and Impact Investments, Invesco
Ronie Mak, Managing Director, RS Group
Anna Ng, Regional Head of Operations, East Asia & Pacific Head of Office, Hong Kong SAR International Finance Corporation, IFC
The insightful conversation was moderated by SFi’s Head of Innovation, Christine Yu.
Learn more about Invesco and their newly launched climate adaptation fund in emerging markets here: https://www.invesco.com/
Follow us on our LinkedIn page here: https://www.linkedin.com/company/sustainablefinancehk
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