Convergence has consistently observed that adaptation climate finance (projects that help in the process of adjusting to the current and future effects of climate change), as a focus within climate blended finance is underdeveloped compared to mitigation transactions — both in terms of deal flow and deal value. With global climate finance flows currently well below target to meet the goals of the Paris Agreement, one pathway to close the climate financing gap is to ramp up investment in climate change adaptation and resilience. Although investment in adaptation has increased slightly over the years, the sector is still very much an under looked opportunity for investment. Specifically, most adaptation investments are funded by the public sector, but the private sector has potential to unlock financing to help close the climate financing gap.
To do this, we must address reasons for private sector hesitancy to allocate resources to adaptation-focused projects. Unlike mitigation projects, these projects tend to have less established revenue models and are not typically linked to clear cash flow-generating activities. This makes adaptation projects less attractive to private sector investors in terms of commercial viability.
Another barrier to unlocking private capital for adaptation projects is limited private sector exposure to these projects. The limited understanding and knowledge about adaptation transactions reduces the likelihood for private investment. Additionally, there are few adaptation projects in general and pipeline that exist have smaller investment opportunities compared to mitigation projects.
For these reasons, building a strong business case around investment in adaptation is difficult, but growth is on the horizon. Convergence’s Design Funding Program has awarded grants in the adaptation space since 2016 and this flexible funding can be strategically used to expand and accelerate investment in climate change adaptation.
Testing the feasibility of innovative adaptation projects
Design stage funding allows blended finance practitioners to test the feasibility and proof of concept of innovative adaptation projects and concepts, helping to build an evidence base for successful adaptation projects using private sector funding. In addition to exploring feasible vehicle structures, design funding grants give practitioners the opportunity to engage in strategic partnerships and test models that can improve risk-return profiles, showcasing what works, what doesn’t work, and what can or cannot be replicated.
Another factor that can prevent investments from scaling is the availability of reliable impact metrics for adaptation projects. However, we see some impact frameworks and models emerge (for climate risk insurance and resilient agriculture, for instance) from design funding proposals we receive and from deals captured in Convergence's deals database. Our Design Funding Program develops and refines existing impact frameworks to accelerate innovative blended finance solutions.
Building knowledge and exposure for private sector players in adaptation projects
Design funding engages private sector stakeholders in the early design stage consultation and in relationship building, opening pathways for later-stage private sector investment. Through design funding, practitioners designing adaptation projects can capture private sector perspectives, concerns, and expectations, which can then be addressed through the vehicle’s design.
Each new adaptation blended finance vehicle designed and launched adds to the knowledge base of successful adaptation projects. Proven examples of projects that have been tested or have shown positive results can then encourage private sector actors to invest in future adaptation projects.
Increasing the supply of bankable investment opportunities in climate change adaptation
Another barrier to scaling private sector investments (and investments in general) in the adaptation space is the dearth of bankable investment opportunities. Design funding grants can be a valuable resource in this case as they provide the necessary support for blended finance practitioners to design and launch adaptation blended finance projects, thereby increasing the overall supply of bankable investment opportunities in adaptation.
To date, climate finance flows have been heavily dominated by investment in mitigation projects. Even through Convergence’s design funding windows, we have seen more applications for mitigation projects than adaptation. Scaling investment in adaptation projects is crucial to meet the climate change financing gap. The role of the private sector is critical in supplementing the efforts made by the public sector in adaptation financing. Design Funding can be an important and effective tool for providing the necessary runway for blended finance practitioners, thereby helping expand and accelerate investment in climate change adaptation.
Have a blended finance solution at the intersection of climate change and gender equality? You can apply for funding from our Gender-Responsive Climate Finance Design Funding Window, which awards early-stage grant funding for the design and launch of innovative blended finance vehicles focused on climate change and gender equality in emerging markets globally.
The Window accepts concept notes on a rolling basis. We are currently accepting concept notes for review in the Fall Cycle until November 15, 2023. For more information, visit our website here or register for the upcoming informational webinar here.
To see what Convergence has supported to date, review our Design Funding grantee portfolio here.