(Bloomberg) —
Citigroup Inc. says a failure to cut greenhouse gas emissions at the pace needed to limit climate change means more capital is required to protect homes, cities and infrastructure from extreme weather events.
“A slowing or stagnant advancement in climate-change mitigation increases the pressure to adapt to a changing climate,” Georgina Smartt, a director of environmental, social and governance research at Citigroup, and a team of analysts wrote in a report published Tuesday. That “creates significant opportunities,” particularly in the emerging markets, they said.
Unlike mitigation, which is about reducing the pace of global warming by cutting emissions, adaptation is about coping with a hotter planet that’s more prone to floods, drought and other climatic extremes. It’s an area that’s attracting growing attention as the prospect of limiting global warming to the critical threshold of 1.5C looks increasingly remote.
Today, adaptation attracts less than 10% of climate finance, and there’s an annual funding gap of about $360 billion, the United Nations Environment Programme estimates. Adaptation solutions that lack funding include water-efficiency technologies, climate-resilient crops and cooling systems, as well as financial instruments such as weather derivatives, according to the Citigroup analysts.
“The frequency and intensity of climate catastrophes increasingly places the cost of adaptation on a multitude of stakeholders,” the analysts wrote. “The question really is, who pays the cost of climate adaptation.”
One approach to reducing the cost of climate projects is so-called blended finance, whereby public funds are used to de-risk investments and attract private capital. Blended finance structures can include guarantees to cover first-loss provisions or protections in case of political upheaval, for example.
Earlier this month, the World Bank started a program that aims to boost investment guarantees to $20 billion by the end of the decade, as it seeks to mobilize climate finance in poorer countries. Meanwhile, blended-finance deals reached a five-year high of $15 billion last year, marking a “directional shift” in global markets, according to Joan Larrea, chief executive officer of Convergence, a network of 165 financial institutions.
Citigroup says thematic bonds, carbon markets and insurance-linked securities like catastrophe bonds also can help plug the financing gap. The fact that 98% of adaptation finance currently comes from the public sector means there’s “ample opportunity” to develop new tools and structures, the analysts wrote.
When it comes to adaptation finance, innovation “is accelerating as the race to resilience abounds from macro to micro levels of the economy,” the analysts said.
While the thematic remains nascent, a growing array of rules and market guidance is helping channel investment to where it’s needed. The European Union’s Taxonomy Compass offers some guidance, and banks are coming up with their own definitions of what counts as adaptation finance.
Citigroup has published a list of 23 solutions it considers aligned with climate adaptation. In April, Standard Chartered Plc, together with KPMG and a branch of the United Nations, also unveiled a set of guidelines.
Investors need to “get that capital in place soon,” said Marisa Drew, Standard Chartered’s chief sustainability officer, in an interview in April. “The longer we wait, the more expensive it gets.”
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