Climate change adversely impacts society and ecosystems. It is responsible for rising sea levels, floods, droughts, and an increasing global average temperature. Adaptation finance aims to address the risks and harms of climate change by funding initiatives to help countries prepare and respond to hazards associated with climate change. Initiatives span many industries on a global scale. They can include developing more durable housing, planting drought-tolerant crops, creating social safety nets, and improving decision-making around climate-related risks.

The international community has recognized the need for adaptation finance through the United Nations Framework Convention on Climate Change (UNFCCC), garnering global attention. This article provides a high-level overview of adaptation finance, including Canada’s commitment within and beyond our borders.

Under the UNFCCC, developed countries have agreed to fund adaptation finance initiatives in developing countries. This agreement recognizes that developing countries are vulnerable to the impacts of climate change, but that their limited financial capacities may be insufficient to adapt to these risks. The financing for these initiatives comes from various sources, including government aid, private sector investment, and climate finance mechanisms developed under the UNFCCC. Sources of climate finance include the Global Environment Facility(GEF), Green Climate Fund, and Adaptation Fund. The GEF and Adaptation Fund both finance various projects through grants to support climate adaptation initiatives. The GEF is the largest public financer of projects, having distributed over US$22 billion in grants and mobilizing over US$120 billion in co-financing for more than 5,000 projects.¹ Some carbon credit sale proceeds partly finance the Adaptation Fund under the Clean Development Mechanism. The Green Climate Fund is funded by developed nations and focused on financing developing countries’ transitions to low-emission and climate-resilient economies.

Adaptation financing takes various forms, including grants, loans, and insurance. Grant financing typically has no obligation of repayment. However, most adaptation financing, around 62 percent according to the OECD,² is provided in the form of a loan. The large and growing proportion of loan financing is problematic, as servicing debt and taking on additional debt can exacerbate the debt burden of these developing countries, resulting in some developing nations opting out of climate-related initiatives unless funded through a grant. Insurance is an increasingly popular form of adaptation finance and provides financial protection against the impacts of climate change. An example is coverage that compensates farmers who experience inclement weather that impacts their crops.

Beyond climate benefits, there is a solid economic case for adaptation financing. In September 2019, the Global Commission on Adaptation released its flagship report highlighting returns ranging from 2:1 to 10:1 across five key adaptation sectors.³ Despite the attractive economic, climate, and social returns of adaptation finance, there is a need for additional funding on a global scale.

Allocating adaptation finance is complex and involves many stakeholders, including governments, international organizations, the private sector, and society. The needs of developing nations, priority sectors, and the expected effectiveness of the project guide the allocation of adaptation finance. Typical challenges in adaptation finance allocation include implementation and execution that ensure projects are delivered effectively and efficiently, generate positive impacts, and track and monitor ongoing success. Unlike mitigation finance, which focuses on reducing greenhouse gas emissions and has standard measurement methodologies, adaptation finance initiatives use varying measurement methodologies. Two of the most widely used tracking approaches are OECD DAC Rio Markers and MDB Joint Methodology for Tracking Adaptation Finance. Both provide guidance and measurement methodologies to financial institutions and countries providing adaptation finance. Still, there is no global standardized method, which makes comparison and benchmarking difficult, and may lead to underinvestment.

Adaptation finance heavily relies on the level of political and financial commitment to address the impacts of climate change. The Government of Canada recognizes that the global community seeks increased climate focus and that climate change and biodiversity loss have a global impact. Canada recently doubled its international climate finance commitment from $2.65 billion (2015–2021) to $5.30 billion (2021-2026).⁴ Along with the additional funding, Canada also announced a commitment to:

• Increase grant funding from 30 percent to 40 percent
• Allocate a minimum of 40 percent of funds to climate adaptation projects
• Allocate a minimum of 20 percent of funds to projects that leverage nature-based climate solutions and projects that contribute biodiversity co-benefits
• Continue to support women’s leadership and decision-making in climate action and ensure at least 80 percent of climate projects integrate gender equality

Conclusion

Adaptation finance is a crucial component of the global response to existing climate change and preparation for future climate challenges. Increasing global commitment to align key stakeholders, improve delivery efficiency, and standardize benchmarking methodologies are key components to the future allocation and execution of adaptation finance initiatives. To learn more about adaptation finance, explore the work of United Nations Environment Programme.