Mobilising climate adaptation investments from the private sector in developing countries

The climate crisis’ impacts are rapidly growing along with the concurrent need for adaptation investments. Those most vulnerable to climate change’s impacts, however, lack the resources to adequately respond to adaptation needs. And while developed countries must provide adaptation finance for developing countries, adaptation investment needs will likely exceed adaptation finance provided, and the capacity of developing countries’ public finance.

Directly and indirectly mobilised private adaptation finance will therefore be crucial for responding to climate change impacts. The private sector, however, has proven largely reluctant towards investing in adaptation finance. Moreover, so far the focus has been mainly on big international private actors co-financing adaptation projects and not on the potential of micro, small, and medium enterprises (MSMEs) in developing countries to indirectly mobilise further investments in adaptation. Thus, this study tries to identify ways to enhance indirectly mobilised adaptation investments from MSMEs in developing countries adopting a more comprehensive understanding of private sector engagement.

The study aims to close a research gap by examining international climate finance’s capacity in mobilising adaptation finance from the private sector in developing countries. Given multilateral climate funds’ readily accessible project information, the analysis herein focuses on Adaptation Fund (AF) projects and adaptation projects (including the adaptation component of cross-cutting projects) financed by the Green Climate Fund (GCF). This study reviewed 116 AF projects along with 74 adaptation and 45 cross-cutting projects in the GCF portfolio approved before 30th of September 2021. The analysis provides valuable insight, as the two funds address different project scales, apply different financing instruments, and work with a range of actors. It builds on Pauw et al. (2021), who suggested focusing on addressing three market imperfections that create barriers to private adaptation action:

1. positive externalities,
2. incomplete and/or asymmetric information, and
3. imperfect financial markets.

The study provides respective recommendations for policymakers, decision-makers, investors, and civil society to take into consideration.