This section describes motivations to mobilise private adaptation finance; recent practices; actors, instruments and modalities; and tracking of mobilised private adaptation finance in four subsections. Each subsection provides the perspectives of developed countries (based on the BRs and MSFs); critical reflections by respondents from development banks and agencies; as well as implications of the results for the climate finance system based on the fragmentation typology by Biermann et al. (2009).
Motivation for private adaptation finance
All analysed countries want to mobilise private finance in order to reach the $100 billion commitment. The EU (MSF1: 63) describes private finance mobilisation as “a key part” and Japan (MSF1: 1) as “essential”. Japan (BR2) states to have mobilised $3.6 billion of private finance in 2013–2014, but this was predominantly mitigation finance.
Most countries provide additional motivations for mobilising private finance (see Table 1). The EU, New Zealand, and Norway consider private finance key to limit global warming to 2 °C. The EU, New Zealand, Norway, and the USA mention the importance of the private sector for countries’ transition to low-carbon and resilient economies. Some countries make it clear that public funding alone is insufficient for the challenge of climate change. The US (BR1; BR2) calls its public resources “significant, but finite” and Norway (BR2) points out that the dominant global financial flows are private. Japan furthermore states that private finance is “crucially important” for large investments, such as infrastructure projects (BR1: BR2).
Despite arguing for the importance of mobilised private finance, countries do not define mobilised private adaptation finance in their submissions. The interviews confirm this. Only two respondents state that developed countries sufficiently define private adaptation finance. One respondent states that the OECD’s Development Assistance Committee (DAC) offers tangible criteria to measure public climate finance, which should be elaborated to include private finance in the future. The other respondent states that a vague definition can be interpreted in multiple ways, thus allowing his organisation to be opportunistic. Ambiguous policies that leave room for interpretation can indeed help international organisations to be more functional and have more power (Best 2012b). Such ambiguity, however, also contributes to a proliferation of activities labelled as adaptation and to difficulties in tracking and monitoring adaptation assistance (Hall, this issue). Most respondents state that adaptation is a vague concept; five respondents emphasise that the UNFCCC has not defined private adaptation financing. Four respondents state that at least there should be a differentiation between private investors that provide adaptation finance and businesses that implement adaptation, and between sector types and private actors (e.g. small enterprises and infrastructure).
The respondents are sceptical about developed countries’ motivations for mobilising private finance for adaptation. Several respondents interpret the emphasis on private finance as a strong signal to involve the private sector in projects. However, all respondents find the provided motivation of reaching the $100 billion commitment counterproductive. This is considered a global negotiation issue to which, according to some respondents, both the private sector and project managers at development banks are indifferent in their day-to-day activities. Several respondents furthermore state that the “2 °C target’’ relates to mitigation only. The “transition”, which is more dominant in later reporting, was appreciated. Two respondents point to the important role private finance could play here.
The development banks and agencies instead cooperate with the private sector to fulfil their pre-existing development mission, including sustained creation of jobs, financial sector development, and economic growth. Resilience is crucial for development. As one respondent from a multilateral development bank states: “a country cannot be resilient if the private sector is not resilient’” (Interview, 25 March 2015). Issues such as stability and the prevention of climate refugees, among others, are side benefits. Also, three respondents state that it is impossible not to cooperate with the private sector in one way or another in adaptation projects. These statements refer to businesses that implement adaptation (either autonomous or financed through public climate finance) rather than to private investors that provide adaptation finance.
In summary although there is no synergy between developed countries and the interviewed development banks and agencies on the definition of private adaptation finance and the motivation to mobilise it, there is no conflict either. This can be attributed to the ambiguous delegation from developed countries: it provides development banks and agencies with flexibility in their adaptation projects with the private sector (cf. Hall, this issue).
The developed country documents analysed in this paper focus on recent practices with mobilising private mitigation finance and say little about mobilised private adaption finance. Japan mobilised some private adaptation finance through trade insurance and co-financing by the Japan Bank for International Cooperation (JBIC) (BR1). Japan also states that adaptation projects tend to generate relatively little financial return to the private sector compared to mitigation projects, and that many adaptation projects do not deliver a financial return at all (MSF1). Canada (BR1: 244) states that “there are a number of potential barriers to facilitating sufficient private investment”. Yet it hardly describes such barriers or how to overcome them. Canada contributes much of its climate finance to multilateral organisations (including the IFC, IDB and ADB), thus outsourcing its mobilisation of private climate finance (see BR2).
New Zealand (MSF1) and Norway (BR1) do report on adaptation projects undertaken in cooperation with the private sector. Yet instead of financing, the private sector was implementing projects. This mirrors the differentiation that many respondents refer to, as explained in the previous subsection. Pauw (2014) also illustrates this: in the agricultural sector in Zambia, the (domestic) private sector can implement adaptation, but few opportunities exist for (international) private financing of adaptation.
Finally, although all countries emphasise the importance of strategy development and capacity building for adaptation, they do not involve the private sector here. For example, the EU does not mention the private sector when it explains its strengthened support for building human and technical capacity (BR1). The US (BR1; BR2) aims to engage the private sector through capacity building and strategy development in developing countries, but examples of its assistance focus on partner governments and civil society, even though the for-profit private sector has much more investment potential than the non-profit private sector. Finally, Japan (BR1: 83) claims to have developed its fast-start finance projects in “close consultation” but examples of this only refer to developing country governments and international organisations.
Although respondents confirm that there is very little experience with leveraging private adaptation finance, two-thirds report examples of public–private cooperation on adaptation, either with private investors or with businesses that implement adaptation (actors, instruments, and modalities will be discussed in the next subsection). Examples come from the following sectors: agriculture (five times); water management; water-intensive industries; infrastructure (all twice); insurance; financial sector; and tourism (all once). Such cooperation leads to private implementation of adaptation, and inherently to private expenditure too. Yet the respondents could usually not tell how much the private counterpart spent on adaptation. Indeed, accounting of such expenditure as private adaptation finance is difficult (Atteridge and Dzebo 2015; Brown et al. 2015).
Only one development bank official mentions an example where private finance was leveraged—with a ratio of 1:2. The bank covered the full incremental costs of adaptation and the private investor only covered the business-as-usual investment. Discussions on the share of such investments that could count as adaptation finance have hardly started (see Sect. 3.4; Hall, this issue). Respondents generally see possibilities to mobilise private investments when co-benefits can be created, such as reduced water or energy use. In this context, they mention water management (twice); tourism (once); and agriculture (once). Furthermore, respondents mention service sectors (e.g. insurance, information services, risk assessments (all once)) and large-scale infrastructure projects with revenue streams, such as through toll roads (once).
Most respondents state that it is crucial for private sector involvement in both financing and implementing adaptation to build capacity (six times); raise awareness and provide information (three times); provide guidance in initial phases of projects (twice); and demonstrate successful adaptation to promote up-scaling and replication (once). Some respondents state that although the private sector might have experience with weather-related disasters such as heat waves and floods, it still needs to develop greater awareness and understanding about climate change. One respondent states that public–private partnerships can be a good vehicle here. For example, the IFC financed a $200,000 study on adaptation options for a port in Colombia. Its outcomes led to a private $20 million investment, financed through a commercial loan (Druce et al. 2016). Furthermore, three respondents emphasise that capacity building also helps the public sector to better understand the private sector perspective on adaptation.
This section showed that most cooperation with the private sector on adaptation so far relates to implementation (and inherently to private expenditure on adaptation), rather than to private adaptation financing. Although this might conflict with the first aim in Table 1 (reaching the $100 billion commitment), it does not conflict with the second aim (mobilising private investments for a transition towards climate-resilient economies). Furthermore, the conflict on the mobilisation of $100 billion of climate finance and the perceived importance of capacity building indicate a cooperative but incomplete actor constellation. Many private actors have a limited understanding of adaptation, and an even lower awareness on (discussions about) private adaptation finance at the UN climate change negotiations (cf. Pauw et al. 2015).
Actors, instruments, and modalities
Most analysed countries acknowledge that they have to move forward together and with the private sector in order to reach the $100 billion commitment. The countries also emphasise the importance of enabling environments. However, neither the “partnership” nor the enabling environments are elaborated in detail.
Canada, Japan, and the USA point to the importance of multilateral channels to leverage private finance. In their MSF2, the EU, Japan, and the USA signal the importance of the newly established Private Sector Facility of the GCF. The EU (MSF1) focuses on support for small and medium enterprises in developing countries. Most emphasis, however, is put on both domestic and developing country governments that need to create an enabling environment for the mobilisation of private adaptation finance. Stenek et al. (2013) structure enabling environments along five categories: provision of (weather and climate) data and information; institutional arrangements (e.g. partnerships); conducive policies (e.g. technical standards and zoning regulations); economic incentives (e.g. taxes and subsidies); and communication and technology (e.g. encouraging knowledge and technology transfer). These are generally to be addressed domestically, but they can also be organised or supported internationally (Pauw 2014).
Domestically, for example, the EU (MSF1: BR1) plans to mainstream climate policy into public and private investments to reduce risks of investments, build capacity, and develop a project pipeline. In an international context, Canada (BR1) considers capacity building and the development of financeable projects an effective use of climate finance. New Zealand (MSF1) proposes to increase private adaptation finance by encouraging and supporting developing countries to develop strategies in order to provide the private sector the confidence and policy certainty to make investments. The EU (MSF1: 2) also states that “countries with a sound climate policy framework are well positioned to attract international and domestic climate finance” and support developing countries to build capacity to attract climate finance.
The USA, Japan, and Norway take a harder stance. The USA emphasises developing countries’ own responsibility when stating that “strategies for mobilizing finance in and to developing countries will be incomplete without developing countries doing their part to strengthen domestic enabling environments” (MSF1: 3). Japan (MSF1) explicitly mentions the limited enabling environment in developing countries (including a lack of hard and soft infrastructure) as the main barrier to scale up private finance in climate change mitigation and adaptation. Norway goes one step further. According to Norway, effective climate action by developing countries and these countries’ steps to improve enabling environments (which should be “fuelled by national self-interest”) are even a requirement for the $100 billion commitment to be met (MSF1: 7). This statement puts the responsibility to mobilise finance partly in the hands of the recipients.
All respondents acknowledge the importance of a favourable enabling environment for adaptation. On a very practical level, two respondents for example state that it would be useful to list and describe all potential adaptive measures—in particular those that lower the costs of production—and to showcase replicable and easy-to-understand projects.
However, respondents put more emphasises on the importance of the broader context when implementing adaptation projects with the private sector for three reasons. First, three respondents point out that much of the enabling environment for private climate finance actually depends on the general business environment. This goes beyond the five categories of Stenek et al. (2013) and includes for instance low levels of bureaucracy or good transport and IT infrastructure.
Second, respondents emphasise that enabling environment should encompass more than adaptation alone, because both public and private actors are often unfamiliar with the concept of adaptation. Two respondents note that the specifics of private adaptation are unclear even to countries that make an effort to create an enabling environment for private climate finance. Two other respondents state that it is irrelevant for the private sector whether investments that contribute to adaptation (based on expert judgement) are actually labelled as such. In general, most respondents themselves also refer to increasing resilience and reducing vulnerability, rather than to adaptation.
Finally, respondents point to the difference between global climate negotiations and the level of project implementation. For example, the analysis above shows that enabling environments for private investments are imperative for developed countries in the UNFCCC negotiations. Here, there is a norm conflict with many developing countries: four respondents state that many developing countries oppose the general notion of private adaptation finance at the UNFCCC negotiations (the author also observed this repeatedly). However, on the level of implementation, such political standpoints on private adaptation finance are less relevant. Half of the interviewees are under the impression that developing countries even prefer private investments over public finance, given that the private sector can create longer-term jobs, economic development, and tax revenues.
Instruments to leverage private finance that countries mention are skewed towards mitigation. The analysed submissions scarcely mention instruments to leverage private adaptation finance and generally not describe details (see Table 2). Canada (MSF1: 3) for instance writes that “insurance and other market-based approaches can help address those adaptation risks that are financeable”. Japan (MSF1) mentions concessional loans and insurance mechanisms. More concretely, Japan is working on standby loans for disaster recovery and weather-related insurance provided by private companies. The EU (MSF1) states that it has finance instruments that target specific market failures and that are designed not to crowd out or over-subsidise the private sector. It describes the use of grants to leverage public finance (including official development assistance) and private sector financing though regional blending mechanisms. Instruments for this purpose include grants, technical assistance, interest-rate subsidies, risk capital, and guarantees. Although the blending facilities have mainly supported public investments so far, the EU intends to increase the use for facilitating private sector participation.
Canada (MSF1), New Zealand (MSF2), and the USA (BR1; BR2) state that public grant support should be considered where affordable market-based financing is not available, for example for adaptation in the poorest and most vulnerable countries. Yet the US (BR1; BR2) also turns the argument around by stating that such means can be made available if private finance can be leveraged more efficiently elsewhere. Canada (MSF1) furthermore states that non-grant financing, including (concessional) loans, should be the primary choice in middle-income countries or where the private sector is involved. Japan (MSF1: 3) on the other hand separates public and private responsibilities (and consequently financing) when it states that “private companies basically seek to invest in projects which deliver a financial return without receiving public assistance”, but that the private sector does expect public support through enabling environments in developing countries.
Finally, all countries use non-financing instruments such as technology transfer and capacity building. However, only the US (BR1) and Norway (BR1) mention this instrument in the context of leveraging private finance with examples on mitigation only.
Respondents provided different views on financial instruments. First, they did not mention examples of export credit and guarantees. A potential explanation is that these instruments are not within their mandates.
Second, respondents put more emphasis on loans (mentioned six times) and lines of credit (three times). Through the latter, development banks finance local private banks and other intermediaries in developing countries, which on-lend the credit to private end-borrowers that would otherwise struggle to get finance. Two respondents from development banks however state that it is not in their mandate to finance the private sector directly.
Finally, in contrast to the analysed developed countries, most respondents emphasise that technical assistance is crucial in projects, and one respondent mentions green bonds. Technical assistance, both for financial institutions and for those who implement adaptation projects, can be financed through grants. Bonds are mentioned in the context of cities with comprehensive adaptation strategies. If related adaptation measures have a return on investment, or if a city plans to finance them publicly anyway, bonds could frontload investments.
To summarise the implications for the fragmented climate finance system: developed countries and the development banks and agencies share the norm that enabling environments are important to mobilise private adaptation finance and private adaptation implementation. However, there are different views on the importance of enabling environments for adaptation, even between countries. Just like the minor differences in the instruments that countries and development banks and agencies refer to, this does not cause conflicts for the institutional integration, norms, or actor constellations. A more important contrast, however, seems to be that at a local level, development banks, and agencies perceive that they have synergies with developing countries when it comes to adaptation projects with the private sector. In global climate change negotiations, however, there is a norm conflict between developed countries (advocating for private finance) and developing countries (disapproving of it).
Tracking private adaptation finance
Measurement, reporting, and verification (MRV) of climate finance helps to gain a better overall understanding of its scale, distribution, and use. It is technically complex and touches upon highly political and sensitive definitional questions (Iro 2014). Currently, there is limited publicly available data on private adaptation finance mobilised by public interventions in and to developing countries (UNEP 2016), and there is no agreed definition on how to account for private adaptation finance (Brown et al. 2015; Buchner et al. 2015; Vivid Economics 2015).
The EU (MSF1) emphasises the need to advance towards an agreed definition as well as accounting and monitoring of private climate flows. It mentions the complexities surrounding data availability, the multitude of actors involved, diverse channels of finance, and rapidly fluctuating activities. According to the EU (MSF1), a common understanding of private climate finance is necessary to ensure transparency and trust. The EU expresses support to ongoing research on this matter, and, just like Japan (MSF1) and Canada (MSF1), states that this process should be gone through in close cooperation with other donors.
Canada (MSF1), Norway (MSF1), and New Zealand state that there should be a focus on outcomes; according to New Zealand (MSF1), this would ensure that the results of climate finance interventions can be tracked and reported. Norway (MSF1) states that a focus on outcomes also makes developing country partners accountable for reaching desired climate results.
New Zealand and the USA also criticise tracking. For example, New Zealand (MSF1) states that burdensome reporting and application procedures can deter uptake and further mobilisation of climate finance. The USA points to the range of actors involved and the vast variety of financing tools and policies needed to enable mitigation and adaptation activities. According to the USA (BR1: 1), this should be recognised, “rather than seeking overly simplified solutions focused on a particular delivery channel, sector, or financing approach”. At the same time, however, the USA only describes three financial instruments in their submissions (see Table 2).
All respondents’ organisations report their climate finance contributions using the OECD-DAC Rio Markers. Although these markers were originally introduced by the OECD-DAC to indicate donor’s environmental policy objectives in development cooperation (Iro 2014), they are also used to measure climate finance. Some respondents state that their organisations also monitor and report because of internal targets on financing (for instance renewable energy or climate, twice); because they want to demonstrate that the organisation is an important player in climate finance (twice); or because of accountability towards taxpayers (once).
However, only four respondents mention that their organisation reports on mobilised private adaptation finance, emphasising how difficult this is. The respondents provide three reasons for this: first, internal lack of preparedness. One organisation undertook a reporting exercise before the UN Climate Summit in New York in 2014. According to the respondent, this exercise clarified that there is currently no information available on mobilised private adaptation finance. Future monitoring and reporting would require a new system to be built up; second, limited willingness from the private sector to undertake MRV. Apart from an administrative burden, two respondents also mention confidentiality and competitiveness as potential issues for the private sector. Third, three respondents mention that without a clear definition of adaptation finance, MRV will be difficult and perhaps not very useful. For example, two respondents state that their institution covers the incremental costs of adaptation. Similarly, one development bank covered the costs to climate-proof a road. Strictly speaking, the private sector’s share (the road itself) is not invested in adaptation. In another example, three respondents highlight that the MDBs currently use different methods in their common reporting system. This system (see EIB 2014) takes vulnerability reduction as a starting point rather than adaptation, which could result in an overestimate of mobilised adaptation finance. Reporting based on different methods cannot provide final answers in terms of contributions to the $100 billion commitment.
In terms of the climate finance system, the most conflictive consequences of fragmentation identified in this paper relate to the accounting of mobilised private finance towards the $100 billion commitment. Such accounting would require a cooperative (if not synergistic) actor constellation. However, respondents see limited willingness from the private sector to be part of MRV in the climate finance system. Furthermore, respondents use different reporting systems themselves. Finally, developed countries disagree on the importance and aim of tracking mobilised private finance.