Climate, adapt, resilience – embrace fresh funding tools for innovation.

February 13, 2024
1 min read

Funding for climate adaptation and resilience is a critical need, but current financing tools are not sufficient to address the gap. Traditional investments such as debt, equity, and grants are important but limited in their ability to meet the growing demands of adaptation. However, innovative financial instruments are emerging that can mobilize new capital from the private sector, institutional investors, and philanthropists. These instruments include disaster risk instruments, catalytic instruments, and outcome-based instruments.

Disaster risk instruments, such as parametric insurance products and catastrophe bonds, provide quick liquidity and debt relief after climate disasters. Catalytic instruments leverage commercial capital by blending it with concessional capital, reducing risk or enhancing returns for investors. Outcome-based instruments incentivize specific results, directing financial resources toward projects that deliver tangible outcomes. Examples include debt-for-nature swaps and adaptation benefits mechanisms.

Several recent examples demonstrate the use of innovative financing instruments. The Asian Development Bank’s Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) uses financial guarantees to lower the bank’s capital requirement for credit risk, freeing up resources for climate project lending. The Landscape Resilience Fund provides capital to small and medium-sized enterprises prioritizing resilience outcomes. The Asian Infrastructure Investment Bank has launched a climate adaptation bond to raise funds for climate-resilient infrastructure.

To close the gap in climate adaptation and resilience funding, policymakers, development banks, philanthropists, and commercial funders must collaborate and mainstream the use of innovative financial instruments. By doing so, the world can better respond to the challenge of climate change and save the planet from its worst effects.

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