Striving for $40 Billion

With COP27 just around the corner, this Donor Tracker Insight aims to support evidence-based advocacy efforts by illuminating key gaps and barriers to financing climate change adaptation and offers some concrete recommendations for advocates ahead of this important global convening. The findings of this Insight suggest that overcoming the gap in climate change adaptation finance will require a two-pronged approach. First, the global community must urgently increase the overall pot of funding available to support low- and middle-income countries in adapting to the impacts of climate change. Second, it will be necessary to strengthen the delivery of adaptation funding to low- and middle-income countries that are grappling with the impacts of climate change. To drive progress toward these two overarching goals, advocates should:

1. Increase public support for climate change adaptation in low- and middle-income countries.
2. Support the setting of ambitious, measurable, and globally agreed-upon goals based on low- and middle-income countries’ actual needs and demand greater transparency around funds’ additionality.
3. Simplified and more effectively coordinated processes through which low- and middle-income countries can access climate change adaptation financing;
4. Better metrics for defining adaptation and measuring adaptation needs, spending, and the impact of adaptation interventions; and
5. Increased support to enhance national and local planning for adaptation in low- and middle-income countries.

Introduction

On November 7-18, 2022, in Sharm El Sheikh, Egypt, the 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC; COP 27) is set to take place. Climate change adaptation is high on the agenda. The acceleration of global action on adaptation was among the key successes of last year’s COP26, however, historic flooding in Nigeria and Pakistan and devastating droughts in Somalia serve as recent reminders that more needs to be done to support low- and middle-income countries in adapting to the impacts of climate change. Ensuring adequate support for communities living with the ever-worsening effects of our planet’s changing climate is essential to protecting the health, safety, and livelihoods of the world’s most vulnerable, who bear the brunt of the climate crisis.

Having agreed to scale up funding to support climate change adaptation in low- and middle-income countries, donors continue to fall short of their own promises. “Developed countries"¹ have yet to meet the US$100 billion annual climate finance goal (which they were meant to deliver each year, starting in 2020 and until 2025) and only 20% of the funds (around US$20 billion) disbursed so far have gone toward adaptation efforts. In 2021, high-income countries made yet another commitment, this one aiming to help vulnerable countries adapt to climate change by agreeing to double their assistance to adaptation to reach US$40 billion by 2025.

It is essential that funding for adaptation increase rapidly. The UNEP Adaptation Gap Report 2021 estimates that the cost of climate change adaptation in low- and middle-income countries outstrips available public funding for adaptation by five to ten times. The challenge of meeting this need is exacerbated by the fact that adaptation finance remains difficult to define and therefore difficult to measure. This is in part because what contributes to climate change adaptation varies across space and time; a project that furthers adaptation efforts in one place might not offer adaptive benefits in a different context and the types of actions that might be relevant to helping communities adapt to climate change this year, might not be relevant in five or ten years time.

It is not only the quantity of climate change adaptation finance that’s an issue. The quality of the funding and its delivery also challenge the success of adaptation efforts in low- and middle-income countries. Because adaptation is so context-specific, climate change-impacted communities on the receiving end of climate finance flows are best positioned to define their adaptation requirements; however, many countries face capacity issues in identifying these, and donors are failing to match their funding to the needs identified. Furthermore, the mechanisms in place for delivering climate change adaptation finance are not matched to the needs or capacities of low- and middle-income countries.

COP27 represents a crucial moment for the global community to come together to overcome these enduring challenges and to improve the quality and quantity of international climate finance for climate change adaptation. Given the central role international public finance plays in funding climate change adaptation, donor countries will have a key role to play. This Donor Tracker Insight aims to support evidence-based advocacy efforts ahead of COP27, by providing policymakers, advocates, and decision-makers with an overview of the current public financing landscape, illuminating key gaps and barriers to financing climate change adaptation in low- and middle-income countries.

Drawing from an analysis by the Climate Policy Initiative² (CPI) on past and current public donor funding, needs and capacities of low- and middle-income countries, accountability mechanisms, as well as key disbursement mechanisms and their effectiveness, this Insight sets out to answer the following questions:

• How much is spent on climate change adaptation? Where does the money come from and where is it going?
• Why does international financing of climate change adaptation remain insufficient?
• What can advocates do to improve the quantity and quality of financing for climate change adaptation?

How much is spent on climate change adaptation?

According to the CPI, total funding for climate change adaptation has grown rapidly from just US$22 billion annually between 2015 to 2016 to US$46 billion between 2019 and 2020 (see Figure 1). This includes private and public funding spent both domestically and internationally by Organisation for Economic Co-operation and Development (OECD) and non-OECD countries³.

Public finance (or funding from government budgets) makes up the overwhelming majority of this funding, with 98% of adaptation financing in 2019-2020 coming from public actors (see Figure 2). These include multilateral development finance institutions (DFIs; e.g., World Bank Group, European Investment Bank, Asian Development Bank) and national DFIs (e.g., KfW Group, Agence Francaise de Developpement). Smaller shares were disbursed through direct government financing (funding through ministries, development agencies, and public funds), multilateral climate funds (e.g., Adaptation Fund, Green Climate Fund), and public funds (institutional investors managing funds under public ownership).

Most of the public funding for climate change adaptation is spent domestically; in 2019-2020 less than half (42%) of the climate finance for adaptation flowed from OECD countries to non-OECD countries, even though non-OECD countries are among those grappling with the worst of climate change’s impacts (see Figure 2). At just US$19 billion, funding from OECD countries for adaption non-OECD countries is far from meeting the needs of the world’s most vulnerable. The UNEP Adaptation Gap Report from 2021 estimates that annual adaptation costs in low- and middle-income countries alone could reach between US$155 billion and US$300 billion by 2030.

Development finance institutions (DFIs) were the favored channel for climate change adaptation financing from OECD countries to non-OECD countries. Multilateral and bilateral DFIs accounted for US$8.2 billion and US$4.8 billion of this funding, respectively, together accounting for almost 70% of the total funding flows. The dominance of DFIs in this funding landscape might be to blame for the fact that loans are the most common financing instrument for climate change adaptation in low- and middle-income countries. Loans make up 54% of international climate finance for adaptation (however, the type of financing is only known for about 70% of flows). This is despite overwhelming acknowledgement of the damage that debt burdens have on low- and middle-income countries and the fact that current adaptation programming is not well-suited to debt financing as most projects to date are estimated to not yet provide a clear financial return on investment.

For more information on funding for climate change adaptation, see the Donor Tracker's Climate Change Adaptation Cards, Donor Tracker Toolkit on Funding for climate change adaptation or the CPI Global Landscape for Climate Finance.

Why financing remain insufficient?

International leaders have been making commitments and signing agreements related to climate change adaptation for more than a quarter century. And yet, these targets almost always remain unreached while the climate crisis rages on and the costs of adaptation continue to grow. Why is it that donor countries remain so far off track from meeting their funding goals? This analysis suggests that barriers exist at almost every interface of the value chain for financing climate change adaptation in low- and middle-income countries (see Figure 3). Barriers A through D, as highlighted in Figure 3, are described in more detail below.

(A) Donor commitments are insufficient, and no truly effective accountability exists

An analysis of publicly available donor statements from the 16 DAC donors that provide the most bilateral allocable ODA for climate change adaptation indicates that current donor commitments will likely lead to an increase of just US$5-10 billion in funding for climate change adaptation per year over the next 2 to 3 years. This would translate to a total of US$25-30 billion in financing for adaptation by 2025 leaving donors 30-40% below the annual US$40 billion target.

While it is heartening to see donor countries committing to help poorer nations adapt to climate change, the lack of effective accountability mechanisms at the global or country level makes it difficult to verify the credibility of these commitments or to ensure donors are following through on them. While donors do report to the OECD and UNFCCC on their actual spending of bilateral allocable ODA for adaptation, they are not required to set out exactly how they plan on delivering on their commitments to financing climate change adaptation in low- and middle-income contexts, how their funds will be allocated, or how they will be disbursed.

This lack of transparency makes it very difficult to verify the additionality of the funds committed by donor countries. Reports published by Oxfam, the Center for Global Development, and CARE report that a large share of the climate finance commitments announced by donors are made up of funds that have been reallocated from other causes or simply rebadged within current spending plans. This suggests that there is a risk that climate finance commitments are coming at the expense of other development priorities and calls into question the quality of the funding being counted as climate finance in support of adaptation.

It’s also difficult for advocates and civil society organizations to hold donors to account for their “common but differentiated responsibilities” on climate change adaptation. This is because there are very few politically accepted approaches to determining countries’ fair share of funding. The issue with most approaches is that they are not sufficiently used by donors and advocates, do not focus sufficiently on adaptation, or are limited by data quality issues. Accountability on donors’ financing of climate change adaptation could be improved by a system like that used for climate change mitigation, where countries’ funding is tracked against their historical emissions.

The lack of public awareness in donor countries about climate change adaptation is another hinderance to accountability. Currently, public support is much stronger for climate change mitigation and domestic adaptation to climate change. There are few Civil Society Organization (CSO) coalitions advocating for funding to adaptation in low-and middle-income countries, and that are effective enough to put the topic of climate change adaptation finance, and its related barriers, on the public agenda.

(B) In a fragmented landscape, financing flows are not well coordinated, and channels are not used effectively to maximize impact, making funding difficult to access.

There are three main mechanisms through which funding for climate change adaptation is channeled: DFIs, funds, and direct country-to-country support. While each of these three mechanisms are optimized for different outcomes, there is currently a lack of coordination between donors’ use of each. This means that even when climate change adaptation funding is available, it often fails to reach those who need it most or to address the most pressing challenges. This is in part because the disbursement landscape is highly complex, making it difficult for low- and middle-income countries to access the funding they need quickly. More could be done to ensure these channels are used more complementarily to leverage the comparative advantage of each mechanism. This could contribute to the de-risking of adaptation investments and ensure funding for climate change adaptation is distributed more effectively.

As revealed in the analysis above, DFIs are the main channel of public adaptation finance from OECD to non-OECD countries. These funds are mainly disbursed in the form of loans and tend to be focused on the most creditworthy countries and projects. In the context of low- and middle-income countries, this is problematic because it risks worsening vulnerable countries’ debt thereby exacerbating their vulnerability to shocks, including those caused by the climate crisis. Even regardless of the debt burden, adaptation projects are not well-suited to loan-based financing given that there are yet few projects in this sector that provide a clear financial return on investment leading to a limited pipeline of investable projects. Nonetheless, there are some benefits of channeling funding through DFIs. Given their strong regional and national presence and their in-depth understanding of country-specific contexts, DFIs tend to align their investments more closely with national needs. DFIs are also strategically positioned to drive blended finance efforts and better coordination across different funding streams.

Direct government funding makes up around one-quarter of international public climate change adaptation finance. Decisions regarding funding allocated directly from donor governments are often seen to be driven by donors' geopolitical interests, meaning they do not always reflect the actual needs in low- and middle-income countries. With a fragmented donor landscape and limited coordination at the country level, they also tend to be less aligned with other financing inflows. The advantage of directly channeled funding is that it more often takes the form of grants, making higher-risk investments possible and increasing the likelihood that funds will reach the most vulnerable.

Climate funds such as the Green Climate Fund (GCF) and the Climate Investment Funds (CIF) were established specifically to provide financing to low-income countries, primarily in the form of grants. Only about 3% of public climate change adaptation finance flowing from OECD to non-OECD countries is currently disbursed through funds (see above). Funds have proven to be difficult for the most vulnerable countries to access due to the overall complexity of the landscape (i.e., many funds with variations in mandate not clear to countries), cumbersome internal processes and data requirements, and extended approval cycles. With more years of experience, funds have been trying to evolve their ways of working to better solve for the needs of the most vulnerable through smaller project types, simplified approval processes, and capacity building and project support.

Greater coordination between DFIs’, donor governments’, and funds’ financing could improve the impact of funding for climate change adaptation in low- and middle-income countries. For example, grants could be used to de-risk investments for DFIs, coordinating with climate funds to fund more early-stage innovation that could be scaled by larger DFI investments in the future.

(C) The lack of a robust, bottom-up view of the needs and priorities of low-and middle-income countries is slowing down the commitment and allocation of investments

Low- and middle-income countries are best positioned to determine the scale and scope (e.g., sector and types of projects) of funding they receive in support of their climate change adaptation efforts; however, they face numerous challenges in conducting robust needs assessments. First of all, the complexity of climate change adaptation projects, which tend to be cross-cutting and multisectoral, makes them difficult to plan, quantify, and report on – all of which are required to access climate change adaptation finance. Secondly low- and middle-income countries often struggle to find the resources and capacity to produce complex assessments such as the Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) required by the UNFCCC. Finally, there is no coherent taxonomy or methodology for reporting adaptation needs, which affects the coverage and consistency of reporting what type of funding is needed and which sectors and projects it should go towards. As a result of these challenges, clear funding asks for climate change adaptation remain scattered and inconsistent when it comes to incorporating the needs of vulnerable populations and sub-sectors.

Even when countries on the receiving end of international climate finance do manage to clearly identify their needs, the funding they get often does not adequately respond to them. For instance, bottom-up assessments such as those submitted as part of the UNFCCC process in the form of national reports on needs determination (NDR), estimate total climate finance needs (for both adaptation and mitigation) between 2020-2030 at around US$8.9 trillion 2020-2030, far more than has ever been mobilized for this purpose. (Top-down estimates by CPI fall closer to US$ 4.5-5 trillion per year.) The situation is even worse for adaptation-specific funding needs for which the costs are estimated to be widely under-reported.

(D) Data and metrics needed to effectively deliver adaptation financing and make adaptation investment-ready, are insufficient

As described at the levels of donor financing and needs assessments, both donor and low- and middle-income countries struggle to quantify their adaptation spending and needs in part due to the lack of reliable and aligned data and metrics. This constitutes a cross-cutting issue at all steps of the value chain.

To date, there is no agreement on what constitutes a climate change adaptation intervention due to the absence of widely shared metrics (e.g., a universal definition of climate change adaptation, a classification of climate change adaptation interventions). More reliable data is crucial to create better connections of allocation and need and to improve the overall effectiveness of adaptation finance.

At the project level, a limited number of "good" or "bankable" projects actually meet the investment requirements for funds or DFIs. Adaptation as an investment-ready case has not yet been sufficiently explored, as it is difficult to measure the impact of adaptation and there is limited agreement on how to do so. Having better data and metrics to quantify the impact of adaptation investments is crucial to establishing an investment case for both donors and the private sector.

How can advocates improve climate finance?

This analysis has revealed the scale and complexity of the barriers to international public financing for climate change adaptation. It points to large gaps in the amount and allocation of funding, the assessment of needs, and the quality of funding delivery. Overcoming these issues will require a two-pronged approach, focusing on both growing the quantity and quality of public financing for climate change adaptation while simultaneously strengthening its delivery. This section identifies some priority areas that advocates should engage on to help accelerate funding for climate change adaptation.

Area 1: The global community must urgently increase the overall pot and quality of funding available to support low- and middle-income countries adapt to the impacts of climate change. While donor countries are being pushed to increase their commitments, advocates can further support this by:

1. Increasing public support for climate change adaptation in low- and middle-income countries. Advocates must work collaboratively to bring key adaptation topics and barriers more prominently on the agenda in part through generating more public support for these issues. Advocates should also invest in producing and disseminating evidence on current commitments and actual funding from donors.
2. Supporting the setting of ambitious, measurable, and globally agreed-upon goals based on low- and middle-income countries’ actual needs and demand greater transparency around commitments, actual disbursements and the funds’ additionality. Advocates should pressure donor governments to ensure that all newly agreed upon global targets are accompanied by clear and disaggregated commitments (including a breakdown by anticipated channels, recipient countries, and instruments) and are clearly linked to the needs that partner countries have already identified. This must be supported by mechanisms for tracking and reporting progress with clearly agreed definitions of what is to be counted and how additionality is to be determined. Advocates should also work on establishing consensus around a public approach to determining countries’ fair share of funding, lending more objectivity to globally agreed targets. Advocates can then invest in monitoring individual and collective progress towards financing goals, and their alignment to public fair share analyses.

Area 2: It will simultaneously be necessary to strengthen the delivery of adaptation finance to enable low- and middle-income countries to access this available funding more readily and effectively. Advocates can support this with a focus on:

3. Pushing for simplified and more effectively coordinated processes through which low- and middle-income countries can access climate change adaptation financing. Advocates should collectively push to simplify access modalities for low- and middle-income countries to access the available climate change adaptation financing, especially those received from climate funds and DFIs. Funds need to simplify and better align their approaches for application, approval, and disbursement of funding. Further coherence and complementarity of the key funds, especially those under the UNFCCC, is also urgently required to ease access and improve the effectiveness of financing.
4. Establishing better metrics for defining adaptation and measuring adaptation needs, spending, and the impact of adaptation interventions. The global community should support the development and implementation of global guidance at the UNFCCC level. This would allow for better estimates of the cost and impact of adaptation actions and would complement the work already underway by the UNFCCC Standing Committee on Finance. There is also a need for enhancements in the systems used to aggregate and report on adaptation needs, spending, and impacts. Finally, advocates should push donors to increase support to national and local organizations engaged in data collection to improve the quality and availability of granular climate data.
5. Increasing support to enhance national and local planning for adaptation in low- and middle-income countries. Advocates must call for increased financial and technical support to low- and middle-income countries to enhance national planning processes (NAPs) and the involvement of regional and local actors in this process. Robust, bottom-up assessment of needs will not only serve to improve access to financing but also better align allocations to the actual needs on the ground. Further support to South-South cooperation in this area can help disseminate approaches and rapidly improve assessments.

The negative impacts of climate change are becoming increasingly visible in the daily lives of so many people around the world. As the climate crisis progresses, it is getting ever more difficult and expensive to address adaptation needs, which are increasing in complexity and intersecting with non-climate risks. The IPCC’s 6th Assessment Report found that finance remains a significant barrier to adaptation action. Delivering on the COP26 agreement to double funding for adaptation, making progress on the longer-term goals for Adaptation, and tackling other key barriers to accelerating adaptation action are likely to be a central focus of COP27. Advocates should take advantage of this important moment on the adaptation journey, joining their voices with those of the most vulnerable to demand urgent and immediate action from donors and the global community on funding support to low- and middle-income countries in adapting to the impacts of climate change.

¹ Used here to refer to the countries expected to provide financial resources to assist "developing" country parties as defined in the UNFCCC (Annex II parties). While Donor Tracker tries to avoid using “developed” and “developing”, these terms are used here to align with existing language around climate finance. To learn more about the use of these terms and why we recommend avoiding them, read the Donor Tracker commentary on the power of language.

² The CPI analysis draws largely on data from the OECD CRS, the group of Multilateral Development Banks (MBD) and members of the International Development Finance Club reporting, and Climate Funds updates. For more detail on the data analysis and sources, please see the CPI methodology report.

³ Due to data limitations, an OECD vs non-OECD country distinction is used here as an imperfect proxy to separate “developed” countries from “developing” and emerging countries. It should be noted, however, that under the UNFCCC, OECD countries such as Mexico, Colombia, Costa Rica and Chile are classified as “non-Annex I” – or developing – countries. Similarly, Turkey, while categorized as an “Annex I” country (or developed), is an ODA-eligible count.