The International Chamber of Commerce (ICC) has urged governments to spell out the role they want the finance industry to play in their national climate adaptation plans.
The body commissioned research on how to stimulate more private-sector activity to tackle the physical risks posed by climate change.
The final report includes input from Aviva and Swiss Re, as well as a number of non-financial companies.
“Barriers to private-sector capital flowing into climate adaptation stem from several market failures,” observed the report.
These include high perceived risk, illiquidity and low-replicability of projects.
“Many climate adaptation projects, particularly those with public good characteristics such as early-warning systems or coastal flood defences, do not generate consistent or direct revenue streams,” the research claimed, adding that “the private value of adaptation investments lies in avoiding future costs, rather than generating new revenue streams.”
As a result, the ICC called for more innovative financing mechanisms and collaborative efforts to mobilise institutional capital for adaptation.
National adaptation plans and financial regulation
First, governments “should explicitly define the private sector’s role” in their national adaptation plans, which are part of their commitments under the Paris Agreement.
This process should include targeted incentives and regulatory interventions, it added, including making it easier for companies and financial institutions to collaborate without flouting competition laws, and updating public procurement requirements.
On finance in particular, the ICC called on regulators to assess the impact of adaptation lending on the broader credit risk associated with a portfolio, and adjust capital requirements accordingly.
“Regulators should facilitate dialogue with financial institutions […] on the regulatory implications of emerging climate risks,” it added.
Blended finance and resilience bonds
Governments should also develop public-private partnerships to reduce risk for private capital, according to the report.
This could include concessional funds, guarantees and other blended finance instruments.
Taxonomies that provide universal definitions for climate adaptation projects will be essential, said the ICC, adding: “Once a standardised taxonomy for climate adaptation is adopted and robust systems for information and climate risk disclosure are in place, resilience bonds can become a particularly effective mechanism to direct private capital toward adaptation investments.”
Less than 3% of the current green, social and sustainability bond universe includes allocation to adaptation and resilience, the research noted.
EU’s call for evidence
Last week, the European Commission launched a call for evidence on its plans to create a framework to foster climate adaptation and resilience.
“Europe is increasingly facing substantial losses, destruction and costs from climate-related impacts and risks, including more frequent and intense heatwaves, droughts and heavy rainfall events,” stated the Commission.
“The main objective of the initiative is therefore to establish a more ambitious, comprehensive and coherent EU approach to climate resilience and preparedness,” it continued.
The project, which will include non-legislative and legislative measures across “all relevant sectors”, is led by Martin Spolc, who oversaw the development of the EU’s sustainable finance package until he became the Commission’s head of preparedness and adaptation last year.
The call for evidence is open until 4 September.
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