Mind the Gap: Eradicating South Asia’s Adaptation Finance Shortfall

As recent extreme weather events across South Asia show, there is an urgent need for investment in climate adaptation. The region’s thriving private sector is emerging as a solution to address funding gaps and enhance resilience for vulnerable populations.

In 2022, heavy rains set off flash floods across Pakistan, submerging one-third of the country, displacing nearly 8 million people, and affecting 33 million overall. The unprecedented scale of this disaster is the new normal across many parts of South Asia. So too, is the plethora of human suffering.

As temperatures increase around the world, South Asia sits precariously on the front lines of the global climate crisis. The densely populated region is witnessing hotter weather, more intense monsoon seasons, and increased droughts. While progress has been made in South Asia in scaling up finance for climate change mitigation, adaptation financing continues to fall far short of estimated needs. It is a trend seen around the world: in late 2023, the United Nations announced that the current climate adaptation funding gap is 50 percent higher than previously estimated, following growing needs and a slowing of adaptation finance from resource-rich countries.                                                                                    

So, how does this funding gap affect South Asia? While governments across the region have articulated climate goals, supported by significant expenditure on adaptation, a substantial shortfall remains. With government budgets constrained by limited resources that are often channeled to more immediate development activities, including growing debt burdens, adaptation efforts must compete for limited public and concessional resources. The gap is exacerbated by the less favorable risk-return profiles of adaptation projects, in addition to the difficulty to quantify and monetize their returns. With the perception that there is little to no money to be made, many private investors are hesitant to invest in adaptation.

But there is potential for transformation, thanks to the region’s rapidly growing private sector which presents an opportunity for strategic partnerships – and innovative financial models – to address adaptation funding gaps and to help make communities more resilient.

One solution to the challenge is to dramatically lower the element of risk. Private investors may finance more adaptation projects on commercial terms if reassured about risk-adjusted returns. That opens the door to “blended finance”, a de-risking mechanism that pools capital with different financial returns to make development and impact projects more attractive to investors.

Innovative blended finance examples include guarantees, co-financing, and risk-tolerant capital structures. The Omnivore III project, supported by IFC as an implementing body of the Bill and Melinda Gates Foundation, is a notable example of a first-loss equity guarantee structure that provides an additional layer of support for agritech and climate sustainability initiatives in India.

A key challenge in setting up blended finance facilities for adaptation is defining measurable outcomes linked to a return on investment. This clarity, which exists for mitigation projects, enables private sector investment with greater confidence. The World Bank’s Resilience Rating System is a step in the right direction, providing investors with a clear view of the outcomes they are funding. Additionally, as blended finance facilities are sporadic across South Asia, standardization emerges as an important vehicle to build capacity and further lower risk. The importance of standardization extends beyond risk mitigation, fostering enhanced operational efficiency, thereby encouraging the scaling up of blended finance.

Governments also have a key role in brokering strategic partnerships to unlock greater financing. Combining private-sector investment with public funds imposes criteria that provide rigor – environmental, social, governance, and sustainability – to adaptation projects. Moreover, instituting the necessary policies and regulations to establish an enabling environment can lower barriers to adaptation investment and foster innovation.

Beyond forging more public-private collaboration, multilateral and bilateral development banks can play an important role in capacity building and combining development initiatives with climate adaptation. The Building Regulation for Resilience program, a partnership of international development banks, governments, and private entities, demonstrates this. The program leverages its global experience to help countries strengthen building regulatory frameworks and incorporate resilience best practices, focusing on high-impact areas like building codes.

In addition, international finance institutions can provide concessionary and grant funds, partnering with other organizations. In November 2023, after months of contentious negotiations, it was agreed at COP28 that the World Bank would host the hard-won Loss and Damage Fund. While the difficult task will soon begin of assessing what nations should receive allocations, this fund represents a novel approach to adaptation funding and disbursement.

The recent floods in Pakistan demonstrate the urgent need for investment in adaptation across South Asia. Developing countries require an estimated $160 - $340 billion annually by 2030 to adapt to climate change, a figure set to rise with increasing climate impacts. With the right financial scaffolding, the private sector can significantly scale up adaptation investments. For millions of vulnerable citizens across South Asia, harnessing this power may be the only way to close the critical finance gap.