## clnea2024007 ## Source details **Canonical URL:** [clnea2024007](https://www.imf.org/-/media/files/publications/staff-climate-notes/2024/english/clnea2024007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/staff-climate-notes/2024/english/clnea2024007.pdf.md) - [Structured JSON version](/-/media/files/publications/staff-climate-notes/2024/english/clnea2024007.pdf.json) --- ### Executive Summary: Key Messages - Urgency and financing gap - Annual climate adaptation needs in developing economies are estimated to be $194–$366 billion, approximately 10 to 18 times more than current financing flows. - Based on the Climate Policy Initiative (CPI) tracking methodology, mitigation finance reached $1.2 trillion annually in 2021–22, while adaptation finance reached $63 billion (all-time high). - Studies suggest that 75 to 90 percent of all climate finance is directed toward mitigation. - Nearly 98 percent of adaptation finance comes from public actors; private adaptation flows remain highly fragmented. - Distributional and equity concerns - Developing economies are affected the most despite contributing the least to the problem. - Failure to scale up adaptation investments will increase unabated climate impacts and loss and damage, making many EMDEs—notably low-income countries and small island developing states—even more vulnerable. - Private sector participation: current state and metrics - Financial sector has more comfort with mitigation because of clearer metrics and financial returns; adaptation is often perceived as risk management or government responsibility. - Standard Chartered Bank (SCB) survey of 150 global investors, asset managers, and bankers: - Financial firms have allocated 0.4 percent of their capital to adaptation projects in EMDEs. - 0.19 percent of capital is in adaptation projects in Asia. - 0.07 percent invested in adaptation in the Middle East. - 0.03 percent in Africa. - CPI’s September 2024 updated tracking methodology and bespoke taxonomy led to a fourfold increase in private adaptation finance to USD 4.7 billion annually from an average of USD 1 billion previously tracked by CPI for 2019 to 2022 for the same set of private sector institutions (CPI, 2024). - Survey indicators: - Three-quarters of banks, asset managers, and investors expect climate adaptation finance will become mainstream in the near term. - 55 percent of respondents intend to increase their adaptation investments over the next 12 months. - 77 percent of the world’s top finance firms state it is a strategic focus and 68 percent are actively working on strategies for adaptation finance and investment (SCB 2024). - Key barriers to scaling private adaptation finance - Complexity across sectors and regions; difficulties defining, evaluating, pricing, aggregating, and achieving portfolio diversification for adaptation investments. - Real barriers: high perceived risk, limited track record, small and fragmented pipelines, limited instruments with adaptation benefits as primary focus. - Perceived barriers: adaptation framed as an externality; negative cash flows framed as “future costs avoided”; concerns about greenwashing. - Need for product innovation, public-private partnerships, practical investment guidance, and investor-relevant metrics. - Strategic reframing and investment approach - Reframe adaptation from risk exposure to a viable investment opportunity. - Explore synergies between commercially viable investments and integrate adaptation and resilience across investment processes. - Scale blended finance for adaptation and expand integration across all asset classes. - Policy, institutional, and measurement priorities - Clarify definition and alignment of adaptation to avoid maladaptation. - Enhance tracking and measurement of climate finance flows; improve data collection and reporting. - Improve adaptation investment measurement methodologies and ensure funds meet intended adaptation objectives. - Balance funding between mitigation and adaptation. - Integrate climate adaptation into national and sectoral planning. - Ensure developing economies receive equitable support and easier access to finance. - Increase awareness and capacity building across stakeholders, with focus on low-income and vulnerable countries. - Develop incentives and risk-sharing mechanisms and strengthen public-private collaboration. - Role of IMF and the Resilience and Sustainability Trust (RST) - Through the RST the IMF helps low-income and vulnerable middle-income countries foster an enabling environment for green investments and reduce the cost of capital by strengthening economic fundamentals, implementing effective climate policies, and establishing a robust climate information architecture. - IMF roles: deployment of RST, surveillance, convening power, knowledge sharing to integrate adaptation and resilience across the global financial architecture. - Since operationalization in 2022, 20 arrangements under the Resilience and Sustainability Facility (RSF) have been approved by the IMF Executive Board, encompassing 237 reform measures. - RSF-supported reforms target macro-critical policy and institutional reforms; examples include integrating climate considerations into public investment management, green public financial management, carbon pricing and subsidy reforms, expansion of social safety nets, risk assessments and management, energy transition, and improving financial sector data and disclosures. - During the first 24 months of operation, total commitments under approved RSF arrangements are about $9.5 billion (as of the end of August). ### RST programs, country roundtables, and early lessons - RST and country roundtables - For countries with market access and RSF arrangements, IMF has helped convene climate finance country roundtables with World Bank, regional MDBs, and other public and private actors. - Roundtables serve to: - discuss and develop solutions linking climate goals with macroeconomic policies; - identify main barriers to increased climate financing; - identify complementary reforms, capacity development needs, and comparative expertise; - design programmatic approaches (for example, frameworks for developing financing vehicles) to crowd in additional financing. - IMF’s macroeconomic perspective embeds discussions in a coherent macroeconomic framework. - Early lessons from the RST for scaling adaptation finance - Importance of longer-term financing to address structural climate challenges and enable sustainable adaptation measures. - Necessity of integrating climate adaptation and resilience into broader economic policies to catalyze public and private financing. - Critical role of capacity building to enable countries to access and utilize adaptation finance effectively. ### Purpose, scope, and analytical approach of the note - Purpose - Contributes to policy dialogue on scaling up adaptation finance and recognizes variation in adaptation challenges and access to finance across EMDEs. - Scope - Synthesizes financial industry perspectives on adaptation investments and distinctions with mitigation. - Examines the adaptation finance ecosystem and focuses on a subset of financial instruments suitable for adaptation. - Draws lessons from the RST and IMF’s role in the climate finance architecture. - Analytical inputs - IMF staff outreach to public, private, nongovernmental, and academic institutions; engagement with RST stakeholders; industry surveys and publications. ### Definitions, measurements, and uncertainty in adaptation finance - IPCC (2023 AR6) definition: adaptation as “the capacity of interconnected social, economic, and ecological systems to cope with hazardous events, trends, or disturbances by responding or reorganizing in ways that maintain their essential function, identity, and structure.” - Stakeholder variation in “adaptation” and “adaptation finance”; no universally accepted operational definition. - Public vs. private sector perspectives - Public sector: broad definition (infrastructure, social, community resilience); government responsibility to address externalities and protect vulnerable. - Financial sector: focus on managing financial risks and enhancing financial performance; investments that mitigate risks to physical and financial assets and that fit within asset classes and institutional processes. - OECD (2023) thematic categorization (examples): national adaptation plans, early warning systems, new technologies and services, financial services for adaptation, afforestation, water-efficient irrigation, flood defences, desalination, enabling environments; classified as Usually Publicly Funded, Mixed (below market), or Commercially Viable. ### Challenges in assessing and quantifying adaptation needs - Multifaceted climate impacts create methodological complexities and scarcity of comprehensive global assessments and cross-country comparisons. - Uncertainty about future greenhouse gas emissions and regional vulnerability differences yield wide adaptation estimate ranges. - Other challenges: uncertainties around adaptation outcomes, causality, and effectiveness under different climate scenarios. - Country submissions on adaptation finance needs (2021–30) - 85 developing economies have specified adaptation finance needs in at least one submission. - Among low-income countries, 89 percent have stated their finance needs. - 68 percent of lower-middle-income countries have stated their finance needs. - 42 percent of upper-middle-income countries have stated their finance needs. - 16 percent of high-income countries have stated their finance needs. - 52 countries have detailed adaptation finance needs by sector; water, agriculture, and infrastructure are priority areas. - IMF instruments offering country-focused insights include Disaster Resilience Strategies, Climate Policy Diagnostics, Climate Public Investment Management Assessments, Climate Macroeconomic Assessment Program Reports, joint IMF-World Bank Climate Change Policy Assessments, and World Bank Country Climate and Development Reports. - IMF’s Debt-Investment-Growth and Natural Disasters model can integrate climate risks and adaptation costs into development and macro-fiscal frameworks. ### Estimates of adaptation financing needs and distributional observations - IMF study (IMF 2022b) estimated global public adaptation needs at around ¼ percent of world GDP per year on average. - Existing analyses for developing economies range: - from insignificant amounts to $300 billion annually in 2030; - between $50 billion and $500 billion annually in 2050. - As a share of average annual global GDP, estimates range up to about 0.3 percent of projected 2030 global GDP per year. - In 2050, investment needs increase in all studies even after accounting for global economic growth. - IMF analysis indicates annual adaptation costs exceeding 1 percent of GDP for some developing economies, and above 10 percent of GDP for some island states. - Bottom-up country self-assessments can be much larger—“even 100 or 250 times higher than global averages” for some lower-income vulnerable countries. - Collective adaptation costs for 46 countries that included adaptation cost estimates in their NDCs are estimated at $783 billion by 2030 (or about 1.5 percent of their GDP annually from 2015 on average). - Small island states: cumulative resilience needs for Dominica, Fiji, Grenada, and Tonga range from 100 to 500 percent of GDP. ### Dynamics, policy interactions, and determinants of adaptation costs - Adaptation costs influenced by domestic policy environment, structural reforms, and the global landscape beyond climate scenarios. - IMF modeling (IMF 2024) on adaptation in developing economies facing trade and financing constraints highlights: - Trade openness and structural reforms could significantly reduce adaptation costs in the agricultural sector. - Trade openness can offset agricultural production shortages, reducing adaptation investment needs. - Trade fragmentation could increase food insecurity risks and raise adaptation costs. - Enhancing agricultural productivity, improving adaptation efficiency, and reducing labor market distortions can lower adaptation investment needs. - Fiscally constrained countries face trade-offs between adaptation and broader development goals, particularly where agriculture is critical for food security. ### Measurement challenges, tracking flows, and market implications - Accurate measurement hindered by methodological inconsistencies, data gaps, and inadequate reporting. - Current approaches emphasize incremental, project-by-project initiatives or project finance transactions, which may understate total adaptation investments. - Low headline figures for adaptation finance may deter financial institutions from viewing adaptation as an investable market. - Narrow measurement focus leads to policy discussions dominated by instrument-specific solutions (e.g., cross-border blended finance), which represent only a small fraction of the financial landscape. - Need for comprehensive, scalable frameworks that integrate adaptation across asset classes and investment strategies. - Clear market definitions of adaptation-aligned investment are necessary to avoid maladaptation and recognize adaptation and resilience as an investable asset class. ### Box 2 — Emerging Market and Developing Economies: Evolving Investment Context - Global allocation and investor behavior - As of 2022, advanced economies are home to 80 percent of global financial assets held by financial institutions (of total $489 trillion). - EMDEs, excluding China, hold domestic financial assets that represent less than 5 percent of global financial assets. - EMDEs accounted for about 40 percent of the world population and contributed about 66 percent of global GDP growth over the past decade. - Investment funds allocate only about 10 percent of assets to EMDEs, down from 12 percent a couple of years ago. - EMDEs allocation in ESG funds is 6 percent (IMF GFSR 2022). - Credit quality and investability - Over the past 20 years, average credit quality of EMDEs deteriorated across regions; majority below investment grade, especially in sub-Saharan Africa and Latin America and Caribbean. - Investment-grade status materially affects market access and investor composition. - Nonfinancial factors and ESG assessments - Investors increasingly consider nonfinancial factors (governance, sustainability) as fiscal risks. - Commercial sovereign ESG scores place sub-Saharan Africa in the bottom quartile of EMDEs. - Public sector role and adaptation finance architecture - Adaptation finance dominated by public sector via institutional frameworks, public funding, and multilateral concessional funds; these have not translated into significant private sector participation. - Post-2015 shift: private sector interest moved from moral to financial necessity due to growing climate-related losses. - Institutions, milestones, and technical guidance - Ongoing work on adaptation taxonomies, flow tracking methodologies, topology of adaptation projects, and risk/return profiles. - Adaptation finance outcomes and trends - Technical guidance has not yet produced material progress integrating adaptation across financial instruments. - Four main climate funds’ number of supported adaptation actions stagnated over past decade though size grew. - Green Climate Fund highlighted as significant for concessional blended finance. ### Box 3 — Recent Private Sector Adaptation Finance Platforms and Instruments - GAIA Climate Investment Fund - Nearly $1.5 billion blended finance platform underwritten by MUFG Bank. - Long-term loans: 70 percent for climate adaptation and 30 percent for mitigation. - Targets 19 of the most climate vulnerable countries (25 percent to low-income countries and small island developing states). - Focus areas: climate-resilient infrastructure, ecosystems, health, agriculture, and water systems. - Africa Rural Climate Adaptation Finance Mechanism (ARCAFIM) - $600-million mechanism for small- and medium-scale agrobusinesses and rural microenterprises. - Blended finance with risk-sharing to incentivize regional private banks; structured into four regional facilities. - First $180-million facility for Eastern Africa approved in December 2023 by the Green Climate Fund with Equity Bank Kenya, providing $90 million in commercial funding plus IFAD’s $90 million. - Other regions expected to roll out by 2026. - Blended finance: current use and potential - Historical deal counts: on average approximately six adaptation deals per year recorded up to 2020, with 10-11 annual deals in 2021-2023 (smaller in size compared to earlier years). - 33 percent of blended adaptation financing from 2021 to 2023 came from private sources (Convergence, State of Blended Finance 2024). - Hybrid-blended finance transactions averaged about ten transactions annually since 2013. - Institutional investment allocation into climate finance: 45 percent in hybrid solutions, 35 percent in mitigation, 20 percent in adaptation. - Hybrid transactions amounted to $18.5 billion since 2014. - 27 percent of hybrid transactions focus on agricultural inputs and farm productivity; other hybrid sectors include infrastructure, financial services, housing, and real estate. - Green, sustainable, and sustainability-linked bonds: limited adaptation coverage - Examples: 2019 City of Amsterdam €200 million green bonds; New Zealand green sovereign bond program since 2021; 2020 Government of Fiji $50-million green bond. - As of 2023, only 1,222 out of 48,103 green, social, sustainability, and sustainability-linked instruments had earmarked proceeds for adaptation and resilience activities (Climate Bonds Initiative analysis). - Sovereign issuers led adaptation and resilience-related deals: 31 percent; nonfinancial corporations 19 percent; financial corporations 18 percent; government-backed entities 17 percent. - 2023 saw a 21-percent year-over-year decline in adaptation and resilience-referenced deals, with issuances from 86 countries remaining constant. - Challenges include prioritization of mitigation, large share of proceeds to existing projects, and absence of coherent KPIs for adaptation. - MDBs: growth and trade-offs - In 2023, MDBs adaptation finance portfolio grew to over $25 billion across all economies, accounting for roughly 33 percent of MDBs’ financial commitment. - Of MDBs’ adaptation finance, 89 percent was committed toward low- and middle-income countries. - Most adaptation finance for low- and middle-income countries was committed through investment loans (65 percent), followed by project-based financing and grants. - New instruments and innovations: July 2024 joint $300 million guarantees by the Inter-American Development Bank and the European Investment Bank to enable Barbados’ debt-for-climate initiative; each institution contributes $150 million. - Moody’s analyses: - Increasing adaptation finance at past growth rates could see adaptation financing potentially reaching $90 billion annually by 2030 without substantially affecting MDBs' credit metrics. - Under a maximum leverage scenario, adaptation lending could provide around $380 billion by 2026 but would entail trade-offs with other development needs. - A balanced approach suggests MDBs climate adaptation financing would only reach about $50 billion per year by 2030 even with significant increases in lending. - Public equity investments in climate resilience - March 2024 consortium launched an investor toolkit and report introducing an AI-powered framework to identify over 800 publicly traded companies involved in climate resilience. - Almost a third of identified companies are domiciled in EMDEs; 42 percent are in the industrial sector. - Positions climate adaptation as a growth industry and indicates some adaptation investments can generate commercial returns. ### Barriers to scaling adaptation finance in EMDEs (summarized) - Structural and market challenges: macroeconomic and financial market development variability across EMDEs. - Limited investment opportunities and lack of viable climate projects in smaller and lower-income countries; viable projects often driven by MDB financing. - Data gaps, inconsistent tracking and measurement methodologies, insufficient disclosures, and lack of consensus on defining and measuring adaptation interventions. - Knowledge gaps and scarce technical expertise across the adaptation value chain; need for capacity development. - Survey perceptions (SCB): - 69 percent say government intervention is needed to translate economy-wide adaptation benefits into commercial returns. - 67 percent say public-private partnerships will be critical for unlocking adaptation investment in emerging markets. - Three-quarters of banks, investors, and asset managers believe entirely new products such as adaptation bonds will need to be created. - Other barriers: insufficient incentives or support, operational inefficiencies, limited technical capacity for managing climate risks, perceived low private benefits, underdeveloped business models, legal/regulatory and risk-sharing obstacles. ### Policy Recommendations to Address the Adaptation Finance Gap - Objective: mobilize private sector finance to bridge gap between $63 billion in adaptation finance in 2022 and UN’s estimated $194–$366 billion needed annually by 2030 for developing economies. - Priority actions - Defining Adaptation - Standardize adaptation definitions and develop comprehensive metrics covering diverse activities and flows. - Avoid maladaptation and clarify direct or indirect financial benefits for investors. - Improving Adaptation Data and Measurement Methodologies - Develop standardized reporting requirements, integrate advanced analytics, and ensure transparency in fund allocation and utilization. - Track adaptation activities beyond stand-alone projects, including components within larger programs and asset classes such as bonds and equities. - Balancing Mitigation and Adaptation - Leverage synergies between mitigation and adaptation; promote equitable distribution of climate finance; evolve blended finance models, green bonds, and climate risk insurance to better integrate adaptation and resilience. - Integrating Adaptation into National and Sectoral Planning - Encourage incorporation of adaptation strategies into development plans and infrastructure projects; IMF can illustrate macroeconomic implications and benefits of adaptation investment. - Expanding Integration across Asset Classes and Climate Projects - Mainstream adaptation across public and private asset classes; support project preparation facilities and development of financial products addressing adaptation needs. - Supporting Vulnerable Countries - Simplify access to climate finance, provide capacity-building support, and make funding mechanisms accessible to smaller and less-resourced countries. - Building Capacity - Prioritize capacity-building to strengthen skills for developing, implementing, and managing adaptation projects; provide technical assistance and facilitate knowledge sharing. ### Role of the Resilience and Sustainability Trust (RST) - RST can be catalytic by providing longer-term, affordable financing to address structural challenges including climate change. - RSF has enabled climate finance country roundtables with IMF, World Bank, regional MDBs, and other actors to: - identify key barriers to increased climate financing; - identify complementary reforms, capacity development needs, and comparative expertise; - develop programmatic approaches (for example, frameworks for developing financing vehicles) for crowding in additional financing. - IMF’s macroeconomic perspective helps embed adaptation financing discussions into broader macroeconomic frameworks. ### Annex summaries - Annex 1 (Market perspective on Mitigation versus Adaptation) - Mitigation characteristics: focused on reducing greenhouse gas emissions; sectors with established technologies, standardized metrics (e.g., CO2 reductions), clearer financial returns. - Adaptation characteristics: broader sectoral spread; often absent direct revenue streams, localized solutions, indirect or long-term benefits; harder to standardize and scale. - Sector examples: agriculture, water resources, health, infrastructure, ecosystems, urban development—each with primarily indirect or risk-avoidance benefits. - Key investor challenges: broader scope, indirect benefits, lack of standardization, localized solutions. - Annex 2 (Definitions across adaptation finance ecosystem) - IPCC definition reiterated and forms of adaptation (anticipatory vs. reactive; private vs. public; autonomous vs. planned). - Paris Agreement context: over 50 member countries have submitted national adaptation plans. - Public institutions adopt broader interpretation of resilience as coping, evolving, adapting, transforming; private sector often conflates adaptation and resilience. - Lack of clarity and standardized metrics complicates private investment decisions and underscores need for credible labeling and taxonomies. - Annex 3 (Evolution of adaptation finance in global negotiations) - Key milestones: Marrakesh Accords (2001) institutional frameworks; Adaptation Fund (2007); Green Climate Fund (2010); Adaptation Committee (2010). - Later developments: increased prominence of adaptation finance; IPCC AR5 (2014) guidance; Global Commission on Adaptation (2018); Global Center for Adaptation (2019). *Source: Executive Summary and selected sections (clnea2024007).* ### Executive Summary: Key Messages ### Executive Summary: Key Messages ### Urgency and financing gap - Climate impacts are intensifying, making adaptation an unavoidable and essential priority. - Annual climate adaptation needs in developing economies are estimated to be $194–$366 billion, approximately 10 to 18 times more than current financing flows. - Based on the Climate Policy Initiative (CPI) tracking methodology, mitigation finance reached $1.2 trillion annually in 2021–22, while adaptation finance reached $63 billion (all-time high). - Studies suggest that 75 to 90 percent of all climate finance is directed toward mitigation. - Nearly 98 percent of adaptation finance comes from public actors; private adaptation flows remain highly fragmented. ### Distributional and equity concerns - Developing economies are affected the most despite contributing the least to the problem. - The failure to scale up adaptation investments will lead to more unabated climate impacts and loss and damage, making many EMDEs—notably low-income countries and small island developing states—even more vulnerable to climate-related extreme events. ### Private sector participation: current state and metrics - The financial sector has more comfort with mitigation because of its clearer metrics and financial returns; adaptation is often perceived as a risk management strategy or a government responsibility. - Based on a Standard Chartered Bank (SCB) survey of 150 global investors, asset managers, and bankers: - Financial firms have allocated 0.4 percent of their capital to adaptation projects in EMDEs. - 0.19 percent of capital is in adaptation projects in Asia. - 0.07 percent invested in adaptation in the Middle East. - 0.03 percent in Africa. - CPI’s September 2024 updated tracking methodology and bespoke taxonomy led to a fourfold increase in private adaptation finance to USD 4.7 billion annually from an average of USD 1 billion previously tracked by CPI for the period 2019 to 2022 for the same set of private sector institutions (CPI, 2024). - Survey indicators of rising interest: - Three-quarters of banks, asset managers, and investors expect climate adaptation finance will become mainstream in the near term. - 55 percent of respondents intend to increase their adaptation investments over the next 12 months. - 77 percent of the world’s top finance firms state it is a strategic focus and 68 percent are actively working on strategies for adaptation finance and investment (SCB 2024). ### Key barriers to scaling private adaptation finance - Adaptation’s complexity: broad range of sectors, regional heterogeneity of needs, and difficulties in defining, evaluating, pricing, aggregating, and achieving portfolio diversification for adaptation investments. - Real barriers: high perceived risk, limited track record, small and fragmented pipelines, limited instruments with adaptation benefits as primary focus. - Perceived barriers: adaptation framed as an externality, negative cash flows framed as “future costs avoided,” and concerns about greenwashing if active in adaptation without mitigation emphasis. - Need for product innovation, public-private partnerships, practical investment guidance, and investor-relevant metrics. ### Strategic reframing and investment approach - Adaptation needs to be reframed from a risk exposure to a viable investment opportunity. - Advance a broader perspective that explores synergies between commercially viable investments and integrates adaptation and resilience considerations across all investment processes. - Scale blended finance for adaptation and expand integration of adaptation considerations across all asset classes. ### Policy, institutional, and measurement priorities - Clarity on definition and alignment of understanding of adaptation to avoid maladaptation. - Enhancements in tracking and measurement of climate finance flows and improved data collection and reporting mechanisms. - Improvements in adaptation investment measurement methodologies and ensuring that funds are effectively used to meet intended adaptation objectives. - Strike a balance between funding for climate mitigation and adaptation efforts. - Integrate climate adaptation into national and sectoral planning processes. - Ensure that developing economies receive equitable support and easier access to climate finance. - Increase awareness and capacity building across all stakeholders of the adaptation finance ecosystem and investment value chain, with increased investment in capacity building for countries, especially low-income and vulnerable ones. - Develop appropriate incentives and effective risk-sharing mechanisms and foster stronger collaboration between the public and private sectors. ### Role of IMF and the Resilience and Sustainability Trust (RST) - Through the Resilience and Sustainability Trust (RST) the IMF is helping low-income and vulnerable middle-income countries foster an enabling environment for green investments and reduce the cost of capital—by strengthening economic fundamentals, implementing effective climate policies, and establish a robust climate information architecture. - The IMF can play an important role through deployment of RST, surveillance, convening power, and knowledge sharing to integrate adaptation and resilience considerations across the global financial architecture. - Since operationalization in 2022, 20 arrangements under the Resilience and Sustainability Facility (RSF) have been approved by the IMF Executive Board, encompassing 237 reform measures. - RSF-supported reforms target macro-critical policy and institutional reforms, tailored to country capacity and climate challenges, and include measures such as integrating climate considerations into public investment management, green public financial management, carbon pricing and subsidy reforms, expansion of social safety nets, risk assessments and management, energy transition, and improving financial sector data and disclosures. - During the first 24 months of operation, total commitments under approved RSF arrangements are about $9.5 billion (as of the end of August). *Source: Executive Summary: Key Messages (clnea2024007).* ### 2024. Several countries have expressed interest in having one such arrangement in the near term. Box 1 ### clnea2024007 - 2024. Several countries have expressed interest in having one such arrangement in the near term. Box 1 ### RST programs, country roundtables, and IMF role - For countries with market access and Resilience and Sustainability Facility arrangements, the IMF has helped authorities convene climate finance country roundtables in close partnership with the World Bank, regional multilateral development banks (MDBs), and other public and private actors. - Roundtables serve as platforms to: - discuss and develop solutions linking climate goals with macroeconomic policies; - identify (1) the main barriers to increased climate financing; (2) complementary reforms, capacity development needs, and comparative expertise; and (3) programmatic approaches (for example, frameworks for developing financing vehicles) for crowding in additional financing. - The IMF’s macroeconomic perspective allows discussions to be embedded in a coherent macroeconomic framework. ### Early lessons from the RST for scaling up adaptation finance - Importance of longer-term financing to address the structural challenges posed by climate change and enable investment in sustainable adaptation measures. - Necessity of integrating climate adaptation and resilience into broader economic policies and frameworks to ensure coherence and effectiveness and to catalyze additional financing from public and private sectors. - Critical role of capacity building to enable countries to effectively access and utilize adaptation finance. ### Purpose and scope of the note - The note contributes to the policy dialogue on scaling up adaptation finance and recognizes that adaptation challenges and access to financial resources vary significantly across EMDEs. - The note: 1. synthesizes the financial industry’s perspective on adaptation investments, highlighting key distinctions between strategies for adaptation and mitigation; 2. examines the current state of the adaptation finance ecosystem and focuses on a subset of financial instruments suitable for adaptation; 3. draws lessons from the RST and the IMF’s role in the broader climate finance architecture. - Analysis incorporates IMF staff outreach to public, private, nongovernmental, and academic institutions, engagement with RST stakeholders, industry surveys, and relevant publications. ### Definitions, measurements, and uncertainty in adaptation finance - IPCC (2023 Sixth Assessment Report) defines adaptation as “the capacity of interconnected social, economic, and ecological systems to cope with hazardous events, trends, or disturbances by responding or reorganizing in ways that maintain their essential function, identity, and structure.” - Practical use of the terms “adaptation” and “adaptation finance” varies across stakeholders, reflecting institutional mandates and investment objectives; no universally accepted operational definition exists. - Public vs. private sector perspectives: - Public sector: adaptation finance is part of government responsibility to address externalities and protect the vulnerable; tends to define adaptation finance broadly (infrastructure, social, community resilience). - Financial sector: focuses on managing financial risks and enhancing financial performance; emphasizes investments that mitigate risks to physical and financial assets and that fit within asset classes and institutional investment processes. - Table 1 (OECD 2023) presents adaptation activities across themes (examples include national adaptation plans, early warning systems, new technologies and services, financial services for adaptation, afforestation, water-efficient irrigation, flood defences, desalination, improving water efficiency, enabling environments) and categorizes expected financial returns as Usually Publicly Funded, Mixed (below market), or Commercially Viable. ### Challenges in assessing and quantifying adaptation needs - Multifaceted climate impacts create methodological complexities and scarcity of comprehensive global assessments and cross-country comparisons. - Uncertainty about future greenhouse gas emissions and regional differences in vulnerability lead to a wide range of adaptation estimates. - Other challenges: uncertainties around adaptation outcomes, causality, and effectiveness under different climate scenarios. - Country submissions: 85 developing economies have specified adaptation finance needs for 2021–30 in at least one submission. - Among low-income countries, 89 percent have stated their finance needs. - 68 percent of lower-middle-income countries have stated their finance needs. - 42 percent of upper-middle-income countries have stated their finance needs. - 16 percent of high-income countries have stated their finance needs. - 52 countries have detailed adaptation finance needs by sector, with water, agriculture, and infrastructure identified as priority areas (sectoral priorities vary by region). - Additional IMF instruments offering country-focused insights include Disaster Resilience Strategies, Climate Policy Diagnostics, Climate Public Investment Management Assessments, Climate Macroeconomic Assessment Program Reports, joint IMF-World Bank Climate Change Policy Assessments, and World Bank Country Climate and Development Reports. - The IMF’s Debt-Investment-Growth and Natural Disasters model can integrate climate risks and adaptation costs into development plans and macro-fiscal frameworks. ### Estimates of adaptation financing needs and distributional observations - A recent IMF study estimated global public adaptation needs at around ¼ percent of world GDP per year on average (IMF 2022b). - Existing analyses for developing economies range: - from insignificant amounts to $300 billion annually in 2030; - between $50 billion and $500 billion annually in 2050. - As a share of average annual global GDP, estimates range up to about 0.3 percent of projected 2030 global GDP per year. - In 2050, investment needs increase in all studies even after accounting for global economic growth. - IMF analysis indicates annual adaptation costs exceeding 1 percent of GDP for some developing economies, and above 10 percent of GDP for some island states. - Bottom-up country self-assessments can be much larger—“even 100 or 250 times higher than global averages” for some lower-income vulnerable countries. - Collective adaptation costs for 46 countries that included adaptation cost estimates in their NDCs are estimated at $783 billion by 2030 (or about 1.5 percent of their GDP annually from 2015 on average). - Small island states: cumulative resilience needs for Dominica, Fiji, Grenada, and Tonga range from 100 to 500 percent of GDP (some needs may be defined very broadly). ### Dynamics, policy interactions, and determinants of adaptation costs - Adaptation costs are influenced by factors beyond climate scenarios, including domestic policy environment, structural reforms, and the global landscape. - IMF modeling (IMF 2024) on climate adaptation in developing economies facing trade and financing constraints highlights: - Trade openness and structural reforms could significantly reduce adaptation costs in the agricultural sector. - Trade openness can offset agricultural production shortages, reducing adaptation investment needs. - Trade fragmentation could increase food insecurity risks and raise adaptation costs. - Enhancing agricultural productivity, improving adaptation efficiency, and reducing labor market distortions can lower adaptation investment needs. - Fiscally constrained countries face trade-offs between adaptation and broader development goals, particularly in agriculture where adaptation is critical for food security. ### Measurement challenges, tracking flows, and market implications - Accurate measurement of adaptation finance flows is hindered by methodological inconsistencies, data gaps, and inadequate reporting. - Current approaches often emphasize incremental, project-by-project initiatives or project finance transactions, which may understate total adaptation investments. - Low headline figures for adaptation finance may deter financial institutions from viewing adaptation as an investable market. - Narrow measurement focus leads to policy discussions dominated by instrument-specific solutions (e.g., cross-border blended finance), which represent only a small fraction of the financial landscape. - Developing comprehensive and scalable frameworks that integrate adaptation across asset classes and investment strategies is essential to attract a broader range of financial actors. - Clear market definitions of what qualifies as adaptation-aligned investment are necessary to avoid maladaptation and to recognize adaptation and resilience as an investable asset class. *Source: IMF | Staff Climate Notes (content unit: clnea2024007).* ### Box 2. Emerging Market and Developing Economies: Evolving Investment Context ### Box 2. Emerging Market and Developing Economies: Evolving Investment Context ### Global allocation and investor behavior - As of 2022, advanced economies are home to 80 percent of global financial assets held by financial institutions (of total $489 trillion). - Emerging market and developing economies (EMDEs), excluding China, hold domestic financial assets that represent less than 5 percent of global financial assets. - EMDEs accounted for about 40 percent of the world population and contributed about 66 percent of global GDP growth over the past decade. - Investment funds currently allocate only about 10 percent of their assets to EMDEs, down from 12 percent just a couple of years ago. - EMDEs allocation in environmental, social and governance (ESG) funds is 6 percent (IMF GFSR 2022). - Many large institutional investors avoid EMDEs altogether. - Advanced-economy investors make allocation decisions to EMDEs based on institutional mandates, specific investment objectives, and desired risk/return profile. ### Credit quality and investability - Over the past 20 years, the average credit quality of EMDEs—a proxy for a country’s investability, as measured by credit rating agencies—deteriorated across all regions. - The large majority of EMDEs are currently below investment grade, especially in sub-Saharan Africa and Latin America and Caribbean regions. - The distinction between instruments rated “investment grade” versus “below investment grade” effectively determines the potential investor base, because a number of institutions are limited to investment-grade investments. - Investment-grade status materially affects market access and investor composition. ### Nonfinancial factors and ESG assessments - Investors’ view of EMDEs’ investability has evolved to include nonfinancial factors due to increasing sustainability and climate regulations and a broadening market perspective (Mobilist 2023b). - Investors seek to assess a sovereign’s sustainability profile as it is seen to pose substantial fiscal risks, including a country’s quality of governance and policy execution, and how long-term competitiveness is affected by managing climate and environmental risks. - Commercial sovereign ESG scores indicate that sub-Saharan Africa is in the bottom quartile of all EMDEs; the Middle East and North Africa fared not much better. - Sovereign governance, environmental, and social factor scores have increasingly influenced investors’ capital allocation and investment decisions, heightening risk perception of EMDEs in the industry. ### Public sector role and adaptation finance architecture - The adaptation finance landscape has been dominated by the public sector, driven by international climate agreements and multilateral initiatives. - The public sector has focused on creating institutional frameworks, securing public sources of funding, and addressing adaptation needs of the most vulnerable countries. - Public-sector efforts shaped framing for broader engagement on adaptation, developed early technical guidance, and set up multilateral concessional funds for vulnerable developing economies; these are yet to translate into significant private sector participation. - The financial sector’s interest in adaptation finance shifted after the 2015 Paris Agreement from a moral argument to a financial necessity, prompted by growing climate-related losses. - This shift led to private sector–focused and private sector–led initiatives developing technical guidance across the adaptation investment value chain. ### Institutions, milestones, and technical guidance - A range of international institutions, initiatives, and alliances influence private sector involvement in adaptation finance (MDBs, IFIs, DFIs, standard setters, and market initiatives). - Over the past five years, initiatives have examined challenges in scaling up adaptation finance and how to incentivize increased investment. - Work is under way to develop technical guidance across: - adaptation taxonomies, - adaptation flow tracking methodologies, - topology of adaptation projects, including risk/return profiles. - Key technical documents have been released or are under development across the adaptation finance ecosystem addressing various aspects of the adaptation finance value chain (examples and mapping to bibliography noted in the original text). ### Adaptation finance outcomes and trends - Growing awareness and technical guidance on adaptation has yet to result in material progress in incorporating adaptation and resilience considerations across the financial instrument landscape. - Over the past decade, the number of adaptation actions supported by the four main climate funds—UNFCCC’s Adaptation Fund and Green Climate Fund; and Global Environment Facility’s Least Developed Countries Fund and Special Climate Change Fund—has stagnated, although their size has grown. - The Green Climate Fund is highlighted as a significant source of concessional funding for blended finance transactions; two recent adaptation-focused transactions supported by the Green Climate Fund are featured in Box 3 (referenced in the original content). *Source: Box 2. Emerging Market and Developing Economies: Evolving Investment Context.* ### Box 3. Recent Private Sector Adaptation Finance Platforms ### Box 3. Recent Private Sector Adaptation Finance Platforms ### GAIA Climate Investment Fund - Nearly $1.5 billion blended finance platform underwritten by MUFG Bank. - Offers long-term loans for climate adaptation (70 percent) and mitigation (30 percent) investments. - Targets 19 of the most climate vulnerable countries in the world (25 percent to low-income countries and small island developing states). - Focus areas: climate-resilient infrastructure, ecosystems, health, agriculture, and water systems. - Design goals: become a lasting and scalable platform for adaptation and mitigation projects in emerging markets by addressing hurdles faced by institutional investors, aligning projects with nationally determined contributions and national adaptation plans, providing longer tenors, and reducing currency volatility through a decentralized network of public and nongovernmental institutions. ### Africa Rural Climate Adaptation Finance Mechanism (ARCAFIM) - $600-million large-scale mechanism tailored for small- and medium-scale agrobusinesses and rural microenterprises. - Integrates blended finance and incentivizes regional private banks through a risk-sharing mechanism. - Structured into four separate facilities serving East, South, West, and North Africa. - First $180-million facility for Eastern Africa was approved in December 2023 by the Green Climate Fund with Equity Bank Kenya, providing $90 million in commercial funding along with International Fund for Agricultural Development’s $90 million. - Other regions expected to be rolled out by 2026. - Example of a hybrid transaction combining mitigation and adaptation objectives. ### Blended Finance: Current Use and Potential - Historical deal counts: on average approximately six adaptation deals per year recorded up to 2020, with 10-11 annual deals in 2021- 2023 (smaller in size compared to earlier years). - Thirty three percent of blended adaptation financing from 2021 to 2023 came from private sources (Convergence, State of Blended Finance 2024). - Hybrid-blended finance transactions have averaged about ten transactions annually since 2013. - Institutional investment allocation into climate finance: 45 percent in hybrid solutions, 35 percent in mitigation, 20 percent in adaptation. - Hybrid transactions amounted to $18.5 billion since 2014. - Twenty-seven percent of hybrid transactions focus on agricultural inputs and farm productivity. - Hybrid sectors also include infrastructure, financial services, housing, and real estate. ### Green, Sustainable, and Sustainability-Linked Bonds: Limited Adaptation Coverage - Examples cited: 2019 City of Amsterdam €200 million green bonds; New Zealand green sovereign bond program since 2021; 2020 Government of Fiji $50-million green bond. - As of 2023, only 1,222 out of 48,103 green, social, sustainability, and sustainability-linked instruments had earmarked proceeds for adaptation and resilience activities (Climate Bonds Initiative analysis). - Sovereign issuers led adaptation and resilience-related deals: 31 percent of their instruments address some aspect of adaptation; nonfinancial corporations 19 percent; financial corporations 18 percent; government-backed entities 17 percent. - 2023 saw a 21-percent year-over-year decline in adaptation and resilience-referenced deals, with issuances from 86 countries remaining constant. - Challenges: most issuers prioritize mitigation; significant portion of proceeds directed to existing projects; absence of coherent, comparable KPIs for adaptation in sustainability-linked bonds; difficulty measuring adaptation impacts compared with mitigation (CO2 emissions). ### Multilateral Development Banks (MDBs): Growth and Trade-Offs - In 2023, MDBs adaptation finance portfolio grew to over $25 billion across all economies, accounting for roughly 33 percent of MDBs’ financial commitment. - Of MDBs’ adaptation finance, 89 percent was committed toward low- and middle-income countries. - Most adaptation finance for low- and middle-income countries was committed through investment loans (65 percent), followed by project-based financing and grants. - New instruments and innovations: July 2024 joint $300 million guarantees by the Inter-American Development Bank and the European Investment Bank to enable Barbados’ debt-for-climate initiative; each institution contributes $150 million. - Moody’s analyses: - Increasing adaptation finance at past growth rates could see adaptation financing potentially reaching $90 billion annually by 2030 without substantially affecting MDBs' credit metrics. - Under a maximum leverage scenario, it would be possible to increase adaptation lending to provide around $380 billion by 2026 but would entail trade-offs with other critical development needs. - A balanced approach suggests MDBs climate adaptation financing would only reach about $50 billion per year by 2030 even with significant increases in lending. ### Public Equity Investments in Climate Resilience - March 2024 consortium (Global Adaptation and Resilience Investment working group, MSCI, The Lightsmith Group, Bezos Earth Fund, ClimateWorks Foundation) launched an investor toolkit and report “The Unavoidable Opportunity: Investing in the Growing Market for Climate Resilience Solutions.” - Introduces an AI-powered framework to identify over 800 publicly traded companies involved in climate resilience (sectors: grid resilience, stormwater management, insurance, vaccines). - Almost a third of the companies covered are domiciled in EMDEs. - MSCI Sustainability Institute analysis: 42 percent of identified companies are in the industrial sector, with a significant portion based in emerging markets. - Positions climate adaptation as a growth industry and challenges the view that adaptation-focused investments cannot generate commercial returns or require blended finance structures. ### Barriers to Scaling up Adaptation Finance in EMDEs - Key structural and market challenges: - Structural issues and challenges specific to EMDEs (varying degrees of macroeconomic and financial market development). - Limited investment opportunities and lack of viable climate projects in EMDEs, especially in smaller countries; viable projects in lower-income countries driven primarily by MDB financing. - Data gaps, inconsistencies in tracking and measurement methodologies, and insufficient disclosures; lack of consensus on defining and measuring adaptation interventions. - Knowledge gaps and scarce technical expertise across the adaptation value chain; need for capacity development. - Stakeholder survey data and perceptions: - Almost seven in ten firms surveyed by SCB say government intervention is needed to translate economy-wide benefits of adaptation into commercial returns for investors (69 percent). - 67 percent say public-private partnerships will be critical for unlocking adaptation investment in emerging markets. - Three-quarters of banks, investors, and asset managers believe entirely new products such as adaptation bonds will need to be created for climate adaptation to attract required capital. - Other barriers: insufficient incentives or support, operational inefficiencies at institutional level, limited technical capacity for managing climate risks, perceived low private benefits, underdeveloped business models, legal/regulatory and risk-sharing obstacles. ### Policy Recommendations for Addressing the Adaptation Finance Gap - Scale up investments and mobilize private sector finance to bridge the gap between $63 billion in adaptation finance in 2022 and the UN’s estimated $194–$366 billion needed annually by 2030 for developing economies alone. - Priority actions: - Defining Adaptation - Standardize adaptation definitions and develop comprehensive metrics covering diverse activities and flows. - Avoid maladaptation and clarify direct or indirect financial benefits for investors. - Improving Adaptation Data and Measurement Methodologies - Develop standardized reporting requirements, integrate advanced analytics, and ensure transparency in fund allocation and utilization. - Track adaptation activities beyond stand-alone projects, including components within larger programs and asset classes such as bonds and equities. - Balancing Mitigation and Adaptation - Leverage synergies between mitigation and adaptation; promote equitable distribution of climate finance; evolve blended finance models, green bonds, and climate risk insurance to better integrate adaptation and resilience. - Integrating Adaptation into National and Sectoral Planning - Encourage incorporation of adaptation strategies into broader development plans and infrastructure projects; IMF can illustrate macroeconomic implications and benefits of adaptation investment. - Expanding Integration of Adaptation across All Asset Classes and Climate Projects - Mainstream adaptation across public and private asset classes; support project preparation facilities and development of financial products addressing adaptation needs. - Supporting Vulnerable Countries - Simplify access to climate finance, provide capacity-building support, and make funding mechanisms accessible to smaller and less-resourced countries. - Building Capacity - Prioritize capacity-building initiatives to strengthen skills for developing, implementing, and managing adaptation projects; provide technical assistance and facilitate knowledge sharing. ### Role of the Resilience and Sustainability Trust (RST) - RST can play a catalytic role by providing longer-term, affordable financing to address structural challenges including climate change. - Resilience and Sustainability Facility has enabled climate finance country roundtables in partnership with IMF, World Bank, regional MDBs, and other actors to: - Identify key barriers to increased climate financing. - Identify complementary reforms, capacity development needs, and comparative expertise. - Develop programmatic approaches (for example, frameworks for developing financing vehicles) for crowding in additional financing. - IMF’s macroeconomic perspective helps embed adaptation financing discussions into the broader macroeconomic framework. *Source: IMF staff.* ### Annex 1. Overview of the Market Participants Perspective on ### Annex 1. Overview of the Market Participants Perspective on Mitigation versus Adaptation ### Mitigation: characteristics and key sectors - Mitigation investments focus on reducing or preventing greenhouse gas emissions and concentrate in sectors with well-established technologies, standardized metrics, and clear financial returns. - Financial industry confidence derives from standardized metrics (for example, CO2 emissions reductions), established technologies, and proven business models that support evaluating, pricing, and scaling mitigation investments. - Mitigation presents a more predictable risk-reward dynamic and clearer returns on investment compared with adaptation. - Key sectors include: - Energy: Investments in renewable energy sources like wind, solar, and hydropower. - Transport: Electrification (for example, electric vehicles), improving fuel efficiency, supporting public transit. - Industry: Carbon capture and storage, cleaner production techniques, energy-efficient technologies. - Forestry and Land Use: Reforestation, afforestation, sustainable land use practices; increasingly supported by carbon markets allowing monetization via carbon credits. ### Adaptation: characteristics and sectors - Adaptation aims to make societies more resilient to climate impacts and involves a far broader and more diverse set of sectors than mitigation. - Challenges for investors include often-absent direct revenue streams, lack of standard metrics, high localization of solutions, and benefits that are frequently indirect or long-term (for example, avoided costs or reduced disaster recovery costs). - Sector-specific adaptation activities described: - Agriculture: - Improving crop resilience to droughts, pests, and floods. - Developing climate-resistant seed varieties. - Introducing water-efficient irrigation systems. - Projects must be highly localized; outcomes focus on reducing future risks (for example, crop failure) rather than immediate returns. - Water Resources: - Infrastructure for water storage, flood prevention, irrigation, and sanitation. - Projects include building seawalls, improving drainage systems, ensuring clean water access. - Financial returns are often indirect, such as reduced disaster recovery costs. - Health: - Strengthening public health systems to deal with climate-related diseases. - Improving access to clean water, enhancing healthcare infrastructure to withstand extreme weather events. - Benefits (for example, reduced health care costs or improved public health outcomes) are harder to measure financially over short investment horizons. - Infrastructure: - Building climate-resilient roads, bridges, urban systems that withstand floods, extreme temperatures, and other climate impacts. - Often focused on long-term risk reduction and resilience-building; may not immediately meet private investors’ expected financial returns. - Ecosystems: - Protecting and restoring wetlands, mangroves, forests that act as buffers for storms or floods. - Often yield public goods that are difficult for investors to monetize directly. - Urban Development: - Improving housing, transportation, and public services to be more resilient. - Typically require large-scale public-private collaboration; financial returns depend on local contexts and long-term urban planning. ### Key Challenges in Adaptation versus Mitigation for Investors - Broader Scope: - Adaptation spans a wide array of sectors with different metrics, strategies, and timelines, complicating a uniform financial industry approach. - Mitigation has narrower, more clearly defined pathways enabling investor specialization (for example, renewable energy or energy efficiency). - Indirect Benefits: - Adaptation projects often deliver avoided costs or long-term resilience rather than immediate monetizable outcomes (for example, energy savings or carbon credits common in mitigation). - Lack of Standardization: - Mitigation uses widely accepted metrics like tons of CO2 reduced or energy savings; adaptation lacks standardized metrics to track success across sectors. - Financial industry reluctance stems from difficulty measuring, comparing, or reporting adaptation success. - Localized Nature: - Adaptation investments must be tailored to local conditions, hindering scalability and standardization of investment models and risk assessment. - Example: flood prevention in coastal cities differs significantly from solutions needed in drought-prone regions. - Mitigation solutions (for example, a solar project) can often use similar business models across countries. ### Annex 2. Definition of Adaptation across Adaptation Finance Ecosystem - IPCC definition quoted: adaptation is the “adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities.” - IPCC distinguishes forms of adaptation: anticipatory versus reactive; private versus public; autonomous versus planned. - Paris Agreement context: - Since the Paris Agreement established the framework for national adaptation plans, over 50 member countries have submitted their plans. - National adaptation plans generally align with the United Nations Framework Convention on Climate Change but differ in specificity due to unique climate risks. - Examples of national definitions: - United States: “climate change adaptation or climate adaptation means taking action to prepare for and adjust to both the current and projected impacts of climate change,” with a primary goal of “protecting human health and the environment as climate changes and disruptive events increase.” - Philippines: defines adaptation in human systems as “the process of adjustment to actual or expected climate and its effects, to moderate harm or exploit beneficial opportunities,” and in natural systems, “it is the process of adjustment to actual climate and its effects; human intervention may facilitate adjustment to expected climate and its effects.” - Multilateral development banks’ joint report: adaptation activities “aim to reduce the risks or vulnerabilities posed by climate change and to increase climate resilience,” and outlines principles for identifying and tracking adaptation finance investments. - Public institutions adopt a broader interpretation of resilience as a combination of coping, evolving, adapting, and transforming, in that order; adaptation occurs when a society has reached its limit in coping with climate risks. - Private sector usage: - Adaptation and resilience are often conflated or used interchangeably. - Standard Chartered Bank report identifies adaptation as “the process of adjusting practices, systems, and structures to moderate potential damage and cope with the consequences of natural and climate-related hazards, including adjusting socio-economic and environmental practices to limit damage.” - The same report defines resilience as “the ability of a system, community, or society exposed to hazards to resist, absorb, accommodate, adapt to, transform, and recover from the effects of a hazard in a timely and efficient manner, including the preservation and restoration of its essential basic structures and functions through risk management.” - Implications: - Lack of clarity between adaptation and resilience complicates private investment decisions. - Absence of globally standardized metrics and high localization underscore the need for credible labeling and taxonomies within the investor community to ensure effective adaptation investments. ### Annex 3. Evolution of “Adaptation Finance” in Global Climate Negotiations - Early 2000s: - International recognition of the need for dedicated financial resources for climate adaptation. - Marrakesh Accords of 2001 at the 7th Conference of the Parties (COP7) established the first institutional frameworks for adaptation finance. - Institutional developments under the UNFCCC mandate: - Adaptation Fund in 2007. - Green Climate Fund in 2010. - Establishment of bodies such as the Adaptation Committee in 2010. - Later 2010s and beyond: - Adaptation finance gained increasing prominence, expanding stakeholders beyond the public sector. - Subsequent COPs emphasized improving access to finance for developing economies, enhancing effectiveness of adaptation actions, and focusing on loss and damage. - IPCC AR5 (2014) advanced guidance on adaptation, emphasizing early planning and financial institutions’ role, and highlighted the need for increased investment to build resilience, especially in developing economies. - Global Commission on Adaptation established in 2018 to accelerate adaptation efforts and mobilize governments, businesses, and international organizations. - Global Center for Adaptation established in 2019 to support adaptation solutions at international and local levels through public-private partnerships. *IMF | Staff Climate Notes* ### Bibliography ### Bibliography ### Adaptation Policy Issues - Gratcheva, E., and O’Reilly Gurhy, B. 2024. “Sovereign Environmental, Social and Governance Investing: Chasing Elusive Sustainability.” IMF Working Paper 2024, International Monetary Fund, Washington, DC., https://doi.org/10.5089/9798400277054.001 - Global Center on Adaptation. 2021. 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