Blended finance seen to perfectly suit goal of climate adaptation funding

Climate scientists argue that, apart from climate change mitigation, the most vulnerable communities will require resources for climate adaptation. As the global temperature is on rise, adaptation to extreme weather events becomes no less important than mitigation, and the costs to achieve this have been gradually increasing. Blended finance may be the perfect solution that will benefit both the public and private sectors.

What is blended finance?

Blended finance is a strategy to finance projects that support development, particularly in developing countries, that engages both private and public funds. The term, blended finance, was defined by an international NGO that deals with development issues, the World Economic Forum. Blended finance supports the UN’s 17 Sustainable Development Goals (SDG) which aim to achieve peace and prosperity around the world and is thus an approach that could be also used to undertake climate action, one of the SDGs.

How can blended finance help with climate mitigation?

Extreme weather events are becoming increasingly frequent and robust climate change adaptation is crucial to avoid the high financial costs of the damage caused by floods, heatwaves, hurricanes, wildfires, or droughts which this year have hit many developing states as well as Europe, the U.S., and Canada. Adaptation may reduce the costs that both private and public entities are forced to bear due to extreme weather event-related damage. For instance, the public and private sector could together invest in critical infrastructure such as roads, electricity grids, or the construction of early warning system against floods as both would benefit from this by avoiding the much higher costs involved with the potential damage. As private and public actors need the infrastructure for their everyday activities, their common goal is to ensure climate change resilience.

Blended finance may improve risk management as private entities have broad experience in managing the risks of project implementation although the public sector is better prepared to deal with political risk or deciding to invest in innovative projects. While private investors may provide funds, public partners can deliver technical assistance and create favorable bureaucratic conditions to achieve well-functioning businesses.

Furthermore, finance for climate adaptation from the public sector is insufficient which is why broader engagement with private investors is necessary. While barely 5% of the entire global climate budget is channeled to adapt to climate changes, as much as 95% of this funding comes from the public sector (US$30 billion) annually, the World Economic Forum noted. Bearing in mind that developing countries alone will need between US$140 and US$S300 billion a year within this decade to adapt to climate changes, the contribution from the private sector is very modest.

Finally, blended finance may motivate the private sector to invest in climate adaptation because, thanks to partnership with public partners, private entities may be more easily able to manage certain barriers that prevent them from investing in adaptation such as obtaining patents for innovations which not all are able to access. Patents allow private capital to gain from their inventions and public finance backing enables such obstacles to be more easily overcome.

Landscape Resilience Fund

One example of a private and public sector partnership that uses blended funding to support adaptation to climate changes is the Landscape Resilience Fund. This initiative was launched by four organizations including three NGOs – the South Pole Group, the World Wide Fund for Nature (WWF), and the Global Environment Facility (GEF) – and the luxury brand, Chanel. Its goal is to utilize public and private resources to mobilize capital flow. When GEF initially committed to channel US$1.3 million, this motivated Chanel to add US$25 million in private finance.