This chapter provides the context for the Climate Adaptation Investment Framework. It outlines investment needs and opportunities for climate adaptation, provides key definitions and explains how this Framework links to the Policy Framework for Investment (PFI) and FDI Qualities policy toolkit. It also outlines how this Framework can be integrated into adaptation planning processes.
Climate Adaptation Investment Framework
Green Finance and Investment
Abstract
The Climate Adaptation Investment Framework (CAIF) identifies the policies that can enable increased public and private investment1 in activities that help to build resilience to the current and future climate (Box 1.1). The CAIF builds on the OECD’s Policy Framework for Investment (PFI) and FDI Qualities Policy Toolkit, while incorporating insights from other relevant initiatives including the High-level Approach to Enhance and Better Integrate OECD Work on Infrastructure. It does not prejudge the outcomes of international processes in relation to climate change, investment or related topics.
This chapter provides the rationale for developing the CAIF, outlines the links with OECD standards on sustainable investment, and explains how governments can use the CAIF to enhance resilience to climate change.
This Framework adopts an inclusive definition of adaptation investments, encompassing all investments that help to build resilience to the impacts of climate change. This definition focusses on the expected impact of the investment, rather than how it is labelled or the intention behind the activities being undertaken. Building on the approach of Mullan and Ranger (2022[1]), adaptation investments should meet the following three criteria:
Resilience benefits: the investment should increase resilience to climate change, by directly reducing physical climate risks or by supporting adaptation by others.
Do No Significant Harm: the investment does not negatively affect the resilience of other people or ecosystems, for example by increasing the risks faced by neighbouring communities.
Compatible with adaptation plans: the investment should be compatible with national or local strategies, such as National Adaptation Plans, Nationally Determined Contributions or National Disaster Reduction Strategies. If such plans do not exist, or do not set objectives in relation to the investment, the presumption is that an investment is compatible.
These criteria aim to ensure that the investment is likely to have a positive impact on adaptation and reduce the risk that the measure is ineffective or counterproductive (i.e. the risk of maladaptation).
A major challenge in defining and measuring adaptation investments is that adaptation is not a well-defined set of activities, as it depends upon the context in which the investment takes place. Addressing climate change may be only one of several motivations for undertaking an activity. For example, the activity could be an office refurbishment, with one element of this being the installation of mechanical ventilation to increase thermal comfort during hotter summers. The decision maker may not even view these components as being driven by climate adaptation but rather an effort to reduce exposure to risks or take advantage of any localised opportunities arising from a changing climate. These investments will be context specific and vary in terms of scale, and location. As such, proxies and estimation may have to be used to understand the extent to which investment flows are consistent with climate resilience objectives (Noels et al., 2024[2])
The concept of adaptation is closely linked to the concept of resilience, which is the “capacity of interconnected social, economic and ecological systems to cope with a hazardous event, trend or disturbance, responding or reorganizing in ways that maintain their essential function, identity and structure” (IPCC, 2022[3]). For the purposes of this report, climate adaptation is the process that is intended to lead to the outcome of improved resilience to the impacts of climate change.
Climate change is giving rise to a diverse range of increasingly severe hazards, including heatwaves, wildfires and storms (see Table 1.1). Proactive investments in adaptation – such as risk-reducing infrastructure, climate-resilient infrastructure and improved agricultural practices – can save lives, avoid losses and contribute to economic growth. Investment needs are context specific, but a growing body of literature provides an indication of the overall scale and distribution of investment needs. Plausible estimates of annual investment needs for adaptation are in the hundreds of billions of dollars per year for developing countries (UNEP, 2023[4]).
There is a growing body of research on potential investment needs for adaptation. The UNEP Adaptation Gap 2023 report consolidated and updated sectoral estimates of adaptation needs for developing countries, arriving at a total of USD 130 - 415 billion per year until the 2030s, with a central estimate of USD 240 billion per year (equivalent to 0.6% of developing countries’ GDP). The main constituents of this total were investments in flood protection, coastal protection and infrastructure, while the modelling also showed significant needs for agriculture and social protection (UNEP, 2023[4]). A separate approach, based on aggregating the needs expressed in developing countries’ Nationally Determined Contributions found that the main priorities identified were for water, infrastructure and agriculture (UNFCCC, 2022[6]). There are, however, still significant evidence gaps and inherent methodological challenges (OECD, 2015[7]), which mean that these estimates should be viewed as indicative.
There are currently no comprehensive estimates of investment needs for adaptation in OECD countries, but some indications are available from national and supranational studies. For example, in France, one study identified annual investment needs by the public sector of EUR 2.3 billion per year, including measures to address overheating in buildings, improve the climate resilience of infrastructure, manage wildfires and improve water management (I4CE, 2022[8]). An analysis for the UK estimated that addressing the 61 main risks identified in the 3rd Climate Change Risk Assessment could require annual investment (both public and private) in the region of GBP 5 billion per year (EUR 5.8 billion) (Watkiss, 2022[9]).
The available quantitative evidence suggests that large investment needs are likely to arise across agriculture, infrastructure, flood management, water management and buildings. These investments include nature-based solutions. Cross-sectoral interventions to provide early warnings, improve access to climate data and build capacity are critical for managing climate risk, even if smaller in quantitative terms. Significant public and private investment will be required, but the share will vary by country context and specific investment (see chapter 2). There is very limited quantitative data on business and industry and in relation to the natural environment and ecosystems (UNEP, 2023[4]). However, given that these sectors will be sensitive to the climate and are economically significant, it is likely that they will be important for investment in adaptation. An overview of the key sectors, the potential hazards they are exposed to, and examples of potential investments are provided below in Table 1.1.
Climate change impacts are interconnected, and the actions needed to manage a risk may lie in other sectors. For example, reducing the risk of excess mortality from heat may require investments to improve the thermal performance of buildings (including hospitals) and improved infrastructure to reduce the risk of power cuts during heatwaves. Improved early warning systems can be used to put in place preventative measures before a heatwave occurs, as is used by France’s heatwave plan (Agence Régionale de Santé, 2024[10]). As such, the table above focusses on the sectors where investments are expected to occur, while recognising that these will give rise to wider social and economic benefits.
These estimates of likely investment needs are significantly in excess of recorded finance flows. Climate finance provided and mobilised by developed countries for adaptation in developing countries reached USD 32.4 bn in 2022 (OECD, 2024[11]). The most comprehensive estimates currently available have identified an annual average of USD 63 billion of finance for adaptation in 2021/22, albeit with significant gaps in coverage (CPI, 2023[12]). Even allowing for underreporting of adaptation-relevant finance from some sources, there is an urgent need to scale-up investment in adaptation to become commensurate with the challenge posed by climate change.
Addressing the adaptation investment gap will require concerted efforts to mobilise finance flows from all sources – public and private, domestic and international – for increased investment in adaptation. This has been recognised by Article 2.1c of the Paris Agreement, which call for “[m]aking finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. Previous OECD analysis has analysed how to scale-up climate finance as a key resource to support adaptation in developing countries (OECD, 2023[13]). For all countries, efforts are needed to strengthen the policy enabling environment for investment in adaptation (Mullan and Ranger, 2022[1]).
The need to increase investment in adaptation is taking place against a challenging macroeconomic context (OECD, 2023[14]). In many countries, high levels of public debt, high inflation and low near-term prospects for economic growth are putting pressure on public finances. Many developing countries have limited fiscal space for investments in adaptation. These broader trends are also pushing up the cost of capital, creating challenges for private investment. These trends are exacerbating the challenges to investment in adaptation (Chapter 2). In this context, this Framework is intended to support a strategic, targeted and evidence-based approach for mobilising finance from all sources for investment in adaptation. This approach reflects the common elements of good practice based on international experience, with the application of those principles being tailored to different country circumstances.
The OECD has been a partner for many economies across all continents to share its expertise in reforming investment frameworks. The insights and policy lessons from decades-long efforts to improve the investment climate have been distilled into a set of tools and standards that policy makers can use to enhance the attractiveness of their economies as sustainable investment destinations (Figure 1.1).
Source: OECD (2015); OECD (2022)
The OECD Policy Framework for Investment (PFI) is a comprehensive and systematic tool for improving investment conditions (OECD, 2015[15]). It is neither prescriptive nor binding and provides a list of key questions to guide governments through investment climate reform. The PFI takes into consideration 12 policy areas that are widely recognised as underpinning a healthy environment for all investors, from small and medium-sized firms to multinational enterprises. The three principles that apply throughout the framework are policy coherence, transparency in policy formulation and implementation, and regular evaluation of the impact of existing and proposed policies. The PFI has been used by almost 40 countries at varying levels of economic development and across all continents, as a tool for assessing investment and business climates, and for designing reforms to improve them. In addition, the PFI serves as a reference point for investment promotion agencies, businesses, trade unions, donors as they assist recipient country partners, and non-governmental organisations in their dialogue with governments.
The more recent FDI Qualities initiative complements the PFI with insights and policy recommendations to ensure that FDI contributes to the Sustainable Development Goals (SDGs) in host economies, by creating quality jobs, enhancing innovation capacity, advancing gender equality, and supporting decarbonisation (OECD, 2022[16]). While the PFI addresses investment for green growth in broad terms, the FDI Qualities tools explicitly seek to help government shape policies and institutional arrangements to improve the contribution of FDI to climate change mitigation. Neither the PFI nor the FDI Qualities tools address the specific challenges and opportunities associated with adaptation investments.2
The CAIF builds on the foundation of the PFI and FDI Qualities toolkit, taking these as the foundation of an effective policy enabling environment for investment in adaptation. The CAIF applies a similar diagnostic approach, offering guiding questions to help governments identify areas that are likely to be important for mobilising adaptation investments. However, the design of the CAIF has been tailored to reflect the characteristics of climate adaptation. In particular, the scope includes public investment, given that this is critical for adaptation.
Underpinning elements for an enabling environment for investment
The PFI outlines a set of horizontal pre-requisites for creating an enabling policy environment for investments, which apply also to climate adaptation investments. These factors help maintain a predictable and transparent investment environment, engage relevant stakeholders in the policy making process and reduce the costs of doing business:
Fairness and trust. High levels of trust can facilitate compliance with laws and regulations, strengthen investor confidence and reduce risk aversion. Underlying trust is the expectation that public officials respect high standards of integrity, and effectively address issues around conflict of interest, corruption and fraud. This is particularly relevant in high-risk areas like public procurement, which is a major source of finance for adaptation investments.
Whole-of-government and inter-agency coordination. As with investment in general, adaptation investment is an issue requiring policy responses that do not fit neatly within any single governmental department or agency. Good government requires integrating cross-disciplinary perspectives into policy, improving coordination, and facilitating resource sharing across government institutions. In particular, coordination mechanisms are needed to ensure that centre-of-government financial and planning institutions have ownership of adaptation investment needs.
Transparency and engagement. More open and inclusive policy-making processes help to ensure that policies will better match the needs and expectations of citizens and businesses. Greater participation of stakeholders in policy design and implementation leads to better targeted and more effective policies. Regular consultation of the private sector can help create shared understanding of the likely impacts of climate change, identify priority investment needs and support a discussion about how these can be financed.
International cooperation on standards can complement and even reinforce domestic efforts to improve the business climate. The more standards are harmonised or mutually recognised across countries, the more easily will firms be able to invest and trade internationally. This applies also to sustainable finance taxonomies and other principles and approaches for climate adaptation alignment.
The Climate Adaptation Investment Framework aims to enable a pragmatic diagnosis of the policy gaps and opportunities for increasing investment in adaptation, covering enabling environment issues such as data availability, public funding, planning processes and key regulatory issues. It is structured around six building blocks, covering the policy areas that are particularly relevant for enabling investment in climate adaptation. The value added of the CAIF is in bringing together the different policy strands that are relevant for adaptation. The aim is not to break new ground in individual policy areas but to tie them together to ensure policy coherence. It does not provide ready-made reform agendas but rather helps to improve the effectiveness of any reforms that are ultimately undertaken.
This Framework is intended to provide a non-prescriptive approach to strengthening the enabling environment. It can be used in various ways and for various purposes by different constituencies, including for self-evaluation and reform design by governments and for peer reviews in regional or multilateral discussions. Users of the Framework are invited to go through each of the building blocks and use the provided guiding questions to identify potential gaps and areas for improvement. Each building block contains an explanation of the relevance of the questions, illustrated with examples of international good practice. The building blocks also include links to resources that provide further guidance on how to address any gaps that have been identified through the guiding questions.
Integration into adaptation planning processes
National planning processes for adaptation (such as National Adaptation Plans and the development of Nationally Determined Contributions) provide a key entry-point for the use of the Climate Adaptation Investment Framework (CAIF). These processes are intended to develop a coherent policy response to understand and manage the risks from climate change, reflecting also diverse needs and circumstances (Box 1.2). The CAIF can be used as an input into the development of these processes by identifying potential gaps and facilitating discussions about potential policy responses.
Several countries have started to implement dedicated adaptation investment planning processes to complement their national adaptation planning processes. These can take different forms, but the overall aim to translate national and sectoral priorities into a pipeline of investable projects through a structured process of identifying adaptation needs, prioritising investments in climate change adaptation and developing a robust financing strategy to meet those investment needs (ADB, 2023[17]). In doing so, these processes aim to help translate planning into implementation. The CAIF identifies the elements of the enabling environment that can contribute to the successful implementation of investment planning processes, while being flexible with respect to the process being undertaken.
Climate change will affect different groups in different ways. Vulnerability and adaptive capacity is influenced by characteristics such as level of wealth, age and gender. Those can also be factors increasing the exposure to the climate hazards and threats. In the 6th Assessment Report on Impacts, Adaptation and Vulnerability, the IPCC recognises that “within populations, the poor, women, children, the elderly and indigenous peoples have been particularly vulnerable due to a combination of factors, including the gendered division of paid and/or unpaid work (high confidence)” (IPCC, 2022[18]).
For example, FAO analysed data from 24 countries to measure the impact of climate on vulnerable rural populations. The results highlight the need to tackle inequalities, noting that “female-headed households suffer average annual income losses of 8% due to heat stress and 3% due to flooding, compared to male-headed households” (FAO, 2024[19]).
In order to address these issues, governments can address those issues by conducting gender and social inclusion analyses in relevant sectors. Integration of gender mainstreaming in public policies, and gender responsive approaches in National Adaptation Plan processes to help identify context specific gender and climate change linkages, and provided recommendations. For example, in 2019, following its NAP commitment to gender-responsive actions, Suriname developed a Water Sector Adaptation Strategy (SASAP), which includes a gender-responsive approach. This strategy has highlighted the role of women in national water governance at all levels and gender issues in the water resources sector (NAP Global Network, 2022[20])
Source: IPCC (2022[18]); FAO (2024[19]); NAP Global Network (2022[20]).
References
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← 1. Investment in this context refers to the acquisition of assets that are intended to produce goods or services, such as residential and commercial property, infrastructure, machinery and research & development (Gross Fixed Capital Formation). This definition excludes financial claims on real assets (such as equities or loans).
← 2. The CAIF is part of the activities undertaken to expand the FDI Qualities Policy Toolkit under the FDI Qualities Implementation Roadmap, 2022-2027.