This chapter provides the six “building blocks” of the Climate Adaptation Investment Framework. These collectively identify critical policies areas for enabling public and private finance to flow towards investments that support climate resilience. Each building block includes key findings, examples of international good practice, and provides diagnostic questions to identify gaps in the enabling environment. Links to further resources and guidance are provided for each building block.
Climate Adaptation Investment Framework
Green Finance and Investment
Abstract
The CAIF consists of six components (“building blocks”) that collectively identify the policies that can enable public and private finance to flow to investments that support climate resilience. The Framework targets actions that can be led by national governments and is intended to be applied in a flexible, non-binding and non-prescriptive manner, recognising that the appropriate responses will be context specific. In this evolving policy area, the CAIF provides a baseline of good practices that draw on existing tools and resources, while identifying areas in which information gaps remain.
This Framework covers domestic policy measures, while recognising that the enabling environment for investment is influenced by a broader range of factors, including capacity and access to financial resources. It is intended to complement existing initiatives to build capacity and enhance developing countries’ access to climate finance.
Each component of the CAIF outlines the key policy areas that governments should consider in trying to mobilise investment for climate adaptation, offers examples of good practice, and provides a set of diagnostic questions to guide governments in identifying priority actions (Table 3.1). These components are interlinked and intended to be mutually supportive. For example, effective strategic planning can identify priority investment needs, support for private investments can translate that concept into a viable project provided that there are suitable funding mechanisms in place. Sustainable finance tools could facilitate access to credit on more attractive terms than would otherwise be the case.
The physical impacts of climate change will be far-reaching and systemic. Institutional coordination to develop coherent multi-sector strategies and plans can facilitate adaptation investment by creating a shared understanding of the likely impacts of climate change, identifying priority investment needs and supporting a discussion about how these can be financed. Access to climate and socio-economic data to identify and monitor evolving vulnerabilities and risks is needed to support the strategic planning process.
Institutional coordination
Climate change adaptation is a systemic challenge, both in terms of the propagation of climate risks and the development of adaptation responses. Climate impacts occurring in one area can have knock-on impacts elsewhere: for example, the flooding of a port could disrupt supply chains across the economy. Similarly, the effectiveness of a given adaptation investment will often depend upon what other measures are being undertaken. For example, the expected value of having a generator as backup will depend upon the measures that are underway elsewhere in the economy to enhance the resilience of the electricity supply.
Multiple institutions are involved in designing and implementing strategies and policies that affect investment in adaptation (see Box 3.1 for examples of national approaches). Mechanisms such as central coordination or decision-making bodies can support a comprehensive and coherent approach to adaptation planning. These mechanisms can enhance alignment and communication across ministries, sector entities, national and local agencies, and the private sector. For example, Colombia has established a national system for climate change (known as “SISCLIMA”) that oversees adaptation planning. This is led by the Department of National Planning (DNP) and includes the ministers for the key sectoral ministries. Leadership by DNP helps to ensure consistency with the country’s development plans (OECD, 2014[1]). In the absence of such arrangements, overlapping and sometimes conflicting rules, procedures and regulations across ministries and levels of government, including between the central and provincial levels can create administrative burdens on investors. An inclusive process is needed to engage these actors in identifying and implementing the measures needed to unlock investment.
Climate adaptation is generally the responsibility of environment ministries, yet the policy tools needed to unlock investment flows sit with other ministries and institutions responsible for financial planning and budget management, which may lack capacity and expertise in relation to climate change (CFMCA, 2022[2]). Under the Helsinki Principles, the Coalition of Finance Ministers for Climate Action developed a guide that provides a framework of options for mainstreaming climate adaptation and mitigation into the core functions, capabilities and priorities of ministries of finance (CFMCA, 2023[3]). The framework provides guidance on strengthening inter-ministerial coordination on climate change, including establishing coordination bodies and adapting the mandate of ministries of finance to include climate action. High-level councils set up through the Prime Minister that include representatives from relevant public agencies can help bridge political interests and administrative boundaries, and ensure that centre-of-government financial and planning institutions have better ownership of adaptation and resilience investment needs.
The location-specific nature of climate impacts means that effective governance of adaptation investment relies more heavily on multi-level approaches than other types of investment. National policy alignment instruments can help promote coherence in the activities of different subnational jurisdictions and ensure coordination across different levels of government and line ministries (OECD, 2023[4]). Examples relevant for adaptation include national and regional climate change councils, national adaptation policies, plans and strategies that clearly address the local level, and national urban policies with a focus on climate adaptation. Such instruments can help clarify the decision-making roles and responsibilities of national, subnational and local governments, and help identify concrete measures to be taken at different levels to ensure an enabling environment for adaptation investments.
Involvement of non-governmental actors in multi-level climate governance is useful to ensure awareness and consideration of different perspectives and increasing buy-in and support for implementation. Moreover, stakeholder engagement can play a critical role in ensuring that adaptation commitments, targets, and actions are credible and effective, and grounded in science and legitimate expertise. Experts’ engagement can also come from a wide variety of stakeholders, including indigenous communities, workers and consumer groups. Inclusive processes of engagement with stakeholders are crucial to better understanding potential interdependencies between climate impacts and human rights and can provide valuable insights on how to enhance effectiveness of adaptation investments (OECD, 2023[5]). In France the High Council on Climate was established in 2018 to increase coordination between public agencies, engage relevant stakeholders and advise to the French government on the delivery of policy measures aimed at mitigating and adapting to climate change. The Council’s members include climate scientists, agricultural engineers, and energy and environmental experts.
Strategic planning
Strategic planning has a critical role in supporting investment by raising awareness of climate risks and adaptation opportunities, facilitating discussion about acceptable levels of risk and identifying priority actions and policy tools to accelerate adaptation finance (OECD, 2015[6]). Planning processes can also contribute to improved institutional coordination and provide clarity about the responsibility for managing climate-related risks. National Adaptation Plans (NAPs) and Strategies provide a mechanism for doing so. Currently, all OECD countries have a plan or strategy in place. By September 2023, 143 developing countries were in the process of developing NAPs, with 49 of those countries having submitted completed documents to the UNFCCC (UNFCCC LEG, 2023[7]). However, in general, these plans and strategies have limited coverage of how the measures within the NAP or NAS will be funded, and limited discussion of how to strengthen the enabling environment for investments in adaptation. Furthermore, NAPs are often led by ministries of environment with varying degrees of government ownership. Systematic engagement of ministries of finance in NAP preparation committees can help ensure that NAPs are integrated into wider budget management processes (CFMCA, 2023[3]).
New initiatives are underway to support countries in developing the investment components of their adaptation plans and strategies, reflecting different country contexts. These include the Asian Development Bank’s Climate Adaptation Investment Planning (CAIP) process, which aims to translate national adaptation plans into adaptation investment plans, which are then embedded within countries’ economic and fiscal frameworks (Box 3.1). The GCF and NDC Partnership are developing a Climate Investment Planning and Mobilization Framework, which sets out a process for translating strategies into tangible investments, covering both adaptation and mitigation (GCF/NDC, 2023[8]). The UN has launched an Adaptation Pipeline Accelerator initiative, which aims to foster high-level collaborations to facilitate the translation of adaptation plans into a pipeline of bankable projects (UNDP, 2023[9]). At the national level, the Netherlands Delta Programme has identified almost EUR 31 billion of investment needed in flood defences between 2024 and 2050 (Box 3.1). Based on these and other examples, the CAIF identifies common elements of good practice, the types of policies and institutions that can play key roles, and the broader ecosystem of actors to draw upon and engage.
The development of a strategic approach to investment in adaptation should be aligned with the development of strategies for managing the financial consequences of extreme events. There are close links between strategic planning for investment in adaptation and the implementation of strategies for disaster risk financing (OECD, 2020[10]). Investments relevant to climate adaptation may be made under the heading of disaster risk management, for example. Meanwhile, the choice of risk transfer tools (such as insurance) will affect the allocation of risk and, therefore, the incentive to invest in activities to manage those risks.
Monitoring and access to data
Climate change risk is a driver of investment in adaptation (see Chapter 2), so it is essential to ensure that decision-making is informed by high-quality and reliable estimates of future climate risks. Estimates of overall climate trends are commonly available through national and regional climate centres, and initiatives such as the Global Climate Observing System (GCOS), the Group on Earth Observation (GEO) and the Copernicus Climate Change Service (C3S). International coordination serves as an important basis for the exchange and effective use of climate information for adaptation planning and implementation (UNFCCC, 2022[11]). The use of online platforms, such as Germany’s KLiVO portal, can help to disseminate authoritative projections and tools to potential end users (Cabinet of Germany, 2024[12]). The World Bank Climate Change Knowledge Portal provides access to global datasets and tools, as well as climate risk country profiles for developing countries (World Bank, 2024[13]).
There is a growing number of commercial providers that offer climate risk modelling services, which aim to translate climate projections into estimates for how specific properties or businesses will be affected by climate risks (such as wildfires and floods). The working of these models tends to be proprietary and the use of different models can yield sharply different results (Roston et al., 2024[14]) (Hain, Kölbel and Leippold, 2022[15]). Governments can support the development of better quality climate-risk data through: supporting open access to relevant public data, developing guidelines for measuring the accuracy of climate models and fund foundational research (such as modelling techniques) on climate risk modelling (PCAST, 2023[16]).
In addition to better understanding climate risks, there are opportunities to use innovative approaches to identify potential opportunities for investments in climate change adaptation. For example, the Nature-based Solutions Opportunity Scan uses satellite imagery to identify potential opportunities for using NBS in coastal and urban areas (World Bank, 2024[17]). Infrastructure systems models have been developed to understand how climate change will affect infrastructure networks and the benefits of investing in resilience measures, for example in the case of Ghana (Adshead et al., 2022[18]). National statistical bodies and international organisations can support these efforts by developing natural capital accounting systems with adaptation-relevant metrics. For example, the United States is currently developing a system to monetise natural assets that could be used to better understand the benefits of preserving and investing in ecosystems that help reduce the damages of climate change (Box 3.1).
It will also be important to ensure that mechanisms are in place to monitor investment flows relevant to climate change adaptation, and especially relating to the mobilisation of private finance in this context (OECD, 2024[19]). This can increase transparency, support international assessments of progress and inform the development and revision of subsequent cycles of strategic approaches. Expansion of the FDI Qualities Indicators to cover adaptation investment will provide a better understanding of the relative contributions of public, private domestic and cross-border investment to adaptation. Developing reliable indicators will however depend on improving the availability of reliable, timely and internationally comparable information on adaptation investment flows. There is currently good coverage of international public finance flows, while there is limited coverage of private finance flows and domestic public finance flows (OECD, 2023[20]). Ongoing work in the OECD is exploring options for measuring the alignment of finance flows with adaptation and resilience goals. Options for filling these gaps are discussed in the following components: public finance and investment and sustainable finance.
Guiding questions
Are there clear objectives for adaptation at the national level, for example through a National Adaptation Plan or Strategy?
Has adaptation been integrated into the strategies and plans for investment in key sectors (such as agriculture, infrastructure and water)?
Is there a process in place to identify adaptation investment needs and link those needs with finance sources?
Are responsibilities for managing climate-related risks clearly identified?
Are mechanisms in place to ensure that centre-of-government financial and planning institutions have ownership of adaptation and resilience investment needs?
Is there a process in place to ensure multi-stakeholder coordination and dialogue across relevant ministries, national and local agencies and the private sector on adaptation priorities and investment plans?
Is authoritative data on climate risks publicly available? For example, through a platform or data repository.
Have the potential economic risks of climate change been assessed?
Are any data collection efforts in place to monitor trends in public and private investment relevant to adaptation?
Relevant tools and resources
Asian Development Bank’s Climate Adaptation Investment Planning process
The Asian Development Bank is working with 12 countries in the Asia-Pacific region to support them in translating their adaptation priorities in key sector(s), as set out in NAPs or NDCs, into Adaptation Investment Plans. These plans are intended to be embedded in the countries’ medium-term planning and fiscal frameworks. It follows a structured process that aims to diagnose the overall enabling environment, understand adaptation needs, prioritise investments and identify appropriate financing opportunities. It is designed to integrate with each country’s system for public financial management to ensure that adaptation needs are integrated into overall fiscal decisions. The process brings together finance ministries, sectoral ministries and the ministry responsible for climate change.
Netherlands’ Delta Programme
Water management is a high priority in the Netherlands given that around 26% of the country lies below sea-level and around 60% of the country is susceptible to flooding. The 2012 Delta Act created the current structure for planning to manage flood risks, aiming to support a coherent and adaptive approach in the face of pressures including climate change. Planning takes a consensus-based approach bringing together relevant ministries, local authorities and water boards and is led by the Delta Commissioner. Each year, a Delta Programme is published featuring specific investments and suggested policy measures. Implementation of specific investments is largely funded through a Delta Fund (a dedicated element within the national budget), which includes a total budget of EUR 25 billion for measures between 2024-2037. This planning process takes a long-term perspective (until 2050) and sets out tangible objectives, aligned with secure long-term funding.
UK Climate Change Committee and Adaptation Committee
The UK Climate Change Committee (CCC) is an advisory body designed to provide feedback and evaluation of government progress on climate action. With respect to adaptation, the CCC is required by statute to monitor, evaluate, and report on progress and advise policymakers on the risks and opportunities presented by climate change. In 2009, the CCC established the Adaptation Committee, which develops biennial adaptation progress reports of the UK’s NAP, Scotland’s Climate Change Adaptation Program and an independent climate change risk assessment. As an independent statutory body with considerable leadership across the UK governments, the CCC model helps to ensure strategic alignment, policy coherence, and accountability, and has been emulated by other countries around the world as a result.
Natural Capital Accounting in the United States
The US National Strategy to Develop Statistics for Environmental-Economic Decisions, launched in 2023, creates a system to monetise natural capital, providing metrics to help monitor changes in the condition and economic value of land, water, air and other natural assets. Such a Natural Capital Accounting (NCA) system can help mainstream climate adaptation in policy making and improve understanding of both climate risks and the benefits of investing in adaptation. For example, NCA metrics can be used to record and model climate change outcomes on ecosystems, or to estimate the economic value of preserving natural defences against climate-related disasters (e.g. reefs, dunes, forests reduce the damage cause by storms and floods).
Source: ADB (2023[21]); Delta Programme (2023[22]); van Buren (2019[23]); OECD (2024[24]); White House (White House, 2023[25]).
Aligning regulatory arrangements and resolving market failures can strengthen the incentive to invest in activities that enhance climate resilience, while discouraging investments that undermine resilience to climate change. This building block identifies critical issues in key sectors for adaptation: agriculture, buildings, business and industry, infrastructure, natural environment and ecosystems, and water. It also identifies transversal areas including technical codes and standards.
A fair, transparent, clear and predictable regulatory framework for investment is a critical determinant of investment decisions and their contribution to development priorities, including climate adaptation (OECD, 2015[26]). Taking measures to enhance the quality of the regulatory framework and its effective implementation is particularly important for investors to navigate the complex policy space around climate adaptation (see Chapter 1).
Autonomous adaptation will be a critical driver of adaptation investment, but sectors that are critical for climate change adaptation often have high levels of government intervention for reasons unrelated to climate (Cimato and Mullan, 2010[27]). Regulatory frameworks that were implemented for reasons unrelated to climate change can nonetheless hinder desired investment, by distorting prices or creating regulatory hurdles to adaptation investment. Examples of efforts to achieve this are provided in Box 3.3.
Regulatory alignment is also critical for ensuring that investments made by businesses to manage their own exposure to the physical risks of climate change do not lead to increases in the risks faced by third parties, such as suppliers or neighbouring communities. The OECD standard for Responsible Business Conduct call on business to “avoid activities which undermine climate adaptation for, and resilience of, communities, workers and ecosystems” (OECD, 2023[5]). For example, this can mean ensuring that cooling infrastructure is available to avoid exposing workers to unacceptable levels of heat. Regulatory alignment can support this goal by discouraging behaviour that negatively affects third parties.
Addressing regulatory misalignments in key sectors
The regulatory environment is particularly critical for sectors that are heavily exposed to the impacts of climate change, and already subject to considerable government intervention. Critical sectors will vary by country, but this section focusses on key aspects of the regulatory regime in sectors that will frequently be important for investment in adaptation (see Chapter 1).
The agricultural sector will be critical for investment in adaptation, as farmers seek to adjust their practices in the face of climate change impacts on this climate-sensitive sector. There are high levels of government intervention in this sector globally, with an annual average of USD 851 billion of support to agriculture in 2020-22, including USD 630 billion of direct support to producers1 (OECD, 2023[28]). Market price support measures (such as import tariffs, minimum prices and export taxes) may potentially hinder adaptation to climate conditions. Direct payments for individual agricultural commodities may also slow down the necessary re-adjustments in production patterns to prepare the sector for changing climate; the annual average payments in 2020-22 amounted to USD 380 billion (OECD, 2023[28]). Input subsidies can contribute to the inefficient use of water, fertiliser and energy. Reducing and redirecting distorting forms of agricultural support can increase the incentive to adapt, while also potentially improving public finances. There is also the potential for agricultural policy to provide positive support for investment in adaptation, by considering climate change impacts and necessary measures on the sector, detailing them as a plan for each field and crop (see Box 3.3 for the example of Japan’s agricultural adaptation plan).
Regulations covering business and industry may need to be examined to ensure that they are conducive to managing climate risk, and hence encourage investment in climate change adaptation. In particular, these regulations can help to ensure that efforts by businesses to manage their physical climate risk do not increase the risks faced by others. Some key areas include:
Health and safety requirements: climate change may have a negative impact on worker health and safety, for example through increasing the risk of overheating for those working outside. Regulations covering worker health and safety may need to be updated to account for new risks, or changes in the characteristics of current risks.
Business continuity planning: regulations can be used to encourage businesses that provide critical services to better understand and plan for climate-related risks, as part of broader business continuity planning.
Responsible business conduct: the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct provide a benchmark for ensuring that adaptation measures do not have negative impacts on ecosystems or communities (see Box 3.2).
Buildings are vulnerable to the impacts of climate change (e.g. damage from subsidence or wildfires) and also influence the vulnerability of their inhabitants to climate risks (such as health impacts from overheating). Land use planning and technical codes (discussed below) are critical for influencing new buildings and major renovations, but further measures may also be required to support investment in retrofitting of the existing building stock. These include:
Examine planning and zoning policies that may hinder retrofitting measures, such as external shading or installing light-coloured roofs.
Integrate climate change adaptation with energy efficiency retrofitting programmes to reduce costs and avoid inadvertent tensions.
Support transparency about the climate resilience of buildings, for example through voluntary labelling initiatives.
Encourage retrofitting of rental properties through support measures (such as retrofitting subsidies) or regulatory requirements, particularly with regard to the provision of social housing.
Infrastructure regulation is a critical element for unlocking investment in climate-resilient communications, energy and transport networks. The contribution of economic regulation and standards are discussed below. In addition to these, critical areas for examining regulation include (OECD, 2024[29]).:
Implementing requirements for securely sharing information between infrastructure sectors, given that climate-related risks can propagate through infrastructure networks.
Using proportionate regulatory requirements (such as financial penalties for service disruption) to encourage infrastructure operators to internalise climate-related risks therefore invest to manage those risks.
Ensuring a clear allocation of climate-related risks throughout the infrastructure lifecycle.
Examining permitting and environmental impact assessment processes to ensure that they are conducive to investment in climate-resilient infrastructure.
The OECD Guidelines for Multinational Enterprises (MNEs) on Responsible Business Conduct provide recommendations from governments to MNEs about how they can contribute to sustainable development while avoiding adverse consequences from their activities. The Guidelines cover a breadth of themes including human rights, labour rights, environment and anti-bribery. They have been endorsed by 51 jurisdictions that account for two thirds of global trade, and serve as an internationally recognised source of good practice. Although the Guidelines are voluntary, the underlying principles may be embedded within domestic legislation or international agreements. The implementation of the Guidelines is supported by a network of National Contact Points, which provide a non-judicial grievance mechanism if enterprises are not in compliance with the guidelines.
The Guidelines provide a mechanism for supporting investment in adaptation by encouraging enterprises to manage their exposure to the risks of climate change in ways that also support the resilience of the communities in which they operate. RBC principles and standards, including risk-based due diligence, call on business to implement adaptation measures as needed and “avoid activities which undermine climate adaptation for, and resilience of, communities, workers and ecosystems”.
Source: OECD (2023[5])
Natural environment and ecosystems underpin economic activity and well-being, yet these are under severe pressure due to human activity. Climate change is putting further pressure on ecosystems and is driving biodiversity loss (IPCC, 2022[30]). An underlying challenge is that the benefits of ecosystems are frequently not valued by markets, leading to unsustainable practices and underinvestment in preserving natural capital. Regulation, economic instruments and information can all play a role in encouraging investment in adaptation in this sector (OECD, 2021[31]): putting a price on the use of natural resources, through taxes or charges, can discourage harmful investments (such as conversion of forest). The use of positive incentives, such as payments for ecosystem services, can provide an additional revenue stream for adaptation investments in this sector, such as the use of Nature-based Solutions.
The water cycle will be a significant transmission mechanism for the impacts of climate change, with negative impacts on the reliability of water supply and water quality. Regulations guiding the use of water will therefore shape adaptation responses. A key structural challenge is that the prices of water faced by some end-users, such as agriculture or industry, does not necessarily reflect its value (GCEW, 2023[32]). A related issue is that systems for water allocation that were designed under the assumption of a static climate are no longer fit-for-purpose in a changing climate (OECD, 2013[33]). The OECD’s Recommendation on Water identifies a number of good practices (OECD, 2016[34]):
Manage water at the appropriate scale(s) within integrated basin governance systems to reflect local conditions, and foster co-ordination between the different scales.
Implement water demand management policies that build on an understanding of ecological limits and are informed by short- and longer-term projections and account for uncertainties on current and future water availability and demand.
Consider using economic instruments for water resources management (e.g. water abstraction charges), support for water-efficient technologies or for the use of alternative sources of water (e.g. reclaimed water).
The implementation of these good practices for realising the value of water will often require a coherent package of reform measures to ensure that the required data are available, suitable governance mechanisms are in place and regulatory arrangements are aligned to national circumstances. For example, the Climate Resilient Water Sector in Grenada project includes governance and regulatory reforms, combined with support for end-users to reduce their consumption (see Box 3.3). The OECD also supports governments in improving their systems for water management through a series of Regional and National Policy Dialogues on water (OECD, 2024[35]).
Updating regulations and standards across all sectors
Technical codes and other regulatory standards often need to be updated to account for the impacts of climate change (Cançado and Mullan, 2020[36]). For example, road surface specifications may need to be updated to account for higher summer temperatures. These can also act as a barrier to the adoption of innovative technologies, where technical codes presuppose the use of a particular technology, such as requiring a certain capacity for drainage when it may be better to let the water percolate into the soil. Canada is investing to update its national technical codes through the Climate Resilient Built Environment Initiative and the Standards to Support Resilience in Infrastructure initiative (see Box 3.3). These initiatives aim to support the updating of national codes, and providing the underlying evidence needed to demonstrate the performance of innovative adaptation solutions. The use of performance-based standards can help to unlock the potential for innovative approaches, because they target outcomes rather than mandating specific approaches.
Land use planning is also a critical area for directing investment towards areas that are less exposed to climate hazards. As well as preventing inappropriate development in highly exposed areas, effective land-use planning arrangements provide a signal to investors about the relative riskiness of various locations, thereby helping to avoid the accumulation of exposure to physical climate risk. To be effective, land use planning should be informed by climate data to understand how climate hazards may evolve, be developed in an inclusive manner and effectively enforced. For example, the Green Climate Fund is supporting modelling of areas that are highly exposed to climate risks to inform the update of Tunisia’s Master Land-use Plan (GCF, 2021[37]) The alignment of incentives between layers of government can also be relevant, for example if the benefits of developments accrue at the local level, while the costs of disaster response and reconstruction are picked up at the state or national level.
Economic regulation of infrastructure networks
Infrastructure networks are often natural monopolies, meaning that it is not feasible for them to be provided competitively. For example, electricity transmission and distribution, railway networks and water supply and sanitation are usually provided by a single supplier in a specific area. Given the absence of competition, prices and requirements for service quality are often determined by an economic regulator. The objectives of regulators will vary, but in general terms the aim is to ensure a balance between affordability and service quality, while allowing private owners to earn a reasonable rate of return on the capital invested.
The structure of economic regulation has a key impact on the willingness and capacity of the regulated firm to invest in climate change adaptation. The following elements of the regulatory structure can influence investment in adaptation (OECD, 2024[29]):
Allowable investments: ensuring that decision on whether to allow investments by the regulated utility account for the benefits of resilience.
Performance standards: adjusting performance standards to reflect changing risks from climate change, covering both risks to service provision (such as supply disruption) and risks from service provision (such as the failure of dams during heavy rainfall).
Additional requirements: regulators can raise awareness of climate risks through requirements to undertake stress tests, identify interdependencies and report on adaptation plans
Guiding questions
Sectoral
Do agricultural support mechanisms favour specific commodities? Are payments linked to compliance with environmental regulations?
Does the regulatory system encourage resilient retrofitting of buildings? For example, is adaptation mainstreamed into existing retrofitting programmes, and do planning requirements support adaptation?
Do regulatory arrangements for business and industry facilitate investment in adaptation? For example, are climate-related risks addressed within existing health and safety legislation.
Are climate-related risks clearly identified and managed for infrastructure networks?
Do policies for economic regulation of infrastructure providers provide incentives for mainstreaming climate resilience? To what extent are investments in climate resilience viewed as allowable investments?
Are there mechanisms (such as payments for ecosystem services) in place to put a value on the services provided by the natural environment and ecosystems?
Is there an effective system in place for managing water resources, including mechanisms for reflecting the value of water?
Cross-cutting
Are fundamental elements of investment policy in place to promote confidence in transparency and predictability, and non-discriminatory contract enforcement and dispute settlement?
Are there efforts underway to identify whether technical codes need to be updated in light of climate change? What support is available to help enable and prioritise these interventions?
Does land use planning account for the evolution of climate risks over time? Are these planning processes enforced?
Relevant tools and resources
Climate-resilient Infrastructure Standards in Canada
Canada has invested in two programmes to support climate resilience for infrastructure and the built environment. These aim to support the development of voluntary standards for climate resilience and inform the development of regulatory codes:
Climate Resilient Build Environment Initiative (2021-2028) – this CAD 25 million (USD 25 million) programme is led by the National Research Council of Canada and supports research and the development of tailored tools and guidance for a climate-resilient built environment. It includes, for example, research to inform the revision of key standards and codes for bridges to account for climate change impacts.
Standards to Support Resilience in Infrastructure Program (2021-2026) – this CAD 11.7 million (USD 8.6 million) is led by the Standards Council of Canada and aims to develop new standards and guidance to address climate risks. This programme aims to advance 36 new standards and technical guidance documents and promote the adoption of revised guidance across relevant industries.
Climate Resilient Water Sector in Grenada
Grenada is faced with pressures on its water resources, given rising temperatures, changing patterns of rainfall and saltwater intrusion into groundwater sources due to sea-level rise. The Green Climate Fund (GCF) is supporting efforts to improve water efficiency and management in Grenada with a grant of USD 38.7 million. This project, implemented by GIZ (the German development agency), includes an integrated package of measures that aim to improve water security. These measures include the creation of a Water Resources Management Unit (WRMU) as a national regulator, improvements in data collection and revision of water tariffs to encourage efficiency. Technical and financial support will be provided to the agriculture and tourism sectors to help them improve their efficiency of water use, for example through the use of rainwater harvesting.
Japan’s Agricultural Adaptation Plan
Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) developed its Adaptation Plan in 2015 to address the impacts of climate change on the sector. This aims to precisely and effectively respond to climate change impacts. Necessary measures are mainly arranged and promoted as a plan for each field (e.g. agricultural production, plant pests etc.) and crop (e.g. paddy field rice) for the next ten years. This Plan also aims to help realise potential opportunities brought by climate change, such as the expansion of areas where subtropical and tropical fruits can be cultivated. In cooperation with local governments, MAFF monitors global warming impacts, and has offered information concerning adaptive measure in the annual Global Warming Impact Investigation Report.
Source: Government of Canada (2024[38]); GCF (2018[39]); OECD (2023[28]).
Insurance and risk transfer arrangements have a critical role in helping to manage the consequences of physical climate risks, as well as raising awareness of climate risks and providing incentives to invest in risk reduction. This building block examines key issues, including the implementation of effective insurance and risk transfer strategies, understanding of risk exposure and support for resilient reconstruction.
Insurance and risk-transfer arrangements have a critical role, given that physical climate risks are a significant driver of investment in climate change adaptation (see Chapter 2). Effective insurance and risk-transfer mechanisms can support greater visibility of climate-related risks, provide incentives to invest in reducing physical climate risks through investments in adaptation and provide a mechanism to support resilient reconstruction (see Box 3.4) (OECD, 2023[40]). The role of risk transfer at the project level is covered in the section on “Support and incentives for private investment”.
Countries have developed different systems for managing the financial consequences of extreme events, involving different sets of responsibilities in relation to the public and private sectors. Even where insurance is provided by the private sector, there tend to be significant degrees of government involvement. For example, in the US the National Flood Insurance Program (NFIP) is directly administered by the federal government, while in Australia, France and the UK insurance is offered by private companies who are able to access dedicated reinsurance programmes (OECD forthcoming, 2024[41]). These diverse institutional arrangements, reflecting different national circumstances and priorities, mean that the general principles outlined below will need to be applied in different ways.
At the global scale, increasing the availability of insurance and risk-transfer arrangements supports investment in general (OECD, 2015[26]). In 2023, recorded global losses from extreme weather and climate-related events reached USD 281 billion in that year, yet only 40% of these losses were insured (AON, 2024[42]). Within this average, there is considerable variation between countries. For example, the European Central Bank estimates that only 25% of climate-related catastrophe losses are insured in Europe, but in some European countries this figure is less than 5% (ECB and EIOPA, 2023[43]). Climate change will make it more challenging to provide insurance coverage, as potential losses become larger and less predictable. Ensuring that insurance and risk-transfer mechanisms contribute to risk reduction can help to manage these impacts and support the availability of affordable terms, while also providing an incentive for adaptation investment.
International cooperation has a critical role in expanding access and use of insurance mechanisms in developing countries, including innovative tools such as index insurance and parametric insurance. Developing countries face distinct challenges in expanding insurance, including lack of access to financial services, high transaction costs relative to the value of assets insured and lack of affordability. The G7/V20 Global Shield against Climate Risks initiative was launched in 2023 to provide a comprehensive mechanism to support vulnerable countries to enhance their financial resilience to extreme events (G7-V20, 2023[44]). This can include the provision of technical and financial support to address barriers to insurance coverage. Insurance mechanisms can also be complemented with tools for disaster risk financing including catastrophe bonds bond and contingent credits (Clarke et al., 2016[45]).
Insurance and risk transfer arrangements ought to increase the visibility of physical climate risks. Governments can support this process by (i) undertaking multi-hazard assessments that evaluate direct and indirect climate impacts (ii) promoting the development of technologies and expertise in monitoring and assessing risks across the public, private, and non-profit sectors (iii) ensuring data relevant to understanding disaster impacts is produced and shared publicly (iv) and assessing financial capacities to manage the impacts of disasters across public and private sectors, including the use of risk financing and risk transfer tools (OECD, 2023[40]).
Policies governing insurance markets and risk-transfer arrangements should aim to minimise the potential for “moral hazard” and therefore support investment in risk reduction. This means that insurance premiums should reflect the underlying risk. The OECD’s Recommendation on Building Financial Resilience to Disaster Risks calls for ensuring that financial policy, supervision and regulatory arrangements “[enable] pricing, contractual terms and conditions (e.g. premiums, deductibles, coverage limits) that encourage and support risk reduction where relevant and as appropriate” (OECD, 2023[46]). In doing so, reductions in risk from investment in adaptation can translate into reduced insurance premiums.
Governments can also ensure that the policy, regulatory and supervisory framework is conducive to resilient recovery from extreme events. Traditionally, insurance coverage aims for a like-for-like replacement of the damaged asset. However, the reconstruction process can be a critical moment for investing in adaptation, such as raising critical equipment to a higher floor. Mechanisms to encourage resilient recovery include provision of information following an extreme event on options to reduce risks, access to credit and provision of additional coverage to enable additional works following an extreme event. The UK’s Flood Re programme’s Build Back Better initiative, for example, will reimburse up to GBP 10 000 (EUR 11 700) beyond the cost of a standard repair to fund resilience measures (see Box 3.5).
Where there are challenges in moving to risk-reflective pricing or resilient recovery, governments may consider offering subsidies for risk reduction measures through grants, tax credits, or loans directly to households and businesses facing increasing climate risks (OECD, 2023[40]). For example, in the United States, programmes such as Strengthen Alabama Homes, South Carolina Safe Home and My Safe Florida Home provide grants to policyholders to implement risk reduction measures to protect against hurricane damages. In Queensland, Australia a Betterment Fund was introduced to enable resilient reconstruction for locally owned public assets, such as roads and drainage infrastructure. They estimated that investment of AUD 174 million (EUR 105 million) in betterment has already led to savings of AUD 379.5 million (EUR 230 million) in reduced damage and disruption.
Losses that are not covered by insurance can create liabilities for the public sector and the scale of these liabilities may not be understood prior to a loss occurring. Potential liabilities include (i) the expected costs of relief and recovery, with an emphasis on building back with greater resilience (ii) exposures to losses as a result of funds invested into insurance or guarantees (iii) estimated payments under public compensation and financial assistance (iv) unanticipated demands or needs for public compensation, assistance and/or transfers (v) potential impact of macroeconomic deterioration (OECD, 2023[46]). Developing plans or frameworks to address the impact of climate-related disasters on public finances can help to ensure climate-risks are adequately priced, and all relevant actors across the economy, especially governments, are prepared to respond when climate-related disruptions occur.
The OECD’s Investment and Private Pensions Committee has identified the following potential contributions of the insurance sector to supporting investment in adaptation:
Providing analytics to better understand physical climate risks, using tools such as catastrophe models. These tools can provide probabilistic estimates of the level of climate risk to homes, buildings and public assets in specific locations.
Sharing expertise to climate policy makers, individual policyholders and wider communities on effective adaptation and risk reduction measures.
Applying premium pricing that reflects the level of risk to provide a signal of risk exposure and an incentive to reduce risks.
Funding reinstatement of damaged assets to be more resilient to climate change impacts (also referred to as “build back better”).
However, the ability to realise these potential benefits will depend upon having a conducive regulatory environment. An underlying challenge is the short-term nature of insurance contracts, which mean that companies have limited incentive to support risk reduction activities by policyholders (such as “build back better”) if the benefits can subsequently be reaped by a competitor.
Source: OECD (2023[47])
Guiding questions
Do mechanisms exist to help insurers accurately reflect climate risk? What frameworks or standard-setting tools exist to ensure the quality and accuracy of climate-risk assessments across the insurance sector?
Do mechanisms exist to motivate insurers and other institutional investors to align investments with adaptation and resilience needs? Are there clear incentives for risk reduction and resilience building activities?
Do governments help to communicate climate risks that cannot be reduced? Are risk-sharing arrangements well-understood among households, businesses, and governments at all levels?
Does the insurance market offer policies that include resilient recovery from extreme events? Are there market or regulatory barriers to such products?
Do mechanisms exist to understand the impacts of climate-related disasters on public finances? How do governments account for the costs associated with climate risk, including the ex-ante fiscal costs posed by contingent liabilities?
Relevant tools and resources
Public-private insurance initiatives to provide flood insurance in the United Kingdom
“Flood Re” was established by the 2014 Water Act, as a joint initiative between the UK Government and the UK insurance industry. It provides reinsurance for flood risk to a) promote affordability and availability of insurance for UK households at high flood risk and b) to manage the transition to risk-reflective pricing of flood insurance for household premises. It is a not-for-profit fund, owned and managed by the insurance industry. Funding for claims comes from two sources: a charge for each policy that is ceded to Flood Re (determined by the value of the property) and an additional annual levy on UK home insurers, which is currently GBP 135 million (EUR 159 million). In doing so, it provides a cross-subsidy for flood risk. Following the introduction of Flood Re, 80% of homes with previous flood damage saw their insurance premiums fall by at least 50%. To avoid subsidising new development in high-risk areas, this programme only covers properties built before 2009.
Flood Re introduced the first nationwide resilient reconstruction programme in 2022. This enabled up to GBP 10 000 to be reimbursed for resilience measures following a loss event. Following recent storms, Flood Re estimated that 30% of claims included an element of resilient reconstruction.
Sharing climate-risks in large-scale infrastructure projects
In Canada, the Government of the Northwest Territories and the Tłı̨chǫ Government are working in partnership to develop the Tłı̨chǫ All-Season Road project. The 97-kilometre all-season highway is intended to provide uninterrupted access between remote norther communities with the Northwest Territories, even in the face of climate change. The project is jointly funded by the Government of Canada (25%) and the Government of the Northwest Territories (75%). The Tłı̨chǫ All-Season Road project includes a bespoke climate change risk-sharing mechanism that uses modelling of climate risks to effectively price long-term risk exposure for the operations and maintenance of a road constructed above permafrost. In the event climate change impacts exceed the ranges set by the Government, any financial impacts will be shared between proponents to a predetermined cap. The risk-sharing mechanism was developed through the Request for Proposal (RFP) period, which enabled all proponents to effectively price climate risk from the outset.
Parametric insurance: restoring coral reefs in the event of hurricanes
The Mesoamerican Reef (MAR) spans Mexico, Belize, Guatemala and Honduras. An innovative parametric insurance programme, the MAR Insurance Programme, has been introduced to provide insurance coverage to finance restoration of the reef following hurricanes. Insurance coverage is provided by commercial provider, while the programme benefits from financial support from Canada (via the Ocean Risk and Resilience Alliance) and Germany (via the Insuresilience Solutions Fund). Under the policy, insurance claims are paid automatically when certain conditions are met at designated points. As the insurance policy is based on a parametric trigger, payouts can be made quickly following a hurricane. For example, following Hurricane Lisa in 2022, payouts were made within 14 days of the event. This programme has expanded to cover 11 sites along the reef.
Source: Flood Re (2024[48]); CCPPP (2019[49]); Climate Champions (2023[50]).
Critical investments for climate change adaptation lie within the remit of the public sector, including capacity building and some forms of infrastructure. This building block examines the extent to which fiscal policies, budgetary processes and tools are conducive to mainstreaming climate resilience into public spending, while ensuring that sufficient resources are available for public investments in priority areas for adaptation
Climate change will affect budgetary needs and priorities. For example, additional resources may need to be allocated to some areas (e.g. protective infrastructure, provision of climate data) to address climate risks. The relative priority of areas of spending may also change because of climate change. Green budgeting provides a framework that can support the integration of adaptation into budgetary processes. For budget allocations, key instruments include the integration of climate into the design of medium-term expenditure frameworks, requirements specified in the budget preparation phase (“budget circular”) and reporting (Blazey and Lelong, 2022[51]). These efforts can be supported by the development of measurement frameworks to define and track public investment that supports climate adaptation. Examples of national approaches to mainstreaming into public finances can be found in Box 3.6
Project and programme appraisal tools need to be fit for purpose for a changing climate, given the role of uncertainty, non-market benefits and discount rates. The UK government has adopted supplementary guidance to support the appraisal of adaptation-related projects. The application of commonly used approaches for appraisal, including cost-benefit analysis and cost-effectiveness analysis, may need to be adjusted to account for these characteristics (OECD, 2015[6]). For example, the benefits of adaptation investments will often include non-market components, such as saving lives, benefits for health or well-being. These benefits can be included through the use of non-market valuation or multi-criteria analysis for project selection. Specialised approaches, such as Real Options Approaches2, can support decision making when there are significant uncertainties.
Public procurement is another critical area for steering public expenditure towards activities that support adaptation. Integrating climate resilience can increase upfront costs, while generating benefits over the life of the investment. Procurement policies that only consider upfront cost can therefore discourage the selection of more resilient solutions. The use of Life-Cycle Costing can provide a level playing field for resilient investments. Performance standards may also need to be updated to reflect the projected impacts of climate change. In the case of PPPs, risks related to climate change should be clearly identified and allocated, suitable insurance required and provision made for adaptive management (PPIAF, 2016[52]).
On the revenue side, the structure of taxation policies may need to be examined to strengthen incentives for adaptation. Policy options include setting a policy framework that allows for the implementation of taxes or charges on externalities relevant to adaptation. For example, the city of Philadelphia has introduced a stormwater fee based on impermeable surface area, which provides an incentive to replace paved areas with green spaces (US Government, 2024[53]). Tax credits and rebates can be used to encourage retrofitting and investment in R&D (see also below: financial support).
Tracking expenditure relevant to climate change adaptation can increase accountability and transparency. If linked to targets, such tracking can also provide an incentive to mainstream adaptation. UNDP has developed the Climate Public Expenditure and Institutional Review (CPEIR) process to support the identification of climate-relevant expenditure (UNDP, 2015[54]). Several other countries, including France and Germany, have undertaken independent analyses to examine the value of public spending linked to climate change adaptation objectives finding that only a small share of government spending currently contributed to climate change adaptation.
Guiding questions
Does the process of allocating budgets take into account the potential impacts of climate change?
Do project or programme appraisal tools account for the benefits of adaptation?
Do public procurement policies account for benefits over the lifecycle of the investment? Do the systems for asset management aim to optimise costs of existing assets over their lifespans?
Does the process for allocating risks within PPPs account for climate risks?
Is there a strategy in place to manage the financial consequences to the public sector of climate extremes?
Relevant tools and resources
Mainstreaming adaptation into the European Union’s budget
Climate change is being mainstreamed across the European Union’s 2021-2027 Multiannual Financial Framework, which covers EUR 1.2 trillion of planned expenditure, and the EUR 807 billion NextGeneration EU initiative. The EU has committed to ensuring that 30% of total expenditure contributes to climate mitigation and/or adaptation. Beyond this, all expenditure is subject to a “do no harm principle” to ensure that budget expenditure is consistent with the EU’s climate and environment goals.
To support the achievement of these targets, the Commission has integrated budget tagging into its core financial systems. The Commission also committed to producing annual reports to outline the share of past expenditure that contributed to climate objectives, as well as estimates of future expenditure. The Commission has also developed tools and guidance to support the application of the “do no harm principle”, including dedicated guidance for infrastructure projects.
Climate Toolkits for Infrastructure PPPs
Public-Private Partnerships are an important tool for mobilising investment in infrastructure. From an adaptation perspective, there is both the need to ensure that infrastructure commissioned through PPPs is resilient to climate change, but also an opportunity to use PPPs to support investment in infrastructure that helps to protect against climate change impacts. The World Bank Group has developed a set of Toolkits to support the integration of climate adaptation and mitigation into PPP advisory work and project structuring. It includes an overall toolkit covering general issues, such as risk allocation within PPP contracts, and a series of toolkits for infrastructure sectors that provide more detailed guidance and suggest relevant performance indicators.
Governance for Resilient Development in the Pacific (Gov4Res)
The Governance for Resilient Development in the Pacific programme (Gov4Res) works with local and national governments and regional organisations in the region. The programme aims to mainstream resilient development into the government systems that are responsible for planning, financing and overseeing development. In doing so, it has a particular focus on gender equality and social inclusion. Outputs under this project include the introduction of climate budget tagging in Fiji, Solomon Islands and Tuvalu. It also includes a capacity building component to support the integration of risk informed development into the budget development process. The project is being implemented by UNDP, with funding committed from Australia, Korea, New Zealand, Sweden and the United Kingdom
Source: EC (2022[55]); Neves et al. (2022[56]); UNDP (2024[57]).
Sustainable finance instruments can support the allocation of capital to adaptation investments. Increased transparency on climate-related risks can help investment decisions integrate physical climate risks and potential future costs, providing a market signal to better manage relevant risks. This building block examines the arrangements that are in place to realise this potential, including the existence of usable taxonomies, disclosure arrangements and suitable financial instruments.
Financial instruments
There is growing market demand for financial instruments that are intended to contribute to environmental and social objectives, including ESG funds, green, social, sustainability and sustainability-linked bonds (GSSS) (OECD, 2023[58]), and sustainability-linked bonds (SLBs) (OECD, 2024[59]). OECD analysis found that the value of sustainable bonds issued by the corporate sector (including financial and non-financial companies) was six times larger in 2019-23 than in 2014-18. The amount of outstanding sustainable bonds by the corporate sector reached USD 2.3 trillion in 2023, while official sector sustainable bonds reached USD 1.99 trillion (OECD, 2024[60]). Adaptation and resilience, however, currently constitutes a small part of the overall market. Around 19% of GSSS bonds issued in 2022 were identified as having at least some of the proceeds used for adaptation and resilience-related activities.
GSSS bonds encompass two families of instruments, each with different implications for supporting investment in adaptation (OECD, 2024[59]). The first, use-of-proceeds GSSS bonds, are issued to finance specific activities that are intended to deliver environmental or ESG benefits and are not tied to the performance of the issuing entity. Meanwhile, SLBs are linked to the achievement of certain performance thresholds by the issuing entity. SLBs issued have predominantly included performance thresholds linked to mitigation, while the use of adaptation-relevant measures remains very rare (CBI, 2024[61]). Each of these categories has different requirements for investment in adaptation: use of proceeds bonds require a pipeline of projects that can be defined as contributing to climate change adaptation (see below). Expanding the use of SLBs for adaptation will require the development and adoption of relevant performance standards.
The public sector can help to create momentum in markets for green financial instruments that support adaptation. At the national level, for example, France issued EUR 10 billion of Obligation assimilable du Trésor (OAT) vertes (green bonds) in 2023. That same year, EUR 1.98 billion of the proceeds from green bonds were allocated to climate change adaptation (See Box 3.8). In the UK, Green Gilts have raised GBP 2.1 billion (EUR 2.5 billion) for climate change adaptation measures (HMT, 2023[62]). Development banks can also play a critical role in supporting the development of markets for climate-resilient debt instruments. Since 2019, EBRD raised USD 700 million for adaptation investments by issuing a dedicated climate resilience bond (EBRD, 2024[63]). The Asian Infrastructure Development Bank has issued a USD 500 million Climate Adaptation Bond to fund projects that deliver resilience benefits (AIIB, 2023[64]). In September 2023, the Japan International Cooperation Agency (JICA) issued JPY 32 billion (EUR 200 million) of Disaster Resilience Bond (Sustainability Bonds) under the form of Agency bonds (that are non-government guaranteed domestic bonds) to finance its cooperation projects on the theme of Disaster Risk Reduction and Build Back Better in developing countries.
GSSS bonds have institutional and macroeconomic prerequisites that pose obstacles to their use in least developed countries. These bonds are predominantly issued by high-income and emerging economies, with European jurisdictions representing 67% of global official issuance, 54% of issuance by financial corporates and 45% by non-financial corporates (OECD, 2024[60]). In particular, the use of GSSS bonds requires borrowers to have the capacity to take on more debt, sufficiently developed local capital markets and mechanisms for managing exchange rate risk (OECD, 2024[59]). As such, these mechanisms will not always be appropriate for financing adaptation investments.
Labels and taxonomies
Clear and consistent standards are required to define what counts as an adaptation and resilience investment to support the use of financial instruments, provide transparency to market participants and avoid the risk of greenwashing. A growing volume of standards are now available. For adaptation and resilience, these standards tend to be focussed on the processes undertaken rather than the adoption of specific technologies or compliance with performance standards. In general, these standards focus on demonstrating the climate-related risks have been identified and managed, while avoiding harm to people or the environment (Mullan and Ranger, 2022[65]). Ensuring interoperability between standards, whether these standards are voluntary or mandatory, will support market development and reduce transaction costs.
Climate adaptation has been included in the design of most taxonomies. The EU Taxonomy for Sustainable Activities provides process-based criteria for identifying investments that make a significant contribution to climate change adaptation. It also contributes to mainstreaming by requiring that all “green” investments comply with the Do No Significant Harm principle, which includes the requirement to avoid adverse impacts on climate change adaptation. Climate adaptation is also included within the development of some other national taxonomies, including Chile, South Africa (Box 3.8) and the UK (OECD, 2020[66]). In the case of Chile, the taxonomy under development is based on the EU framework but focuses exclusively on "environmentally sustainable activities". This distinguishes it from the approach taken by other taxonomies, such as South Africa’s, which includes a broader range of assets, projects, activities, and sectors. For jurisdictions that decide to develop official taxonomies, the G20’s Sustainable Finance Roadmap encourages the use of common terminologies, industry classifications and regional interactions to enhance interoperability and support market development (G20 SFWG, 2021[67]).
There is also a growing set of efforts to define adaptation-related investments by non-government actors. Japan updated its guidance on green bonds in 2022 to provide further emphasis on adaptation, Do No Significant Harm and propose relevant key performance indicators (KPIs) for adaptation (Japan Ministry of the Environment, 2022[68]), The Climate Bonds Initiative developed a Climate Bonds Resilience Taxonomy, which aims to provide clear performance standards for adaptation measures (CBI, 2024[69]). Climate change adaptation projects can also be included within bonds that are issued within the International Capital Market Association’s Green Bond Principles. Toolkits have been developed to identify investments that have resilience benefits. These include frameworks by the Global Adaptation and Resilience Investment Group, the Adaptation and Resilience Investors Collaborative (ARIC) and Standard Chartered (see Relevant Links and Resources below). Ensuring coherence and interoperability between frameworks will be important to reduce transaction costs and the risk of market fragmentation.
Financial system measures can support efforts to better track finance flows relevant to climate change adaptation. The adoption of taxonomies can provide an incentive for financial actors to identify and demonstrate the contribution of their investments to climate change adaptation, thereby helping to fill this gap in the measurement of private sector flows. New tools, such as AI, have the potential to translate heterogenous corporate disclosures into a better-harmonised understanding of the investments being made that are relevant to adaptation. For example, the Bank for International Settlement has a pilot project to translate disclosure documents into harmonised indicators of climate risk (BIS, 2024[70]).
Disclosure and transparency
The failure to adequately consider climate risks, including physical climate risks, within financial markets can lead to misallocation of capital and the accumulation of risks within the financial system (TCFD, 2017[71]). Initiatives to achieve greater transparency and disclosure within financial markets can support the allocation of capital to investments that are more resilient to climate change (see Box 3.7). The starting point is for entities to disclose climate-related risks. The Taskforce on Climate-related Financial Disclosure (TCFD) recommended the disclosure of physical climate risks. These risks are included in major frameworks for disclosure, including the International Sustainability Standard Board’s (ISSB) “IFRS Sustainability Disclosure Standards, S2 Climate-Related Disclosures” (IFRS, 2023[72]) and the European Union’s European Sustainability Reporting Standards. The Global Reporting Initiative is currently consulting on updates to the standards for Companies that may voluntarily report on climate-related risks as part of their sustainability commitments.
The effectiveness of disclosure in raising awareness of physical climate risks, and therefore potentially supporting investment in climate-resilience, depends upon the breadth, robustness and usability of the information being reported. An analysis of reporting under the TCFD guidelines found that physical climate risks were included in less than half of the reports. Those organisations reporting risks tended to only feature some potential climate hazards and used different scenarios, metrics and assumptions (Zhou and Smith, 2022[73]). The adoption of common metrics and more detailed guidance for reporting on physical climate risks would facilitate greater transparency in this area (EBRD and GCECA, 2018[74]). For example, the ISO 14091 standard can be used to provide an overall framework for undertaking climate change risk assessments at the organisational level (ISO, 2021[75]).
A critical issue for investment in adaptation is to ensure that mechanisms for disclosure reflect the benefits of adaptation, rather than just looking at potential physical climate risks. An overly narrow focus on risk exposure could have the undesired effect of diverting finance flows away from the areas that are most in need of investment for adaptation. It is also important to have transparency about adaptation efforts, so that the benefits of relevant investments can be considered in decision-making. Transition plans were developed to address an analogous issue for climate mitigation and provide a potential mechanism for providing transparency about how reporting entities plan to adapt to the impacts of a changing climate. The UK’s Transition Plan Taskforce’s Adaptation Working Group has produced guidance on how adaptation can be integrated within transition plans (See Box 3.8)
Ensuring that a project is well adapted to climate change may increase upfront costs. These costs can arise, for example, from increased project preparation time due to the need to understand how the project will be affected by climate change risks. They may also arise from the cost of technical changes required to manage climate risks, such as specifying materials that can handle hotter temperatures. These upfront costs should be outweighed by the benefits over the lifetime of the project: these benefits can include lower insurance premiums, lower operating costs and reduced risk of premature obsolescence.
Well-functioning financial markets should reflect these benefits in the valuation of financial assets, thereby encouraging investment in adaptation. However, information asymmetries can prevent these benefits from being correctly priced, thereby discouraging investment in adaptation.
Source: OECD (2024[29]) based on CCRI (2021[76])
Guiding questions
Are there voluntary or mandatory standards/mechanisms or principles for identifying adaptation investments that have been adopted by market participants? How is compliance with those standards/mechanisms or principles measured and verified?
Are mechanisms in place to provide transparency about the exposure of financial assets to physical climate risks? What guidance exists to support disclosure in relation to the choice of metrics, scenarios and assumptions?
Do requirements for corporate disclosure, including transition plans, address adaptation? Do these reflect the benefits of adaptation, as well as exposure to physical climate risks?
Is there a taxonomy for green and sustainable finance? If so, does this taxonomy include criteria for climate resilience?
Is there any technical or financial support available for potential issuers of climate resilience financial instruments?
Relevant tools and resources
French Sovereign Green Bonds (“OAT vertes”)
France was one of the first countries to issue a sovereign green bond (“obligations assimilables du Trésor verte”) in 2017. Since then, France has issued further sets of green bonds, reaching a total value of EUR 61.9 billion by the end of 2023. The proceeds from these bonds are allocated to eligible green expenditures for climate change mitigation, adaptation, biodiversity and efforts to reduce pollution. This issuance is compatible with the French system for green budgeting, with almost all eligible expenditures from the green bonds being rated in the budget system as environmentally favourable (or, at a minimum, neutral). To ensure transparency and environmental integrity, an independent council has been established to evaluate the performance and allocation of these green bonds and the issuances are verified by an independent third party.
The proportion of green bond receipts allocated in support of climate change adaptation has increased over time, reaching EUR 1.98 billion (19% of the EUR 10.2 billion of eligible expenses that year). The majority of these funds are used for capacity building, data and research (including satellite observation), bilateral cooperation and contribution to transversal projects.
Guidance on integrating climate change adaptation into private sector transition plans
The UK’s Transition Plan Taskforce was launched in 2022 to develop a framework for companies to disclose their plans for transitioning their operations towards a low-carbon, climate resilient future. The focus of transition plans has largely been in relation to making the transition to net zero, but the UK’s guidance also included climate change adaptation. This recognised that companies will also have to adapt to physical changes resulting from climate change. The Taskforce commissioned dedicated guidance on integrating adaptation into transition plans and has integrated the insights from this guidance into the core Framework and dedicated sectoral guidance documents, with the aim of encouraging disclosing entities to also discuss their plans for adaptation. The International Financial Reporting Standards (IFRS) Foundation has now taken responsibility for the disclosure-related materials produced by the Transition Plan Taskforce.
South Africa’s Green Finance Taxonomy (GFT)
South Africa released a Green Finance Taxonomy (GFT) in 2022 to provide a tool for identifying “green” assets, projects, activities and sectors, based on international good practice and national requirements. The Taxonomy was developed by the South African National Treasury. The development of the taxonomy was supported by the International Finance Corporation (IFC), with support from Sweden and Switzerland. This taxonomy follows the structure and approach of the EU Taxonomy, with the aim of achieving interoperability. It includes climate adaptation as an environmental objective and process-based criteria for identifying activities that contribute to this objective.
Source: Agence France Tresor (2023[77]); TPT AWG (2024[78]); SA National Treasury (2022[79]).
Barriers to private investment in adaptation include low perceived or actual returns on investment and an inability of the private sector to capture the full social benefits generated by adaptation investments. These barriers are compounded by the double externality effect associated with climate innovation in the case of new adaptation technologies. Addressing these market failures can help strengthen incentives for adaptation investments. This building block covers support for climate-resilient investment projects (e.g. tax incentives, project preparation facilities, incubators, etc.) and measures to mitigate risks associated with adaptation investments (e.g. guarantees, concessional loans).
Private investment in adaptation includes direct investment into firm and supply chain resilience or into the provision of adaptation solutions, and financing of adaptation investments of others through corporate or project finance (see Chapter 2). The private sector does not necessarily internalise the positive spillovers of adaptation finance and investments, nor the full physical climate risks that the investments are intended to address. Targeted support by the government may therefore be warranted to support innovation and adaptation investments that deliver wider social benefits. Different forms of support will apply to direct investors and financers. Financial incentives (e.g. tax breaks, grants) and non-financial incentives (e.g. regulatory incentives, technical and business support) can alleviate barriers faced by direct investors. De-risking instruments (e.g. guarantees, concessional finance), while also available to direct investors, can be particularly helpful to mitigate the risks that inhibit institutional investors and banks from providing finance for adaptation projects. Project preparation helps financers identify bankable projects, while providing support to project developers. More tailored forms of support are needed to address the challenges associated with adaptation innovation.
Incentivising direct investments
Incentives for adaptation investments, whether financial or non-financial, should be targeted and cost-effective. They should be complementary to a sound policy framework for investment and cannot compensate for a weak regulatory environment (OECD, 2015[26]).
Investment tax incentives can target adaptation investment by increasing related after-tax profits, reducing costs associated with certain expenses or exempting recipients from indirect taxes. Existing incentive schemes in sectors that have clear links to climate change adaptation could be revised to integrate adaptation considerations and impact metrics. For example, the Government of Peru introduced a mechanism in 2008 that allowed private firms to prepay a portion of their income taxes in the form of public works to reduce Peru’s infrastructure gap. Through this mechanism, private companies assume the upfront costs and management of new infrastructure programs while the government accepts the infrastructure projects in lieu of future tax payments. Adaptation considerations could be integrated into such incentive schemes by ensuring the climate resilience of new infrastructure.
Tax incentives can be very costly in terms of foregone revenues, create market distortions, or result in windfall gains for investments that would have materialised also in the absence of the incentive regime. Cost-based regimes that are linked to specific expenses and inputs have the potential to mobilise more investment per unit of forgone tax revenue than profit-based incentives (Clark and Skrok, 2019[80]). According to the OECD Policy Framework for Investment and FDI Qualities Toolkit, incentive regimes should be time-limited, well-targeted and subject to regular review, and their uptake and cost-effectiveness should be regularly monitored and evaluated. The OECD is currently in the process of developing a comprehensive checklist to assist governments in crafting, executing, managing, and assessing investment incentives, which strives to ensure that these incentives effectively support sustainable development objectives (including adaptation) while addressing any associated costs.
Non-financial incentives also have an important role to play in encouraging adaptation investments, by reducing the administrative burden and time costs of an investment project. For instance, investment promotion agencies (IPAs) can work to streamline investment processes, provide revenue guarantees for strategic projects, form or facilitate joint ventures and support site visits. Invest India works closely with multiple ministries and agencies to address bottlenecks for climate mitigation FDI, including navigating the national approval system for environmental assessments and land acquisition for larger projects. Establishing a clear mandate for the IPA to support climate adaptation investments can help tailor IPA efforts and resources to alleviating administrative processes associated with adaptation investments, and provide advisory services to ease market entry and support the operations of prospective investors (OECD, 2022[81]; WEF, 2023[82]).
Mitigating risks to project finance
The strategic use of public resources can enhance access to finance and help to address the perception that investments in adaptation are too risky relative to the return that they are likely to deliver. It can also help to address short-termism in decision-making and raise awareness. For example, the state-owned Development Bank of Japan offers loans at favourable rates to enterprises based on their ratings in terms of disaster prevention and business continuity management. By 2022, USD 3.9 billion of loans had been extended under this programme (OECD, 2023[20]).
More generally, a range of instruments can be used to enable enterprises to access finance on more favourable terms (Table 3.2). These include government guarantees, equity stakes, concessional debt finance and blended finance3 in the case of developing countries (OECD, 2021[83]). These instruments can be delivered through different institutional arrangements, including multilateral institutions (such as the European Investment Bank), national development banks, specialised public or private green investment banks and development partners (see Box 3.9 for the example of PIDG). Local financial institutions can be used as intermediaries to provide access to credit on concessional terms to small and medium-sized enterprises (SMEs). Providing these institutions with a mandate to support adaptation efforts can encourage a greater focus on supporting this type of investment. The role of insurance against physical climate risks is covered in the section on “Insurance and risk transfer”.
Government guarantees are a sovereign obligation to protect the beneficiary from defined losses if specified conditions occur and can help make adaptation projects more acceptable to private investors. At the same time, government guarantees expose governments to fiscal risks due to the difficulty of predicting when guarantees are called and the size of the payout. Guarantees should therefore be carefully structured to provide only the minimum to make projects bankable. This entails coverage of a limited number of specific risks that depend on the types of projects, sources of financing, and the political, economic, and financial market conditions of the host countries (IBRD, 2019[84]).
Non-sovereign cross-border guarantees have the potential to make a significant contribution to mobilising adaptation finance in emerging markets and developing economies (EMDEs). Such guarantees are typically provided by multilateral development banks, development finance institutions, export credit agencies, or specialised institutions (i.e. private sector institutions funded by governments and development partners). A recent mapping of cross-border guarantees found that out of 52 existing guarantee instruments, only five are designed to mitigate risks associated with adaptation finance (CPI, 2024[85]). These guarantees are typically provided by specialised institutions like GuarantCO and the Green Guarantee Company, and focus on de-risking green bonds and loans.
The OECD Guidance on Blended Finance for Adaptation report identifies good practices for scaling-up adaptation finance via blended finance. It identifies opportunities for using blended finance in key sectors including agrifood, infrastructure, health and nature and biodiversity. It also outlines the following principles for ensuring the effective use of blended finance in this context (OECD, 2024[19]):
Optimise blended finance for adaptation objectives based on a development rationale.
Consider risk of development reversals in the absence of adaptation when assessing additionality.
Focus on opportunities to use blended finance for the integration of adaptation into the domestic financial sector.
Pursue blended finance for adaptation with a focus on scale, standardisation and systemic solutions.
Use systematic high-quality adaptation data in a dynamic climate change process.
Supporting project preparation
The project development phase is needed to translate worthwhile concepts into high-quality, effective and financially viable projects. This phase provides an entry point for understanding the characteristics of the project and linking the requirements for different funding sources. It follows on from the identification of priority needs (section 3.1). This phase can represent an additional hurdle to investments in climate change adaptation, because of the need for technical capacity to understand climate risks and the potential complexity of developing projects that deliver multiple co-benefits. The smaller average size of adaptation projects relative to mitigation projects can make individual projects unattractive to potential investors.
Support for capacity development as a public good can underpin the development of investments in adaptation. A key area for this is the open provision of data, tools and guidance for managing climate change risks (see Building Block 1 for more on this). Peer-learning mechanisms can also provide a source of inspiration and support in translating project proposals into implementation.
Project preparation facilities (PPFs) can provide an important contribution to help translate concepts into implementation. There are a wide range of PPFs, with varying sectoral and geographic coverage. For example, the Global Infrastructure Facility (GIF) was established by the G20 to support the preparation of sustainable infrastructure projects. The current landscape of PPFs is fragmented and existing PPFs often have limited private sector involvement. Greater coordination and pooling of efforts could help achieve scale and increase project take-off. Governments can support their effectiveness by encouraging greater collaboration between PPFs and harmonisation of documents and processes (EC HLEG, 2024[86]). The development of country platforms could facilitate this process of collaboration and help to avoid gaps and reduce duplication of efforts.
For countries eligible to receive climate finance, capacity constraints can hinder the development of projects that meet the funders’ requirements. At the international level, the Green Climate Fund provides support for project preparation through its project preparation facility, with a simplified process available for grants of less than USD 300 000. The Adaptation Fund provides grants of up to USD 50 000 to assist with Project Formulation. National climate funds, such as Rwanda’s Green Fund (FONERWA), can rationalise access to climate finance, provide a central source of expertise with the requirements of different funding sources and support project development (OECD, 2023[20]).
The use of intermediaries and programmatic approaches can help to unlock access to private investment. For example, the Urban Resilience Fund B (TURF) uses a blended finance approach to combine private capital, with support from public development banks to fund infrastructure in Africa. The use of intermediaries can provide greater flexibility to adjust application requirements to the scale of the project.
Fostering innovation and technology transfer
New technologies can improve adaptative capacity and increase resilience to climate change. For example, risk modelling firms are using new analytical capabilities provided by artificial intelligence (AI) and machine learning to develop risk scores for future climate conditions that can be integrated into insurance products (OECD, 2023[40]). Supplier tracking systems that combine internet-of-things sensors and AI are being used to reroute the distribution of healthcare products based on current environmental conditions (The White House, 2024[87]). Deep learning techniques are being exploited to design drought-resistant crops at the molecular level (WEF, 2024[88]). Breakthrough innovations, defined as having higher potential societal impact and higher scientific novelty than incremental innovations, have the potential to make especially large contributions to building climate resilience.
Innovative technologies and solutions emerging from R&D must pass through several stages of validation and refinement before reaching full commercialisation. Due to long development timelines, high technology risks (especially high for climate technologies), and information asymmetries, adaptation technologies are vulnerable to funding gaps (OECD-World Bank-UN Environment, 2018[89]). Generally, R&D in breakthrough technologies relies more heavily on public support, as this is where the risk is highest and commercial viability is most remote. Private sector firms generally fund less risky R&D to improve the performance, reduce the costs of existing products, or build on the results of publicly funded early-stage efforts (UNFCCC, 2017[90]). Once the technology is developed, recent evidence suggests that traditional venture capital models may not be well-suited to funding demonstration and early-stage commercialisation of climate adaptation technologies, due to the relatively poor risk-return profile of such investments (Gaddy et al., 2017[91]). Scaling breakthrough innovations may be especially risky because it is unknown how markets will react to them.
Governments can help address some of these challenges through a variety of support measures affecting the supply and demand for breakthrough innovations in climate adaptation (Table 3.3). These include directly investing in R&D (or subsidising private R&D), expanding incubators and accelerators to support commercialisation of new technologies, investing in technical and data infrastructure, promoting inter-disciplinary collaborations across academia and industry, investing in skills and training, and providing regulatory exemptions to facilitate testing of innovations. The public sector also plays a key role in promoting knowledge-sharing on what constitutes effective adaptation and resilience building. Demonstration of resilient investments and best practices is a form of knowledge-sharing that can further stimulate technological innovation as new investors become aware of resilient investment opportunities (World Bank-GFDRR, 2021[92]).
Small enterprises play an important role in technological innovation but are constrained by weak entrepreneurial support systems, fragmented linkages to climate technology markets, and lack of finance. Incubators and accelerators play an important role in addressing these challenges and strengthening the national innovation ecosystem. They facilitate linkages between entrepreneurs, other innovation actors, suppliers, buyers, and sources of finance. Public support for creating local adaptation-focused innovation centres can help leverage the specialised expertise of firms and universities, while facilitating access to regulatory agencies and financing institutions, as is the case for Kenya’s Climate innovation Center. There are estimated to be around 2 000 technology incubators and 150 accelerators worldwide. Public sector is increasing its supports to these centres, as shown by the recent funding of the National Science Foundation (NSF) Colorado-Wyoming Climate Resilience Engine (CO-WY Engine), an accelerator focused on climate resilience technologies that has received a public grant of USD 160 million over the next ten years to help start-ups accelerate R&D for adaptation solutions. However, fewer than 70 are estimated to be climate technology incubators and accelerators, and just 25 of the 70 are in developing countries (UNFCCC, 2018[94]). Limited information is currently available on the specific challenges and opportunities for incubators and accelerators to support innovation in adaptation technologies.
International climate finance can support adaptation innovation by fostering partnerships with businesses on the cutting edge of climate adaptation innovation. For example, the Global Environment Facility’s (GEF) Challenge Program for Adaptation Innovation seeks to catalyse adaptation innovation by engaging directly with leading innovators through calls for proposals. After their selection, winning projects are developed and implemented in partnership with one of the 18 GEF agencies. This model of linking directly with ideas of innovation leaders can help engage a broader spectrum of actors in presenting and developing GEF-financed initiatives.
International technology transfer mechanisms and development co-operation have an important role to play in ensuring that innovation benefits a larger number of countries. Technology transfer plays an especially significant role in supporting adaptation efforts of SMEs in emerging economies that that lack access to climate finance (OECD, 2023[95]). International mechanisms have been established to support North-South and South-South technology diffusion, such as the UNFCCC’s Technology Mechanism, implemented through the UNEP Climate Technology Centre & Network, which promotes the accelerated transfer of environmentally sound technologies for low carbon and climate resilient development at the request of developing countries.
Guiding questions
Are existing incentives to stimulate private investment in support of adaptation well-targeted and time-limited? Are measures in place to assess their cost-effectiveness?
What resources are available to help project developers understand the climate-related risks that they face and potential adaptation measures?
What support is available to help with early-stage project development? Is climate resilience systematically considered within existing mechanisms for supporting project preparation?
Are there support mechanisms in place to assist with access to climate finance, such as national climate funds?
To what extent is the existing intellectual property framework conducive to promoting investment in adaptation innovation and transfer of adaptation technologies among firms?
What support is available for early-stage innovation in adaptation? Are knowledge transfer facilities in place (e.g. technology centres, business incubators, applied research centres) to provide knowledge exchange and innovation services for adaptation technologies?
Relevant tools and resources
Blended finance for infrastructure: the Private Infrastructure Development Group
The Private Infrastructure Development Group (PIDG) was established in 2002 to mobilise private finance for infrastructure in developing countries, with a particular emphasis on least developed countries and fragile states. It is currently supported by six bilateral donors and the International Finance Corporation. It uses concessional finance to mobilise private capital for infrastructure investments, using the following tools across the infrastructure lifecycle:
Technical assistance for feasibility studies, project incubation and other early-stage activities;
Project Development to share risks of early-stage project development with other sponsors;
Credit Solutions including long-term debt, provision of guarantees and credit enhancement facilities.
PIDG estimates that it has mobilised USD 25 billion in private investment for infrastructure since its creation. In 2023, 65% of the PIDG projects contributed to climate change mitigation and/or adaptation objectives.
National support for Climate Resilience initiatives.
In the United States, as part of the Inflation Reduction Act (IRA) programme and, on the basis of the National Climate Resilience Framework, the national government has invested USD 3.9 million to encourage private sector players to innovate in the field of climate resilience. The funds were allocated to the National Oceanic and Atmospheric Administration (NOAA) that selected several accelerator programs, which are responsible for screening and selecting the businesses to receive government financial support and technical assistance for ocean-based climate resilience innovations. As a result of this public funding, 16 business accelerators were established and recruited new cohorts of innovative Climate Resilient businesses ideas.
France 2030 is a national investment plan aimed at fostering innovation in the French private sector. The programme deploys ER 54 billion of public investment in various sectors, including improving the resilience of the agricultural sector to the effects of climate change. As a result, a call for proposals entitled ‘Agri-food resilience and capacity 2030’ was launched and managed by the French public investment bank BPI France, which invested a total of EUR 1.8 billion and selected 357 innovative projects, some of which increase the resilience of the agri-food sector. The funding is specifically designed to support investment in R&D or infrastructure construction.
Egypt’s Nexus of Water, Food and Energy (NWFE) Programme seeks to mobilise concessional development finance for climate adaptation in key sectors. This is realised through the design, structuring and preparation of concrete and implementable projects to enhance small farmers’ adaptation to climate risks, increase crop yields and irrigation efficiency to build resilience of vulnerable regions, establish early warning systems, and modernise on-farm practices.
Source: PIDG (2024[96]); UNFCCC (2023[97]); US National Science Foundation (2024[98]); Ministry of Agriculture and Food (2024[99]); White House (2024[100]); Egypt Ministry of International Cooperation (2022[101]).
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← 1. The Producer Support Estimate (PSE) measures all transfers to agricultural producers individually. It includes the net effect of Market Price Support (MPS), which represents transfers from taxpayers and consumers to agricultural producers through domestic prices that are higher than their international reference prices. It also includes budgetary support direct from taxpayers.
← 2. Real Options Approaches provide a means of accounting for the value of flexibility when making decisions (Buurman and Babovic, 2016[102]).
← 3. Defined as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries (OECD, 2018[103]).