Money for a Rainy Day

A searing drought in East Africa, a deluge in South Asia, a heatwave in Europe; the impacts of climate change are here. Yet the money to help vulnerable communities cope is lagging far behind the money to curb carbon emissions. In the grand scheme of climate finance, adapting to a warmer world remains underfunded while mitigation takes the lion’s share.

‘Money to help vulnerable communities cope is lagging far behind the money to curb carbon emissions’

Global investment towards fighting climate change has surged to nearly $1.3 trillion annually. But only a sliver of that goes toward helping countries adapt to climate impacts. Adaptation finance hit an all-time high of about $63 billion in 2021-22 - roughly 5% of total climate spending. That falls far short of needs; by 2030 developing countries will require an estimated $212 billion per year for adaptation. In short, there is a huge adaptation gap between the funding available and the costs of climate-proofing societies.

This imbalance has stark consequences. Africa, with less than 4% of global emissions, receives only around 2% of climate finance. Those least responsible for global warming struggle to secure money for seawalls or drought-resistant crops, even as billions flow to clean-energy projects in wealthier markets.

Donor governments have belatedly acknowledged the shortfall. At the Glasgow COP26 summit in 2021 they vowed to collectively double adaptation funding by 2025 to roughly $40 billion a year. They have made only modest progress - adaptation finance from rich countries grew from $22 billion in 2021 to about $28 billion in 2022. Even if the $40 billion goal is met, it would barely make a dent. The UN estimates hitting that target would shrink the adaptation finance gap by only around 5%.

Why do the pounds and dollars committed to adaptation lag so far behind mitigation? One reason is that projects to fortify coastlines or climate-proof farms often don’t generate revenue, there’s no profit for investors when a seawall prevents a flood. Private finance has largely steered clear: public and philanthropic actors account for about 98% of adaptation funding. Meanwhile, investors can earn returns from wind farms or battery factories, so mitigation attracts far more private capital. The climate-finance system is skewed toward cutting emissions, while funding to weather the coming storms relies almost entirely on limited public purses and the generosity of philanthropists.

‘Mitigation attracts private capital’

This lopsided approach is perilous. Every dollar not spent on resilience today will cost many more in disaster relief tomorrow. 2023 was the hottest year on record globally, and the US suffered a record number of billion-dollar climate disasters. The economic case for adaptation is compelling - with one study finding that investing $1.8 trillion in resilience by 2030 could yield $7.1 trillion in net benefits by averting future losses.

Bridging the adaptation gap will require a profound shift in thinking. Rich countries and development banks must move resilience from the sidelines into the mainstream of investment. Blended finance models, using public or charitable funds to de-risk projects, can help attract private capital into adaptation initiatives. So can creative instruments like resilience bonds earmarked for climate-proof infrastructure. Ultimately, letting adaptation remain the poor cousin of climate policy is a recipe for mounting human and financial costs. The next climate disaster will not wait for budget approvals. Mobilising money for a rainy day is no longer just prudence, it is an urgent economic necessity for a world living with climate change.