Innovative finance tools could protect cities from climate change

Mar 22, 2021

A man walks past a stranded public transport bus on a road flooded by heavy rains in Mumbai, India, August 5, 2016.

Flooding, due to climate change, is becoming increasingly common in cities around the world. Image: REUTERS/Shailesh Andrade.

Nidhi Upadhyaya

Associate Director, Adrienne Arsht-Rockefeller Foundation Resilience Center, Atlantic Council

Morgan Richmond

Senior Analyst, Climate Policy Initiative

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Long-Term Investing, Infrastructure and Development

City residents living in poverty are severely affected by climate change and extremely vulnerable to health risks such as COVID-19.
Climate adaptation finance for cities is largely inadequate and requires urgent review to protect people from future disasters.
New report An Analysis of Urban Climate Adaptation Finance identifies how to build resilient financing solutions for global urban areas.

In January 2020, 11,000 scientists warned that the planet is facing a climate emergency and the The United Nations Framework Convention on Climate Change (UNFCCC) called 2020 a “critical year for addressing climate change”. By March, global focus had shifted to addressing the immediate impacts of the COVID-19 pandemic as economies plunged, death tolls rose, and governments faced steep challenges in managing the crisis.

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Residents of cities, especially in slums and informal settlements, are extremely vulnerable to the impacts of the pandemic as rates of poverty increase, social safety nets decline (given tightening public budgets) and pandemic health risks are exacerbated by a lack of access to sanitation services. City residents, especially in at-risk communities, are also extremely vulnerable to climate impacts such as exposure to pollution and extreme heat, yet we find that cities received less than 5% of global finance to address climate risks in 2017-2018.

The pandemic has re-affirmed the importance of proactive action to address our collective risks. It has pushed decision-makers across the globe – including urban leaders – to respond to and plan for oncoming crises. Leaders must lend the same urgency to the climate crisis and work to build resilience to protect lives and livelihoods from future disasters.

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What’s the World Economic Forum doing about climate change?

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum's Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.

The World Economic Forum's Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

Last month, the Cities Climate Finance Leadership Alliance and the Atlantic Council’s Adrienne Arsht-Rockefeller Foundation Resilience Center released a brief, An Analysis of Urban Climate Adaptation Finance, that focuses on urban dwellers and aims to assess the volume and quality of finance that currently exists to address climate risk in cities. The analysis also outlines opportunities to increase and improve that finance. In assessing flows of adaptation finance to cities through 2018, they found that:

Across sources tracked in the brief, less than $4 billion was invested annually in 2017-2018 in urban adaptation finance projects.
The tracked finance is in contrast to World Bank’s estimate that between $11-20 billion will be needed by 2050 on an annual basis to protect global urban infrastructure from climate risks.
In almost all regions, extreme heat and flooding/sea level rise were the most common hazards reported by city governments.
Water and wastewater management projects addressing urban climate risk received the most finance of any sector, followed by disaster risk management.

Despite the significant gap between the assessed financing need to adequately address urban climate risk and tracked flows of finance, there are significant opportunities to increase finance for climate adaptation. These opportunities are discussed in more detail throughout the brief and include:

Implementers can take best practices and lessons learned from successful financing already underway where innovative financial mechanisms have been employed to address climate risk in cities. This brief includes 12 examples of the use of financial instruments in the urban adaptation context, spanning resilience bonds, disaster risk insurance pooling, public-private partnerships, and catastrophe bonds. We also recommend the development of a set of case studies that are accessible to a wide range of city implementers. The effort should also include a toolkit for cities seeking financing for adaptation projects.
Cities and stakeholders should support government capacity building to implement urban adaptation activities. In order to improve the efficacy of finance to address urban climate risk, cities must rigorously assess their climate risks and should conduct physical climate scenario analysis. When the connection between financial flows and climate risk reduction can be substantiated with improved climate risk analysis, the accuracy of tracking adaptation finance in cities will also improve. Advanced tracking helps Development Finance Institutions (DFIs) and national and international policy makers target capital flows to locations with highest need, and allows for evaluation metrics to be established, thereby easing investor hesitancy.

An Analysis of Urban Climate Adaptation Finance brief identifies gaps and barriers to financing resilience solutions in global urban areas and highlights entry points to drive action by investors, cities, national governments, and other stakeholders to increase urban adaptation finance. The need to act now is greater than ever before as we chart a path to recovery from a global pandemic and prepare for a resilient future.

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