2024 Public Sector Perspectives

“Business” and innovative solutions to the climate crisis Other key actors at the forefront of financing climate adaptation are financial institutions that can direct capital and demonstrate to markets the opportunities, risks, and potential returns of investments. As they bring innovative tools to markets, financial institutions are pivotal in helping investments and assets support the implementation of low-carbon, climate resilient development pathways. A range of innovative green financing instruments have been gaining momentum over recent years and are now being deployed in both developed and developing countries: • Green bonds are now the major bulk of green investments having raised $351 bn in the first half of 2023 (a record six months in terms of the value) with total outstandings of Green and Sustainable issuance exceeding $3.4 tn of such capital raised from investors 16 . Similarly, sustainability-linked bonds (SLBs) where the issuer’s debt is tied to their climate promises have also gathered investors’ attention, albeit there is skepticism amidst rising greenwashing concerns. Sustainable bonds in general are reliant on their credibility and investors are urging for more aligned international standards and regulations. Different actors can help gather momentum of the said instruments to create a “circle of greater issuer and investor experience and confidence to catalyze the mobilization of finance for climate resilience action at scale” 17 . In that regard, MDBs issuing green bonds is encouraging, with the World Bank’s issuance of the first Wildfire Conservation Bond in 2022 being an example 18 . • Additionally, debt-for-climate and debt- for-nature swaps can help governments with limited access to traditional grants or debt reliefs to improve climate resilience without triggering a fiscal crisis or sacrificing other development projects. MDBs can help improve the financial terms and scale up the number and size of these transactions to ensure swaps can have a tangible impact 19 . Additionally, private sector players such as NGOs and Foundations can deploy their capabilities and competencies on behalf of sovereigns to assist in the execution of investing the capital, enhancing the governance and transparency of the investments, and facilitating the disclosure of the impact of such investments. Debt related swaps are increasingly more relevant as debt relief becomes a more prominent topic amongst countries that need to create fiscal headspace for climate investments. • Finally, blended finance solutions which use development capital to mobilize private capital for climate and nature are a key tool to be used in emerging market and developing countries. Blended finance configurations of concessional public funds with commercial funds can be a powerful means of de-risking investments which alter the risk-return profile in favor of climate adaptation financing. These innovative climate finance solutions and structures demand greater governance and accountability than traditional capital market issuances. Sovereigns must develop and/ or leverage existing capabilities to capture, manage and disclose data and the associated impact of deploying proceeds to access the market through these structures and solutions. 16 Bloomberg and Dealogic as of October 9th, 2023 17 Global Center for Adaptation 18 World Bank 19 IMF There is little doubt that traditional financing instruments such as social protection, catastrophe risk insurance and contingency finance remain key in dealing with loss and damage, but the size of investment needed will require innovative financing solutions to achieve the appropriate scale. Conclusion Financing climate adaptation is optional no longer, as consequences from climate change are increasingly shaping our reality and will only be further accentuated in the coming years. As the cost of inaction rises there is a stringent need to rethink the global architecture towards climate change financing. Well-thought tools are available, but their efficiency rely on the commitment of the entire spectrum of actors from private, public, to supra-national institutions towards a common objective. Climate change and climate adaptation financing must be done fairly, methodically and by utilizing all resources available to ensure a just transition. Financing climate adaptation is optional no longer, as consequences from climate change are increasingly shaping our reality and will only be further accentuated in the coming years. Citi Perspectives for the Public Sector 17 16 Building Resilience Against Future Loss and Damage Through Climate Adaptation