“The business case for adaptation is improving.” These were the promising words from Daniel Dowling of PriceWaterhouseCoopers, shared during a breakout session at a recent conference called Climate Finance and Private Sector: Investing in New Opportunities. The conference was part of a week-long climate finance event held in conjunction with the opening of Green Climate Fund secretariat in Songdo, South-Korea.
The break-out session, called “Building Resilience,” brought together a diverse group of experts to discuss the role of the private sector in helping communities adapt to the impacts of climate change. In addition to Dowling, speakers included Michael Schwarz from SwissRe, Jovy Bernabe from Philippine Crop Insurance Corporation, and Pradeep Kurukulasuriya from the United Nations Development Program (UNDP).
While these speakers highlighted ways that some private companies are already engaging in adaptation, they also noted that these engagements haven’t been at the scale required to prepare societies for the impacts of climate change. The breakout session, therefore, focused on three main questions:
- How can we scale up private sector involvement in building climate resilience?
- What is holding the private sector back in investing more in building resilience? and
- Can these barriers be overcome?
From those questions, the following four lessons emerged:
1. Companies are aware of the risks, but find it difficult to act.
Large parts of private sector operations are exposed to climate risks such as drought, sea level rise, and extreme weather events—all of which can cause supply chain disruptions and other problems. Although companies are mostly aware of these risks, they find it difficult to quantify risk. If companies or individuals are unable to quantify risks, they have a hard time integrating them into their decision-making. As a result, many people and companies accept high levels of risk without knowing what the possible impact is to their business.
National governments and international climate funds can help companies or sensitive sectors understand and mitigate some of these risks by providing better information and technical assistance. Apart from this, there are four areas in which national governments can help the private sector incorporate adaptation and climate resilience into their day-to-day businesses, including by:
- Improving the enabling environment for business to act. For example, governments can provide financial incentives in the form of loans or grants.
- Providing technical and knowledge-related support to operational risk management practices, such as giving trainings on reducing water in operations or making information on climate trends and patterns available to the public.
- Providing financial support for developing products, technologies, and processes that build climate resilience.
- Supporting investor engagement and risk management by creating platforms for cross-collaboration and developing public-private partnerships to decrease private investment risk.
2. Insurance can play an important role in building resilience
“Disasters are the most tangible aspect of climate change,” said Schwarz. Economic losses resulting from natural disaster events are increasing, primarily due to higher asset and population concentration in disaster-prone areas. The United States, for example, experienced 11 extreme weather events in 2012 that each caused more than $1 billion in damages. A changing climate will likely exacerbate this trend. But to date, only a small portion of disasters' economic losses are covered by the insurance industry – most are absorbed by the public sector, which predominantly finances post-disaster losses, often by increasing public debt. With challenging fiscal situations in many countries, this approach may be unsustainable in the future.
The insurance industry can help governments design risk-transfer solutions that aim to balance financial approaches by combining pre-event and post-event financing instruments. The insurance industry can partner with governments to identify and quantify risks, design risk prevention and mitigation strategies, and absorb residual risk. This can help build more climate-resilient communities while also opening up new markets for insurance companies.
In the Philippines, for example, the Philippine Crop Insurance Corporation (PCIC) provides farmers with insurance. Bernabe from PCIC said, “The Philippines is one of the top 10 countries most vulnerable to climate change. Insurance provides farmers an opportunity to strengthen their resilience.” Because of this vulnerability, the PCIC is expanding its coverage by piloting new insurance techniques such as weather-based index insurance and area-yield crop insurance, which helps protect farmers in the event that a flood or drought significantly decreases agricultural yields.
3. Adaptation starts with individuals
“We all have to make choices and decisions that reduce our risk, not because of climate change, but because something matters to us,” said Kurukulasuriya. He discussed his experience visiting private sector adaptation initiatives in Asia that were made possible from a small amount of public finance. “Adaptation is a continuous process that starts with individuals taking action,” he said. “The private sector includes not only large corporations, but also small and medium enterprises as well as private individuals who invest their own capital to make adjustments to their business or livelihood practices in response to or in anticipation of various stimuli, including climate”. Kurukulasuriya gave an example of a UNDP-supported project in Cambodia, where the organization provided funding and technical assistance from the Global Environment Facility’s Least Developed Country Fund to support climate-resilient agricultural practices in local communities in the Preah Vihare region. In some cases, communities invested funds in a solar cell to power a small water pump. They then added in their own time and financial resources to develop micro-enterprises, like selling excess water to fellow community members and providing drip irrigation devices to farmers. Combined with earnings from increased crop outputs, the community could afford to maintain the solar system and invest in other areas, such as biogas. Kurukulasuriya’s Cambodian example highlighted the power of small-scale private investments that can be catalyzed through strategic public investment for building resilience.
4. Role of international climate finance in scaling-up climate resilience
Creating the right conditions to scale up adaptation interventions is still a challenge. The international community can help countries—and companies—by enabling knowledge-sharing, improving risk management, supporting development of policies to help overcome investment barriers, investing in innovation and new technologies, and lowering investment costs by providing support for adaptation projects. More broadly, the process of making adaptation part and parcel of private investment in developing countries will take time. The Green Climate Fund and other international funding institutions can support this process through consistent, long-term engagement. There will be no single, “quick fix” to leverage large-scale private action on adaptation. But with the right amount of innovation and incentives, governments, international institutions, and businesses can scale up investments in building climate-resilient communities.