Proving efficacy of climate adaptation plans will differentiate who gets funding: Moody’s

The governments able to present plans that credibly reduce physical climate risks will be best positioned to attract financing

Effective climate adaptation is critical in nations' efforts to reduce the fiscal, socioeconomic and environmental impacts of extreme weather events and long-term climate change - but many are struggling to prove the efficacy of their plans and access needed funding.

A Moody's report, out on Friday, said that proving effective action when it comes to adaptation plans will be a crucial differentiating factor when it comes to obtaining credit - with such an indicator of credit risk being especially important for those whose exposure to physical climate risk is most material.

Citing a Climate Policy Initiative report, published in December, Moody's noted that only a quarter of the annual spending on adaptation projects needed to reduce the associated risks globally is currently being met. And adaptation needs are large - having been estimated by the IMF to amount to 0.25 per cent of gross domestic product (GDP) per year in 2030 at a global level, and at around 1 to 2 per cent for some emerging markets, and in excess of 10 per cent for some small island economies.

"Given the financial constraints faced by the sovereigns and regional and local governments (RLGs) most vulnerable to physical climate risk, strong governance - which increases the likelihood that adaptation investment effectively reduces risks and fosters access to funding - will be a key differentiating factor of governments' climate resilience," Moody's report said.

Its own engagement with sovereigns and RLGs, it said, suggests that while most have formed an assessment of the risks and defined their vulnerabilities to climate change, many of their plans lack detail when it comes to implementation and prioritisation.

For example, according to the United Nations Environment Programme (UNEP), only 26 per cent of sovereigns have monitoring and evaluation systems in place, though a further 36 per cent are in the process of developing a system. Only 8 per cent, however, have evaluated their National Adaptation Plans, or national-level planning instruments, based on, for example, additional qualitative and quantitative information about progress made and feedback from stakeholders; this is even less developed for RLGs and their climate adaptation plans or strategies.

This has left potential financiers of such plans uncertain about their likely effectiveness - contributing to the low level of global climate finance directed towards adaptation, which was at around 10 per cent in 2019-2020.

In addition, difficulties in pricing net financial and economic gains from adaptation, and broader credit risk, are expected to weigh on the private investment that will be crucial to emerging markets.

"We expect advanced economies will accelerate their adaptation planning and start to increase investment financed from either the public purse or debt markets over the coming years. By contrast, weak government balance sheets and competing policy priorities will weigh on public spending on adaptation initiatives in lower-income jurisdictions, who are also most at risk from extreme climate events and climate-related long-term trends such as rising sea levels," Moody's said.

Private finance is therefore vital for these economies; but funding is likely to be limited due to the broader credit risk present in these economies - such as weaker policy frameworks and limited organisational capacity to undertake detailed adaptation planning - and the difficulties in estimating the potential gains and the avoidable losses from climate adaptation investment.

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