Capital and Climate: The Incursion of Private Investment in National Climate Policy
At New York Climate Week a few days ago, a friend repeated a truly remarkable exchange to me. He had attended the cross-city conference to explore how companies and investors are addressing water and climate issues. In an accidental conversation, a private investor told my friend that she was looking at National Adaptation Plans (NAPs) for projects she could buy into.
It’s hard for me to describe how world-shaking (and how simultaneously unremarkable) that statement is.
My first UNFCCC COP was in 2009 — arguably marking the point when I began to take climate policy and finance seriously. NAPs existed back then, six years before the 2015 Paris Agreement. Despite their name, NAPs are not really “plans.” They started off as something like planning documents for the poorest countries — around two dozen LDCs prepared NAPs, but no one else did. They were almost a sign of poverty, and most of them were pretty awful planning documents to boot. But a few years ago, the number of countries writing NAPs exploded, approaching four or five dozen. That number is growing rapidly. AGWA is helping Brazil prepare its first NAP as you read this essay, while many other solid middle-income countries are doing the same. The reason is simple: NAPs are now shopping lists for climate finance donors.
And apparently for climate investors too.
Off the record, I’ve been predicting a transition for climate funding and finance for at least six months already. “Climate finance” usually means concessional finance — the country (and project) in question is getting a special deal. The Green Climate Fund (GCF), for instance, sometimes provides grants to help with the project preparation for a loan application. MDBs like the Asian Development Bank or World Bank are “real” banks in the sense that they make loans and are judged in part on the return they make on those loans, but they also apply extra analytics to ensure that the loans are applied to well developed and good projects. Sometimes they also have access to “technical assistance” or TA grants that help with capacity or more detailed support that are out of scope for the country or project in question — a sophisticated hydrological study, for instance.
For climate finance, NAPs have become one of the essential mechanisms for a country to signal that a particular project is aligned with the national government’s priorities.
That’s not the market for climate investors, who are looking for solid returns. What this woman was telling my friend was that NAPs are now becoming the poaching ground for non-concessional finance.
Why is this interesting? I see several reasons we should be taking notice:
A project listed on a NAP has adaptation and resilience as part of its core mission and has or will prepare a thorough risk reduction and adaptation building process. Investors are beginning to realize that risk reduction and adaptation building are not incidental or supplemental issues but necessary and required. Capital and climate are -- finally -- converging.
Resilience is emerging as a new sector in itself rather than as an extra step in projects previously labeled energy, agriculture, or transport. The credibility of resilience thus becomes essential to the investability of this new sector.
More money is going to crowd in to adaptation and resilience, from more sources.
My hunch is that most of the investments will be water projects, directly or indirectly. But they need to be non-traditional water projects that incorporate new thinking about robustness, flexibility, and systems change.
I would not be surprised if the next stage was to see private sector adaptation and resilience investments begin to be included on NAPs. The “Breton Woods” consensus post-1946 that nation-states are the best target for aid and cooperation, and which underlies most of the MDBs, UN, and global financial-institution system (e.g., IFC, IMF, etc.), may soon dissolve into other key actors for climate investment.
I was at New York Climate Week myself, including in a great session AGWA organized with the Alliance for Water Stewardship on the role of business in national climate policy. This session occurred a few hours before my friend had his chat with investor. Of the 40 or so people in the room, there was a clear tension between the more traditional advocacy groups who wanted to double down on how their messaging and solutions from 20 or 30 years ago mattered and was useful and important to business, and the businesses and investors in the room who were worried about how climate was scrambling strategies, operations, and their own credibility.
New problems seem unlikely to be solved with old solutions. Climate investors may be leading the way.
John Matthews
Sydney, Australia