Unlocking Climate Resilience: The Role of Adaptation Finance in Developing Nations

Multilateral development banks (MDBs) are major providers of the climate finance that vulnerable nations need^[2]. In 2024, MDBs achieved a record $137 billion in global climate financing, a 10% increase from the previous year, with over $85 billion directed to low- and middle-income economies^[10]. However, progress is mixed. While every MDB hit a record high for total climate finance in 2023, funding for adaptation continues to lag behind mitigation^[2]. In fact, public money for adaptation from richer nations fell in 2023, partly due to a decline in funding from MDBs^[3]. The quality of finance is also a concern, as 67% of MDB climate finance to developing economies between 2019 and 2023 came as investment loans, while the share of grants decreased^[2]. This is problematic for the three-fifths of low-income countries already at risk of or in debt distress^[2]. In response to calls for reform, MDBs have pledged to provide $120 billion annually in climate finance for low- and middle-income countries by 2030, with $42 billion earmarked for adaptation^[10].

To bridge the funding gap, innovative financial instruments are emerging to mobilize significant new capital from the private sector, institutional investors, and philanthropists^[1]. These instruments often use creative design and risk-sharing to make investments more attractive^[1]. Key approaches include:

• Blended Finance: This method uses catalytic public or philanthropic capital to increase private sector investment^[8]. It leverages concessional capital to reduce risk or enhance returns for commercial investors^[1].
• Risk-Sharing and Insurance: Instruments like parametric insurance and catastrophe bonds provide quick liquidity after climate disasters^[1]. Credit guarantees, where an entity like an MDB covers potential loan defaults, also help de-risk investments for the private sector^[1].
• Resilience Bonds and Debt Instruments: The Asian Infrastructure Investment Bank (AIIB) launched a climate adaptation bond that raised AUD500 million for climate-resilient infrastructure^[1]. Other tools include climate-resilient debt clauses, which allow for a temporary pause on loan repayments after a disaster, and debt-for-nature swaps, where countries receive debt waivers for meeting conservation targets^[1].
• Results-Based Finance: These instruments channel funds toward projects that deliver tangible outcomes^[1]. Examples include Payment for Ecosystem Services (PES) arrangements and adaptation benefits mechanisms, which provide fiscal credits for achieving adaptation goals^[1][8].

Effective adaptation finance translates into tangible, community-level projects, with a growing emphasis on Nature-Based Solutions (NbS)^[4]. NbS offer cost-effective, long-term strategies that enhance resilience while providing co-benefits for biodiversity and local livelihoods^[4]. For example, the Landscape Resilience Fund, supported by partners like the WWF and Chanel, invested in Koa, a Swiss-Ghanaian cocoa company^[1]. This initial investment helped secure over $5 million in additional private funding to enhance cocoa production and improve farmers’ resilience in Ghana^[1]. In Kenya, a blended finance project combined community equity, World Bank grants, and microfinance loans to connect 1,500 households in arid regions to new and improved water infrastructure^[8]. In Nepal, a concessional loan from the International Finance Corporation was blended with private equity to help small and medium-sized agribusinesses adopt climate-resilient practices for key crops like rice and maize^[8]. Another innovative model is the Quiroz-Chira Water Fund in Peru, which uses a Payment for Ecosystem Services (PES) mechanism. Downstream water users, including municipalities and water boards, voluntarily contribute to a fund that finances upstream conservation and ecosystem recovery, protecting the water source for over 500 families and impacting over 18,000 hectares of land^[8].

A critical challenge in climate adaptation is the lack of tools to easily answer the question, 'how resilient are we?'^[14]. While many indicators exist to measure social vulnerability and climate hazards, they do not reveal whether the systems that form the core of resilience are functioning effectively^[14]. Measuring the progress and outcomes of adaptation strategies is crucial for assessing and optimizing their effectiveness^[5]. This requires developing both process-related metrics, which track planning and resource allocation, and outcome-related metrics, which assess performance during shocks and stresses^[5]. As a model, the U.S. federal government developed a common set of five process-related indicators for its Climate Adaptation Plans, covering whether resilience is integrated into budgeting, data systems are updated, policies incorporate nature-based solutions, supply chains are evaluated for risk, and staff are trained^[5]. To be effective, indicators must be aligned with stakeholder priorities^[14]. A project in New York City analyzed 41 community-based resilience plans to identify shared goals and develop corresponding indicators^[14]. The ultimate goal is to create user-friendly tools, such as a 'resilience report card,' that can help officials triage funding, enable advocates to build public pressure for government action, and empower communities to guide local resilience planning^[14].