Decoding Urban Adaptation Finance

The devastating wildfires in California are yet another reminder that people in cities across the world are facing varied, recurrent and intense impacts of climate change. It has never been more evident that climate action is the need of the hour. Then why do challenges to climate financing persist?

Jaya Dhindaw, Executive Program Director of our Sustainable Cities program and Director of WRI India Ross Centre decodes urban adaptation finance and the challenges to enabling it, in conversation with Aditi Sundan. The following is an edited transcript of the conversation.

Aditi: First and foremost, let's address the fundamental question – what is the difference between adaptation finance, mitigation finance and finance for loss and damage?

Jaya: So, let me start by talking about adaptation finance. These are financial resources to help countries, communities or sectors adjust to the impacts of climate change. This includes efforts to reduce vulnerability to climate change impacts – such as extreme weather, sea level rise, change in precipitation etc. – by enhancing resilience measures. Adaptation finance supports projects that help communities, particularly vulnerable populations, adapt by strengthening basic infrastructure or improving resource management, and has broader Sustainable Development Goals benefits, including safeguarding biodiversity, bolstering food security and improving health outcomes.

Mitigation finance is the financial support that is directed towards reducing greenhouse gas emissions, such as supporting renewable energy, improving energy efficiency and decarbonizing transport and industries.

While there's no official definition of loss and damage under the UN, it broadly refers to the financial resources that support countries and communities in dealing with the losses and damages caused by climate change impacts that cannot be fully mitigated or adapted to. This is also largely directed towards developing or vulnerable countries. Loss and damage addresses the irreversible losses such as loss of life, culture and biodiversity. The goal of this type of finance is either compensation for the affected population or financial support for recovery.

Let me share some numbers to illustrate the current state. Globally about 4% to 8% of tracked climate finance goes towards adaptation and the majority is towards mitigation. As per estimates, developing countries need about $212 billion per year by 2030 to address their adaptation needs. About 98% of adaptation finance comes from the public sector, and the private sector's contribution is fragmented. Annual mitigation finance in 2021-2022 was about $1.2 trillion. To keep global temperature rise within 1.5°C by the end of the century, it needs to grow to over $8.4 trillion by 2030 and $10.4 trillion by 2050. So that tells you about the gap in mitigation finance as well. Since the establishment of the Loss and Damage Fund in 2022 at COP 27, about $700 million has been pledged, but the estimated loss and damage requirement by vulnerable nations is anticipated at $580 billion per year till 2030. All this to say that our climate finance needs are enormous, and we quickly need to secure this funding to avert further losses to our economy, people and systems.

Aditi: As you mentioned, climate finance takes place at various levels, let’s talk a little about urban climate adaptation finance. What kind of climate risks do Indian cities face and what role can urban adaptation finance play in countering these risks?

Jaya: India is the 7th most vulnerable country to climate risks in the world, with 17 out of 20 people being highly vulnerable to climate change and its compounding impacts. 80% of India’s population suffered heat stress in just the first 15 days of April in 2024. This is some of the analysis that WRI India has carried out. We also know that about 50% of people in urban areas live in informal settlements and during periods of heat, these settlements are up to 6-8°C hotter than the surrounding formal settlements. As per some estimates, about 1.5 million people have been displaced in the country due to climate change in just the last few years.

The poor state of urban planning in our cities has further compounded this. For instance, Bangalore has grown by about 170% in the last three decades, mostly in the peripheries where much of its natural infrastructure exists. The grey infrastructure has now reduced the natural infrastructure in these areas by 50%, and the groundwater recharge potential by 50% to 60%. Consequently, just 20 millimeters of rain, within a couple of hours, results in a waterlogged city.

A quarter of the city's population lives in these kind of flood prone areas, and this is a pattern we see recurring in every Indian city. The smaller, tier-2 or tier-3 cities and towns are more vulnerable because they do not have adequate resources, influence and capacity to overcome these challenges. Heat waves, one of the most pressing climate risks of our time, have not been notified as a disaster in our country, making it ineligible for any kind of disaster relief programs. Adaptation finance can help move us from disaster response post facto to resilience and preparedness, which is really the need of the hour.

Aditi: Even as public and private investment climate finance have increased, much of it has gone towards mitigation with very little going to adaptation. What are some of the challenges to financing adaptation and who is most at risk in the absence of it?

Jaya: The way I have made sense of this is that mitigation measures are easily productized. You can create tangible products whether it's solar rooftops or electric vehicles, which have a very clear return on investment, therefore it is more easily financed. That's part of the reason. Adaptation, very community centric, highly localized, such as mangrove restoration or wetlands protection, is not easily productizable.

Adaptation projects and measures, which for all the right reasons are context sensitive, often don't find funding due to the limitations of project readiness towards implementation. These projects typically have three stages – project preparation, implementation, and operations and maintenance. Funders focus only on the implementation part, not the entire value chain of adaptation and resilience. Focus is not on project preparation upfront, which needs to be really sound and robust, or the operation and maintenance models, which need to be very well thought out and have good business underpinnings.

There are several barriers. One, many solutions for local and urban adaptation and resilience are nature based and have long time horizons to implement and mature. Then, monitoring and measuring effectiveness is difficult. With grey infrastructure, you can say how much water a pipe will manage. Furthermore, it is difficult to build an economic case, since there are ethical dilemmas – should such infrastructure be charged or monetized? So, there's a lack of monetizing frameworks. There's also the issue of scale, unless you combine or aggregate, you don't have large-scale opportunities which will attract investors. Then, since the risks are often not clear because of information and data gaps, the risk return profile of most projects do not end up meeting investors’ criteria.

Most of these projects also require a multisectoral approach, often across administrative boundaries. Solutions needed at the watershed level, for instance. But our cities function in a very siloed way so there are no cooperation mechanisms or incentives to enable these projects. Cities also lack the local capacities and cohesive policies needed to integrate climate resilience into their broader development plans. Together these reasons result in the lack of a pipeline of bankable projects that are investor ready. And that's what makes it so difficult.

Who is impacted the most? Clearly vulnerable communities and the informal sector. 80% of our economic base is informal sector workers. People who are gig economy workers, construction workers. If you look at a typical city vulnerability profile, about a quarter to half of the population lives in places with higher climate risk exposure. And these are the people that are getting impacted.

Aditi: What role can nature-based solutions (NbS) play in building the resilience of vulnerable groups considering the financing challenge and the ethicality concerns?

Jaya: Basically, nature-based solutions refer to sustainable management of nature to address societal challenges. I think of these as solutions by the nature, of the nature and for the nature. They can be standalone solutions like improving wetlands, or in combination with grey infrastructure solutions for things like wastewater management. They can also be used to protect grey infrastructure solutions, like planting on the slopes of hills to protect the roads there. The good thing about NbS is that when you consider life cycles, they offer a low cost, scalable and resilient way to adapt to climate change.

Grey infrastructure solutions typically only solve the problem that they are designed for, like moving water or blocking floods using retaining walls. NbS, on the other hand, offer multiple co-benefits like biodiversity protection, job and livelihood creation, and improved ecosystem services. That's why they're very appealing for communities and are gradually becoming appealing for a wider spectrum of stakeholders. At a localized level this can take the form of planting and digging recharge pits, at the meso level it can create city resilience through blue-green infrastructure networks, and at a macro level nature-based solutions can supplement grey infrastructure to make it more effective both in terms of costs and impacts.

Every solution has pros and cons and can maladapt if not done right. So, while NbS is proving to be a very promising and effective solution in local and urban contexts, it is not a silver bullet.

Aditi: How can we make finance accessible to small businesses seeking to adapt to the increasing impacts of climate change?

Jaya: MSMEs are an important sector to consider given that they’re a big part of our economic system and a lot of them, about 60% are located in Tier 2 and Tier 3 cities and remain highly vulnerable to climate risks. One way to make finance accessible for them is creating tailored financial products like micro loans, blended finance or green bonds. Loans which have low interest rates, longer repayment period and climate specific terms can be helpful for MSMEs. There are examples of microfinance institutions in countries like Bangladesh and Kenya, which have been instrumental in providing small loans for sustainable energy solutions and creating flood resilience for small businesses.

Second, of course, is nature-based solutions. Things like rainwater harvesting and green roofs offer cost-effective, scalable ways for small businesses to build climate resilience and offset some of the operational costs, which can rise due to climate risks. Blended finance mechanisms to enable nature-based solutions is an area where we are experimenting with even in India, in Mumbai the Brihanmumbai Municipal Corporation is leading this.

MSMEs can undertake climate risk assessments through tools like the Climate Hazard Vulnerability Assessment by WRI India which can help them understand the climate impacts they face and identify appropriate adaptation measures well in advance. Innovation and technology can democratize access to finance and connect them with funding opportunities through digital platforms or crowd funding.

There's also policy support, which is critical for creating an enabling environment for adaptation finance, integrated with incentives like tax breaks, capacity and skill building efforts. Finally, partnerships are key. At the end of the day, numerous MSMEs are dependent on large businesses for their revenue. Partnerships between public and private sector can facilitate the flow of finance to where it's needed most and empower smaller industries. By combining a set of these approaches, climate finance can become more accessible, inclusive and impactful for smaller businesses.

Aditi: Considering the role of transnational and private funding from multilateral organization in enabling climate adaptation in the developing world, how is India expected to be impacted by the global political landscape?

Jaya: The US administration’s decision to scale back contributions to climate finance has created uncertainty for developing nations, including India, since substantial resources and funding for climate action emanates from the US. Second, the diminished US leadership on climate initiatives has sent mixed signals to private financiers globally, potentially reducing their already small contribution in this space and their ability to disburse funds. This can slow the momentum of investments towards things like sustainable or green infrastructure.

However, this is an opportunity to turn adversity into strength and innovate. If we look at options, one is that there will be a shift towards other partners and countries. Second, the role of bilaterals and multilateral development banks and their continued support on India's climate adaptation work is going to remain very important and will partly offset the US disengagement.

With reduced transnational support, India must emphasize its domestic climate policies, urban resilience programs, etc. Indian corporations and private investors will need to play a larger role in climate adaptation projects driven by government incentives and market opportunities. MSMES and startups can also innovate on the solutioning side for cost-effective solutions to support adaptation and mitigation efforts.

India can play a leadership role in the global South, building south-south cooperation on climate action and improving climate finance to fill the gaps left by US. International solar alliance is one example of India taking up such a leadership role in the past, along with France, to promote solar energy deployment in developing nations.