Inventory of Innovative Financial Instruments for Climate Change Adaptation

Closing the gap between available financing for climate change adaptation and the needs of developing countries requires looking beyond traditional sources of finance—i.e., grants and (concessional) loans—to innovative financial instruments and mechanisms that can unlock (private) investment. These instruments are increasingly viewed as a means to scale up the investment needed for countries to achieve their climate adaptation goals.

“Innovative financial instruments for climate change adaptation” include mechanisms and approaches that can be used to acquire, structure, govern, and allocate financial resources toward adaptation priorities. They can enable access to financial resources from financial institutions, private investors, institutional investors (such as pension funds), impact investors, foundations, and other philanthropists, and may be blended with traditional sources of financing.

This inventory provides information on a range of innovative financial instruments that have been used, or potentially could be used, to finance the implementation of climate change adaptation measures, including the national priorities identified in National Adaptation Plans (NAPs). It includes

  • mature instruments – instruments that have been used for many years for other purposes and that could be adjusted to finance climate change adaptation;
  • emerging instruments – newer instruments that may or may not have been developed specifically to finance climate adaptation; and
  • pilot instruments – instruments that are currently being developed to finance climate adaptation and that may be applied in the near future.

The inventory is intended to inform governments, project developers, and financiers about available instruments and how they have been used, or could be used, to increase resilience to climate change. It

  • describes each of the instruments;
  • identifies sectors in which the instruments currently or potentially could be used to support the implementation of climate adaptation measures and actions;
  • presents considerations for their use (by developing countries); and
  • provides illustrative examples of how they have been used to support climate adaptation.

A summary provides an overview of the included instruments, the sectors in which they might be applied, and where they have been used.

Please select a category of financial instruments

Financial risk management is the process of identifying and analyzing the uncertainty in investment decisions. The financial instruments used to mitigate identified risks are called financial risk management instruments. They serve to transfer risks away from one party to another party that is better able to underwrite or manage the risk, such as an insurer. Examples include public–private partnerships, credit-enhancement tools, and catastrophe bonds. 

Adapted from this source:

United Nations Environment Programme. (2004). Financial risk management instruments for renewable energy projects: Summary document. https://energy-base.org/app/uploads/2020/03/1.SEFI-Financial-Risk-Management-Instruments-for-Renewable-Energy-Projects-2004.pdf 

(Parametric) Catastrophe Bonds

Case Studies

  • A catastrophe bond (CAT bond) is a high-yield debt instrument that was initially designed for insurance/reinsurance companies but is increasingly used by government bodies and other businesses to protect themselves against catastrophe-linked losses. A CAT bond mitigates the impacts of large payouts in the event of a natural disaster by allowing the issuer (such as the insurance company) to receive funding from the bond only if a specific predefined catastrophic event occurs, such as a hurricane causing USD 500 million in losses.

    If the event occurs, the insurance company retains the bond proceeds to cover the cost of the catastrophe damages, and its obligation to pay interest and repay the principal to the buyer of the bond is either deferred or completely forgiven. If the event does not occur, the investor (buyer of the bond) receives interest and full principal repayments.

    CAT bonds tend to cover short time periods (3 to 5 years). Buyers of CAT bonds tend to be hedge funds, pension funds, and other institutional investors. These investors usually seek diversification in their investment portfolios and are willing to accept the default risk in return for higher interest payments.

    Parametric CAT bonds can also be issued by multilateral development banks and sovereign governments. For example, the World Bank has issued CAT bonds that provide insurance for protection against natural disasters and weather events in countries such as Mexico, the Philippines, and Jamaica. Some countries, such as the Philippines, have both catastrophe bonds that are triggered by established parameters (such as modelled loss, wind speeds, and precipitation) and Deferred Drawdown Options for Catastrophe Risks financing that is designed to be accessible before the CAT bond.

     

    Current or potential adaptation-relevant sector applications:

    • disaster risk reduction.

     

    Additional insights:

    • This is a mature instrument, introduced in the 1990s when the American insurance industry was coping with a series of costly catastrophes resulting mainly from devastating hurricanes.
    • Mexico was the first country to utilize CAT bonds, in 2006.

     

    Considerations for issuing a CAT bond:

    • Many developing countries have received support from multilateral development banks and bilateral donors to structure and issue CAT bonds.
    • CAT bonds require long structuring periods, legal expertise, and the definition of strict terms and conditions.
    • Generally, CAT bonds are complex investment vehicles and have relatively higher transaction costs than other financial instruments.

     

    Adapted from the following sources:

    Henry, P. (2021). Explainer: How catastrophe bonds help manage the risk of climate change. World Economic Forum. https://www.weforum.org/agenda/2021/11/catastrophe-bond-finance-insurance-climate-change-natural-disaster/

    Rabener, N. (2021, June 21). Avoiding disaster with catastrophe bonds? CFA Institute. https://blogs.cfainstitute.org/investor/2021/06/21/avoiding-disaster-with-catastrophe-bonds/

    White, S. A., Blake, D, Koch A. C., Goring, K., Tumuluru, K., Radki, A., & Pal, R. (2022, August 16). The G7 takes on climate change: Are catastrophe bonds an answer? Millliman. https://www.milliman.com/en/insight/meeting-the-g7-commitment-to-disaster-financing-with-catastrophe-bonds

    World Bank. (2021, July 19). World Bank catastrophe bond provides Jamaica $185 million in storm protection [Press release]. https://www.worldbank.org/en/news/press-release/2021/07/19/world-bank-catastrophe-bond-provides-jamaica-185-million-in-storm-protection

  • Extreme Climate Facility (XCF) of the African Risk Capacity

    In 2014, the African Risk Capacity (ARC) (a mutual insurance facility of the African Union) launched the concept of the Extreme Capacity Facility (XCF). It has since continued to work toward establishing the facility as a multi-year funding mechanism issuing CAT bonds to provide additional financing to ARC members to enable them to manage climate risks. These bonds will be used to blend private capital for climate change adaptation/resilience projects into the XCF funds in eligible African countries. The ARC programs offer protection against droughts, wind hazards, storm surges and wave damage, and flood risks.

    Adapted from the following sources:

    African Risk Capacity. (2018). Extreme Climate Facility. https://www.arc.int/extreme-climate-facility

    Evans, S. (2019, October 23). ARC progresses climate cat bond facility XCF, signs up UN support. Artemis. https://www.artemis.bm/news/arc-progresses-climate-cat-bond-facility-xcf-signs-up-un-support/

  • World Bank Catastrophe Bond in Jamaica

    In 2021, the World Bank issued a CAT bond that provided the Government of Jamaica with financial protection of up to USD 185 million against losses from named storms for three Atlantic tropical cyclone seasons ending in December 2023. Payouts to Jamaica would have been triggered when a named storm event met the parametric criteria for location and severity set forth in the bond terms. The transaction included an innovative reporting feature resulting in a quick payout calculation within weeks of a qualifying named storm.

    Adapted from the following source:

    World Bank. (2021). World Bank catastrophe bond provides Jamaica with financial protection against tropical cyclones [Case study]. https://thedocs.worldbank.org/en/doc/43a111757d3b1ff1cabde80ee7eb0535-0340012021/original/Case-Study-Jamaica-Cat-Bond.pdf

  • Residential Reinsurance

    USAA Insurance, which provides financial services to U.S. military veterans, issued its 38th catastrophic bond in 2021. The USD 300 million special purpose Residential Reinsurance catastrophe bond would provide USAA with 4 years of reinsurance protection against losses from a range of perils, including many that address climate-related hazards such as tropical cyclones, severe thunderstorms, winter storms, and wildfires. The money raised with the bond is set aside to cover potential losses. If triggers are reached, such as insured losses from a hurricane hitting a specific level, USAA Insurance can use the money to offset what is to be paid out to policyholders.

    Adapted from the following source:

    Artemis. (2022). Residential Reinsurance 2021 Limited (Series 2021-2). https://www.artemis.bm/deal-directory/residential-reinsurance-2021-limited-series-2021-2/

Contingent Line of Credit – Liquidity facility

Case Studies

  • Contingent lines of credit are loans that provide countries with immediate financial liquidity following a defined event. They can help countries face natural disasters, including extreme weather events such as droughts, hurricanes, and typhoons. They have also been used to address health crises, such as the COVID-19 pandemic.

    The Asian Development Bank, Inter-American Development Bank, and World Bank have contingent credit facilities for natural disaster emergencies that disburse funds to countries that are impacted by a verifiable disaster event. The terms of the loan are negotiated in advance to enable the borrower to rapidly meet its financing requirements during times of shortfall due to disasters. The terms include the types of natural disasters that are covered (such as hurricanes and floods), the parametric triggers used to confirm that a disaster has occurred, the payout, and the timeline of the payout.

    Current or potential adaptation-relevant sector applications:

    • disaster risk reduction – early warning and observation systems, and
    • social infrastructure – health facilities.

     

    Additional insights:

    • This is a mature instrument introduced by the World Bank in 2008.

     

    Considerations for using liquidity facilities:

    • Multilateral development banks typically require that other measures be in place, such as a disaster risk management program, to mitigate the probability of accessing the facility.
    • Recipients require an adequate macroeconomic policy framework and satisfactory disaster risk management program.

     

    Adapted from the following sources:

    Bruce, G. L. (2019, September 10). What is the Contingent Credit Facility? Inter-American Development Bank. https://blogs.iadb.org/caribbean-dev-trends/en/what-is-the-contingent-credit-facility/

    Development Asia. (2018). Explainer: Mobilizing contingency funds for climate-related disasters. https://development.asia/explainer/mobilizing-contingency-funds-climate-related-disasters

    Lu, X., & Abrigo, R. (2019). Contingent disaster financing under policy-based lending in response to natural hazards. Asian Development Bank. https://www.adb.org/sites/default/files/institutional-document/518061/disaster-financing-policy-paper.pdf

  • Development Policy Loan with a Catastrophe Deferred Drawdown Option

    A development policy loan with a catastrophe deferred drawdown option (Cat DDO) is a financing and risk management instrument provided by the World Bank to help clients address economic shocks. It is a contingent credit line allowing a borrower to rapidly meet its financing requirements following a shortfall in resources due to either a health-related crisis (e.g., the COVID-19 pandemic) or a natural disaster (e.g., drought, hurricane, or typhoon). It is intended to provide immediate liquidity until a country can secure additional financing through either loans or bilateral aid. Access to the line of credit is contingent upon the occurrence of a defined major event, typically the client country’s declaration of a state of emergency.

    A Cat DDO enables eligible World Bank borrowers to activate up to USD 250 million or 0.5% of GDP, whichever is lower, per country from the International Development Association. Countries that sign up for the Cat DDO must have an adequate hazard risk management program in place that is monitored by the World Bank.

    DDOs are being used by developing countries to respond to climate-related and other natural disasters. For example, Sri Lanka accessed the Cat DDO loan in 2016 following the declaration of a state of emergency after torrential rainfall caused floods and landslides. The Cat DDO agreements with Colombia, the Dominican Republic, Kenya, and the Philippines specifically mention risks from climate shocks and extreme climatic events.

    Adapted from the following sources:

    World Bank. (2021). WB approves credit line for managing risks from climate change, natural disasters and disease outbreaks. https://www.worldbank.org/en/news/press-release/2021/11/17/wb-approves-credit-line-for-managing-risks-from-climate-change-natural-disasters-and-disease-outbreaks

    World Bank. (2023). IBRD Catastrophe Deferred Drawdown Option (Cat DDO) [Product note]. https://thedocs.worldbank.org/en/doc/1820b53ad5cba038ff885cc3758ba59f-0340012021/original/Cat-DDO-IBRD-Product-Note.pdf

    World Bank. (2023). IDA Catastrophe Deferred Drawdown (Cat DDO). https://thedocs.worldbank.org/en/doc/ab4dba2d33ec13b86a413fcd3bf0a26f-0340012023/original/IDA-CAT-DDO-Product-Note.pdf

Credit Guarantees

Case Studies

  • Credit guarantees have been described as “mechanisms in which a third party—the guarantor—pledges to repay some or the entire loan amount to the lender in case of borrower defaults” (Gozzi & Schmukler, 2016). This reduces the lender’s expected credit losses, even if the probability of default remains unchanged, acting as a form of insurance against default. In other words, guarantees seek to augment the risk/return calculations of lenders to make project loans more attractive.

    Guarantees in developing countries are most popular in structuring financing in which a multilateral development bank, bilateral development partner, or government entity will guarantee the repayment of a loan taken by a project developer. In essence, the guarantor indicates to the lender, usually a financial institution, that it will pay on behalf of the developer if the developer is unable to repay the loan. Multilateral development banks, bilateral development partners, and government entities undertake this risk to incentivize more lending and investment in sectors and countries in which lending from financial institutions is constrained and/or less common. In some instances, guarantees will be paired with technical assistance to further enhance the chances of repayment.

    Guarantees could be especially crucial for adaptation projects that have less of a track record and are unfamiliar to investors, or adaptation projects that are predicted to have lower or more volatile returns on investment. In addition, credit guarantee schemes that make investment financing available and affordable for small and medium enterprises can be used to encourage investment in adaptation actions that help these enterprises prepare for weather disasters, drought, and rising sea levels. They can also provide emergency finance for small and medium enterprises impacted by climate-related disasters.

     

    Current or potential adaptation-relevant sector applications:

    • crop and food production – crop production (including agroforestry); livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
    • ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
    • water supply (infrastructure) – water storage; water harvesting; water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
    • disaster risk reduction – early warning and observation systems;
    • energy infrastructure – energy generation (including renewables);
    • transport infrastructure;
    • other built environment and infrastructure – urban development;
    • social infrastructure – education; health facilities; and
    • industry and manufacturing.

     

    Additional insights:

    • This is a mature instrument that first emerged in the 19th and early 20th centuries. It is widely used in over 100 countries.

     

    Considerations for using credit guarantees:

    • The project/initiative should be close to being “fundable” without the guarantee, to avoid situations in which the amount of the required guarantee is so large that no third party (e.g., a multilateral development bank) will offer it.
    • Guarantees are normally held on guarantor balance sheets for the full amount and thus, from the perspective of the guarantor, are less popular than other instruments (i.e., loans) because they generate fewer fees and offer less collateral.

     

    Adapted from the following sources:

    Gozzi, J. C., & Schmukler, S. (2015, October 23). Public credit guarantees and access to finance. European Economy. https://european-economy.eu/leading-articles/public-credit-guarantees-and-access-to-finance/

    International Institute for Sustainable Development & MAVA Fondation pour la Nature. (2020). Credit enhancement instruments for infrastructure. https://www.iisd.org/credit-enhancement-instruments/

    Organisation for Economic Co-operation and Development. (n.d.). Facilitating access to finance: Discussion paper on credit guarantee schemes. https://www.oecd.org/global-relations/45324327.pdf

    World Bank. (2022). Guidelines for integrating climate change mitigation and adaptation in public credit guarantee schemes for small and medium enterprises. World Bank Group. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099512111082215393/idu0ef1c33d00fa6c04e180991a0e47a751befcb

  • The Green Guarantee Company

    The Green Guarantee Company, announced in 2022, is the first privately run guarantee company committed to catalyzing climate bonds and loans in developing countries. The company institutionalizes credit enhancement with the aim of attracting investment into climate projects. The company will provide guarantees to mobilize USD 1.6 billion in climate finance for about 40 large-scale climate adaptation and mitigation investment projects in countries that are eligible for official development assistance. The GCF and the United States have provided seed funding for the Green Guarantee Company, which is being implemented in partnership with MUFG Bank Ltd, with the Development Guarantee Group acting as the executing entity. The United Kingdom is providing funding for a linked technical assistance facility, and European financial institutions and national development banks will implement the investment projects.

    Adapted from the following source:

    The Green Guarantee Company. (2023). Guarantees for a greener world. https://greenguarantee.co

  • Tanzania Agriculture Climate Adaptation Technology Deployment Programme

    The Tanzania Agriculture Climate Adaptation Technology Deployment Programme was initiated to increase access to agricultural technologies for climate adaptation. Supported by a USD 70 million concessional loan from the GCF, the program includes the establishment of a lending and de-risking facility to increase access to affordable technologies, as well as to provide technical support and raise awareness of climate change risks within the private sector and government.

    The lending and de-risking facility is developing customized financial products that support climate adaptation and resilience in agriculture in Tanzania, particularly for smallholder farmers. Blended financing from the GCF and the CRDB (an African commercial bank) creates a credit line for CRDB’s Agriculture Resilience and Adaptation lending program, which eases lending for smallholder farmers looking to invest in adaptation and resilience technologies. CRDB will also collaborate with insurance companies to create a resilience and adaptation insurance scheme for smallholder farmers. The success of innovative technologies that result from this program is expected to justify further scale-up and attract private investment, which will help to proliferate both resilience and adaptation technologies and financing products throughout the country.

    Adapted from the following source:

    Green Climate Fund. (n.d.). Tanzania Climate Adaptation Technology Deployment Programme (TACATDP). https://www.greenclimate.fund/project/fp179

  • Water and Waste Disposal Loan Guarantees

    The United States Department of Agriculture has a water and wastewater loan guarantee program that aims to increase private investment in rural businesses and economic development projects. The program provides an 80% guarantee for loans to approved entities to construct or improve facilities for drinking water, sewers, solid waste disposal, and stormwater disposal systems. The program helps private lenders provide affordable financing to public bodies, non-profit businesses, and Indigenous groups.

    Adapted from the following source:

    United States Department of Agriculture. (n.d.). Water & waste disposal loan guarantees. https://www.rd.usda.gov/programs-services/water-environmental-programs/water-waste-disposal-loan-guarantees

Crowdfunding and Investment Platforms

Case Studies

  • Crowdfunding platforms can serve to connect (individual) private investors with projects and entrepreneurs that need (upfront) capital to start or scale their impact-driven venture. Crowdfunding and the investment platforms described here refer to the financing of profitable projects that are able to pay back borrowed capital with interest (as opposed to fundraising donations for non-profits).

    The value of crowdfunding platforms lies in their function to aggregate capital from multiple investors (small private investors, investment funds, donors—each of whom provides a relatively small amount of money) and channel the capital into multiple projects and businesses seeking investment. Project selection (eligible borrowers), risk assessment, and due diligence are done by the crowdfunding platform provider or a partner company. These platforms typically operate as an Internet-based platform and often function without standard financial intermediaries. The platform presents information about the projects to be funded, such as their credit risk rating, financing needs, return on investment, and positive environmental or social impacts.

    The platform operator enters into a loan agreement under commercial terms with the selected borrower and allocates raised funds to these borrowers. The borrower is usually required to pay an administration fee for setting up the funding scheme and interest payments, depending on the risk profile and financing period. However, fees and interest payments are usually lower than conditions at commercial banks. The crowdfunding provider will pay out the principal and return on investment to investors according to the terms of projects they decided to finance via the platform.

    Sustainability-oriented crowdfunding platforms have used various models including loans, rewards, donations, and a hybrid combining the various approaches. All types of platforms could support adaptation projects, with the reward and donation platforms tending to support small, community-oriented projects.

     

    Current or potential adaptation-relevant sector applications:

    • crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
    • water supply (infrastructure) – water storage; water harvesting; water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
    • other built environment and infrastructure – urban development; and
    • social infrastructure – education; health facilities.

     

    Additional insights:

    • This is an emerging instrument. Crowdfunding is beginning to be used to scale up finance for climate adaptation.
    • The term “crowdfunding” first appeared in 2006.

     

    Considerations for using crowdfunding and investment platforms:

    • Crowdfunding typically helps entrepreneurs of new technologies fund their projects before getting a loan or supports small-scale community or local initiatives.
    • It has been used mostly for small-scale interventions.
    • The newness of the technology may not be appealing to all investors and may be open to increasing regulation.
    • Crowdfunding requires a large number of donors/funders.
    • Attracting the attention of potential donors/funders to an initiative among the many on these platforms can be challenging.
    • Projects funding public goods such as adaptation benefits may benefit from financial and non-financial government support to ensure success.

     

    Adapted from the following sources:

    Maehle, N., Otte, P. P., & Drozdova, N. (2020). Crowdfunding sustainability. In R. Shneor, L. Zhao, & B.-T. Flåten (Eds.), Advances in crowdfunding: Research and practice (pp. 393–422). https://link.springer.com/chapter/10.1007/978-3-030-46309-0_17

    von Ritter, K., & Black-Layne, D. (2013). Crowdfunding for climate change: A new source of finance for climate action at the local level? European Capacity Building Initiative. https://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/paper_-_microfinancing_.pdf

  • European Institute of Innovation and Technology Climate Knowledge and Innovation Community

    The European Institute of Innovation and Technology Climate Knowledge and Innovation Community has initiated a new start-up investment program—“Found by us, funded by you”—to enable innovators to transform early-stage start-ups that apply commercial logic to tackle climate change. The program provides them with the equity investment they need to grow and take risks as they work toward a net-zero and resilient economy. The program seeks interesting clean-tech start-ups and provides investors with climate-aligned investment opportunities. The program is co-funded by the European Union and hosted by the Seedrs platform. The platform provides access to detailed information about featured start-ups, including their terms, pitch decks, and founder questions and answers. Seedrs also allows start-ups to close funding rounds faster, which allows them to focus on developing their core business.

    Adapted from the following source:

    European Institute of Innovation and Technology Climate Knowledge and Innovation Community. (n.d.). Home page. https://www.climate-kic.org/

  • Ghent Crowdfunding Platform

    The City of Ghent, Belgium, developed a crowdfunding platform in 2015 to finance the climate change measures proposed by its citizens. The city provides a fund of EUR 55,000 per year, and people who provide a minimum donation of EUR 5 to a project are known as supporters. The platform has produced two successful climate adaptation projects: Lekker dichtbij! and Edible Street. The first project supports mini green spaces on balconies in social housing complexes, which help to mitigate extreme temperatures in these urban spaces. Edible Street sees traditional stone facades transformed into vertical green spaces that stimulate local food production. The crowdfunding platform has performed as an excellent instrument to pilot climate adaptation projects and measure their potential to be scaled up.

    Adapted from the following source:

    Climate ADAPT. (2023, December 12). Ghent crowdfunding platform realising climate change adaptation through urban greening, Belgium. https://climate-adapt.eea.europa.eu/metadata/case-studies/ghent-crowdfunding-platform-realising-climate-change-adaptation-through-urban-greening

  • One Earth Project Marketplace

    One Earth, a non-profit organization headquartered in California, established the One Earth Project Marketplace, which is an online platform for climate change projects that require funding. The projects are identified and vetted by a network of partners in three areas: renewable energy, nature conservation, and regenerative agriculture. The platform aims to scale up climate philanthropy and has an emphasis on projects led by women, Indigenous peoples, and leaders of colour.

    Adapted from the following source:

    One Earth. (n.d.). One Earth Project Marketplace. https://www.oneearth.org/project-marketplace/

Debt-for-Nature Swaps

Case Studies

  • In a debt-for-nature swap, a country that has received development finance can cancel its debt if it agrees to earmark the funds it would have paid for debt servicing for financing programs that protect biodiversity. This arrangement supports biodiversity conservation in emerging and developing economies.

    Debt-for-nature swaps can be structured in two ways (Perera et al., 2018, p. 42):

    • “The creditor government waives all or a part of their credit rights, and the debtor government invests the equivalent value in biodiversity conservation.”
    • “The creditor government sells all or a part of the debt outstanding to an organization with the expertise to carry out biodiversity conservation work in the debtor country.” The debt is usually sold by the creditor government to the third-party organization at a price lower than its face value. The debtor country then repays the outstanding debt to the third party, who in turn uses the payments to fund biodiversity conservation efforts.

    In the first option, it is important to establish a fund into which the proceeds from the debt-for-nature swap will be invested. The establishment of a fund demonstrates the long-term commitment of the debtor government to using the debt-for-nature swap proceedings for conservation and enables the creditor government to monitor progress. It is best if the debtor government invests the proceeds in an environmental trust fund set up in their country. Grants or loans from the trust can then be used to finance the maintenance of the country’s protected areas and the conservation of biodiversity. Alternatively, proceeds from the debt-for-nature swap could be invested in an endowment fund that will ensure long-term, annual funding for projects. Typically, the trust fund or endowment fund is independent of government, although government representatives often sit on their boards of directors.

    There is also an adjusted debt-for-nature swap instrument called a subsidized debt swap. In this case, a non-governmental organization (potentially the organization implementing conservation projects) commits to providing complementary financial resources in addition to the debt-reduction commitment of a creditor government. This commitment can increase the overall financial volume and incentivize the implementing organization to use resources wisely and impactfully.

    Debt-for-climate swaps are an adjacent concept in which debt is exchanged for investment in climate change projects, although these are not necessarily strictly adaptation focused. There have only been a few small-scale climate-related debt-for-nature swaps, including Italy fulfilling EUR 38 million of its fast-start climate finance commitments via debt-for-nature swaps in Vietnam, Ecuador, and the Philippines.

     

    Current or potential adaptation-relevant sector applications:

    • ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
    • water supply (infrastructure) – water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures; and
    • disaster risk reduction – early warning and observation systems.

     

    Additional insights:

    • This is a mature instrument. It first emerged in 1987 to help address the Latin American debt crisis.
    • Debt-for-nature swaps had been used in over 30 countries and had restructured USD 2.5 billion of debt and released USD 1.2 billion into conservation projects by 2022. In 2022, debt-for-nature swaps were under evaluation for Gabon, Sri Lanka, Cape Verde, and Laos (United Nations Development Programme, 2023).
    • The average size and total volume of debt-for-nature transactions have been relatively small, and they typically have not been pursued to address debt sustainability, but rather to create fiscal scope to address nature and conservation priorities. Recent transactions in Belize (2021) and Ecuador (2023) may represent a scaling-up in volume.
    • There is renewed interest in debt-for-climate swaps, but the International Monetary Fund argues that the economic case is narrow. For example, debt-for-nature swaps may be worth pursuing if they can increase fiscal space for adaptation actions when grants are not available.

     

    Considerations for using Debt-for-Nature Swaps:

    • Legal certainty must be established by the creditor governments to assure that debt-for-nature swaps indeed lower the debt burden to the extent agreed.
    • Some donor countries have established eligibility criteria for debtor countries that include financial, political, economic, and/or environmental requirements.
    • Feasibility studies and due diligence commonly take place to prepare new debt-for-nature swaps. These are undertaken to identify the share of debt eligible for a debt-for-nature swap and the creditor’s willingness to swap, as well as to select financial vehicles to receive the newly available funds and terms for receiving proceeds.
    • The risk of corruption needs to be eliminated. The fund structure (financial vehicle) and a reliable implementation organization need to be carefully selected. The financial vehicle might also have a board consisting of members from the creditor and debtor countries.
    • Clear conservation targets need to be established and potential indicators defined to monitor performance and impact.

     

    Adapted from the following sources:

    Chamon, M., Klok, E., Thakoor, V. V., & Zettelmeyer, J. (2022). Debt-for-climate swaps: Analysis, design and implementation (IMF working paper). International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2022/08/11/Debt-for-Climate-Swaps-Analysis-Design-and-Implementation-522184

    Fuller, F., Zamarioli, L., Kretschmer, B., Thomas, A., & De Marez, L. (2018). Debt for climate swaps: Caribbean outlook. Climate Analytics. https://climateanalytics.org/media/debt_for_climate_swap_impact_briefing.pdf

    Perera, O., Wuennenberg, L., Uzsoki, D., & Cuéllar, A. (2018, July). Financing soil remediation: Exploring the use of financing instruments to blend public and private capital. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/financing-soil-remediation.pdf

    United Nations Development Programme. (2023). (Re)orienting sovereign debt to support nature and the SDGs: Instruments and their application in Asia-Pacific developing economies. https://www.undp.org/publications/reorienting-sovereign-debt-support-nature-and-sdgs-instruments-and-their-application-asia-pacific-developing-economies

  • Belize

    A debt-for-nature swap involving the government of Belize, The Nature Conservancy (TNC), the U.S. Development Finance Corporation, commercial creditors, and other partners took place in 2021. A TNC subsidiary lent funds to Belize to buy back a sovereign bond with a face value of USD 533 million (about 30% of Belize’s GDP) at a discounted rate of 55 cents per U.S. dollar. This was financed by issuing USD 364 million in blue bonds. The U.S. Development Finance Corporation provided political risk insurance to lower the credit risk and the cost of the blue bond. This allowed the loan to have a low interest rate, a 10-year grace period during which no principal is paid, and a long maturity of 19 years.

    In return, Belize agreed to use about USD 4 million per year to 2041 on marine conservation, to allocate a portion of the debt relief to pre-fund a USD 23.4 million marine conservation trust, and to double its marine-protection parks from 15.9% of oceans to 30% by 2026. An endowment fund of USD 23.5 million will finance ocean conservation and increase to an estimated USD 92 million by 2041. Because Belize owed creditors a large amount of money relative to GDP, the impact on the country’s overall debt-to-GDP ratio was significant.

    Adapted from the following sources:

    The Nature Conservancy. (n.d.). Case study: Belize blue bonds for ocean conservation. https://www.nature.org/content/dam/tnc/nature/en/documents/TNC-Belize-Debt-Conversion-Case-Study.pdf

    Owen, N. (2022, May 4). Belize: Swapping debt for nature. International Monetary Fund. https://www.imf.org/en/News/Articles/2022/05/03/CF-Belize-swapping-debt-for-nature

  • Seychelles

    In 2018, Seychelles became the first country to undertake a debt-for-nature swap to encourage marine conservation. The deal enabled Seychelles to swap USD 21.6 million in debt in exchange for the creation of two major marine reserves, helping the country achieve its goal of 30% marine protection. This is an example of a debt-for-nature swap where debt was sold at a discounted rate, and different organizations chipped in to fund conservation and climate adaptation projects. The Nature Conservancy’s low-interest loan of USD 15.2 million mobilized USD 5 million in grants from philanthropic foundations to buy the outstanding debt on behalf of Seychelles. The estimated savings for Seychelles were about USD 2 million per annum due to reduced debt service charges.

    The Government of Seychelles used proceeds from the debt conversion to capitalize the Seychelles Conservation and Climate Adaptation Trust. The trust, with additional resources mobilized from the Global Environment Facility and the United Nations Development Programme, provides funds to support marine protected areas, sustainable fisheries, and initiatives that contribute to the conservation and protection of biodiversity and climate change adaptation. This includes projects dealing with coral bleaching, examining the influence of oceans on select species, rehabilitating wetlands, mainstreaming disaster risk reduction, monitoring climate, and installing rainwater collection barrels. The trust distributes grant funding through the Blue Grants Fund and provides a loan scheme to improve fisheries management through the Blue Investment Fund, which is managed by the Development Bank of Seychelles.

    Adapted from the following sources:

    Payet, P. (n.d.). Debt for nature swap and blue bond. Ministry of Finance, Economic Planning and Trade. https://production-new-commonwealth-files.s3.eu-west-2.amazonaws.com/s3fs-public/2022-04/Patrick%20Payet_Seychelles-DfN%20Swap%20&%20Blue%20Bonds.pdf?VersionId=D66L_sebyWWujpMCt5RPdgbT0ikVFu1N

    Seychelles Conservation and Climate Adaptation Trust. (2024). Welcome to SeyCCAT. https://seyccat.org

  • Antigua and Barbuda

    As a result of the Finance for Acting on Climate in the Eastern Caribbean project funded by a grant from the Open Society Foundation, Antigua and Barbuda is being used as a pilot country for a debt-for-climate swap program. It is expected that the debt-for-climate swap will equal approximately USD 245 million, or 20% of the country’s public debt. The intention is that the pilot will be scaled to other small island developing states across the Eastern Caribbean.

    Adapted from the following sources:

    Alliance of Small Island States. (n.d.). Innovative AOSIS–OSF climate partnership aims to reduce island debt. https://www.aosis.org/innovative-aosis-osf-climate-partnership-aims-to-reduce-island-debt-2/

    The Commonwealth. (2022, July 22). Navigating climate finance as a small island state: Lessons from Antigua and Barbuda. https://thecommonwealth.org/news/navigating-climate-finance-small-island-state-lessons-antigua-and-barbuda

Green Revolving Fund

Case Studies

  • A green revolving fund has been defined as “an internal capital pool that is dedicated to funding sustainability projects that generate cost savings. A portion of those savings is then used to replenish the fund (i.e., the funds are revolved), allowing for reinvestment in future projects of similar value” (U.S. Department of Energy, n.d.). This establishes an ongoing funding vehicle that helps drive increased sustainability over time while generating cost savings and ensuring capital is available for important projects. Typically, the interest rates are at or below market rates. The funds are usually capitalized by public sources and managed in a manner that creates a repeated cycle of loans and repayments.

    Traditionally, green revolving funds in North America and Europe provided loans for sustainable energy and sustainable urban development projects. However, in the United States, several states have used state revolving funds to finance adaptation-related projects, including green stormwater and wastewater infrastructure and drinking water capacity projects.

    In addition, revolving funds have been used to support small projects in developing countries, including for adaptation. Repayment to the fund may not be through cost savings, but the fund enables community members to access funds at low interest rates with long repayment periods. Such funds are often established with seed funding from development partners.

     

    Current or potential adaptation-relevant sector applications:

    • ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
    • water supply (infrastructure) – water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
    • disaster risk reduction – early warning and observation systems;
    • other built environment and infrastructure – urban development; and
    • social infrastructure – education; health facilities.

     

    Additional insights:

    • This is a mature instrument. Green revolving funds have been used since the 1990s by educational institutions in the United States to fund climate mitigation projects related to energy efficiency and renewable energy.

     

    Considerations for using Green Revolving Funds:

    • Sufficient capital is required to seed the fund.
    • Green revolving funds seek projects that will pay back/reseed the fund regularly, which may be an impediment to funding long-term projects.

     

    Adapted from the following sources:

    Council of Development Finance Agencies. (n.d.). Revolving loan funds and development finance. https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/revolving-loan-funds.html

    Housing 2030. (n.d.) Revolving funds and auctioning – Austria, Czechia, France, Poland, Slovakia and Slovenia. https://www.housing2030.org/project/revolving-funds-and-auctioning/

    Urban Low Emission Development Strategies. (2021). Innovative financing for low emissions development: Revolving funds, intracting and community funding. What do they mean??https://urban-leds.org/wp-content/uploads/2021/11/Urban-LEDS-factsheet-_Innovative-Financing.pdf

    U.S. Department of Energy. (n.d.). Green revolving funds. https://betterbuildingssolutioncenter.energy.gov/toolkits/green-revolving-funds

  • State Revolving Funds – United States of America

    Federal–state partnerships support a number of water-related revolving funds in the United States. Grant funding from the federal government’s Environmental Protection Agency’s Drinking Water State Revolving Funds and its Clean Water State Revolving Funds can be used to reduce risks from disasters and natural hazards, including the effects of climate change. This can include the purchase and construction of resilience- and recovery-related infrastructure improvements, such as purchasing backup generators, constructing physical flood barriers, moving or modifying existing water facilities, and purchasing and conserving land to protect source-water areas. For example, with funding from the Clean Water State Revolving Fund, California and Oregon purchase and conserve land to protect source-water areas.

    In addition, the Federal Emergency Management Agency has established the Safeguarding Tomorrow Revolving Loan Fund program, which provides capitalization grants to states to enable low-interest loans to local governments to reduce their vulnerability to natural hazards and climate change and enhance community resilience. In October 2023, the Federal Emergency Management Agency granted a total of USD 50 million to seven American states and the District of Columbia to establish revolving loan programs that will support climate resilience and adaptation projects. Additional grants through the Safeguarding Tomorrow Revolving Loan Fund program are planned for 2024.

    Adapted from the following sources:

    Federal Emergency Management Agency. (2024). Safeguarding Tomorrow Revolving Loan Fund. https://www.fema.gov/grants/mitigation/storm-rlf#news

    Martinez, M. (2019). Using state revolving funds for land conservation. Conservation Finance Network. https://www.conservationfinancenetwork.org/sites/default/files/2019-02/CFN%20Toolkit%20-%20State%20Revolving%20Funds%20Rev.pdf

    United States Environmental Protection Agency. (2023). EPA state revolving funds and grants available to water and wastewater utilities. https://www.epa.gov/fedfunds/epa-state-revolving-funds-and-wifia-available-water-and-wastewater-utilities

  • The Maryland Shore Erosion Control Revolving Loan Fund

    The Maryland Shore Erosion Control Revolving Loan Fund provides zero-interest loans to households, businesses, and municipalities that own shoreline property and want to reduce shore erosion through natural solutions or living shoreline projects. These projects include bank grading, dune creation, and arch restoration. Technical assistance is also available in the form of site evaluations and issue assessments. The fund issues between 15 and 20 loans each year of up to USD 60,000, and loans can be repaid over 5, 15, or 20 years.

    Adapted from the following source:

    Crook, M. (2021). Fact sheet: How can revolving loan funds make our coast more resilient? Environmental and Energy Study Institute. https://www.eesi.org/papers/view/fact-sheet-how-can-revolving-loan-funds-make-our-coasts-more-resilient

  • Sustainable Island Resources Framework Fund – Antigua and Barbuda

    The adaptation window of the Sustainable Island Resources Framework Fund is a revolving loan program that disburses unsecured, low-interest loans (average size USD 14,550) to vulnerable homes and businesses to meet new adaptation guidelines and standards for built infrastructure. Loans are used to install rainwater harvesting systems, water efficiency retrofits, hurricane shutters, mosquito screens, and solar panels. The loan facility was capitalized with USD 3 million from the Adaptation Fund and USD 1.6 million from the Special Climate Change Fund, with the United Nations Environment Programme as the implementing entity.

    Adapted from the following sources:

    Adaptation Fund. (2021). An integrated approach to physical adaptation and community resilience in Antigua and Barbuda’s northwest McKinnon’s watershed. https://www.adaptation-fund.org/project/integrated-approach-physical-adaptation-community-resilience-antigua-barbudas-northwest-mckinnons-watershed/

    United Nations Environment Programme. (2023, October 18). How communal loans are helping Antigua and Barbuda brace for hurricanes. https://www.unep.org/news-and-stories/story/how-communal-loans-are-helping-antigua-and-barbuda-brace-hurricanes

Green Securitization

Case Studies

  • Securitization involves the pooling of financial assets into one group to form a new, sellable financial product. The financial assets that are pooled are usually loans or other debt, with regular cash flows being generated by the financial assets. These loans and debt must be fungible or interchangeable—that is, they have similar risk and return characteristics. The issuer pools loans into one group and usually transfers them into a newly created special-purpose vehicle, typically an asset-based security (ABS),  and then sells these repackaged assets to investors. The shares of these securities can be sold in secondary markets. This enables companies and lenders to sell off existing financial assets, which increases their liquidity.

    The instrument is defined as “green” when the underlying cash flows are derived from financial assets (i.e., loans) to fund low-carbon assets or when proceeds from the deal are earmarked to invest in low-carbon assets. Renewable energy, energy efficiency, and transport projects lend themselves to securitization due to their stable income profile and low operational risks. Incorporating physical climate risk considerations into the design of these projects could support climate adaptation efforts.

     

    Current or potential adaptation-relevant sector applications:

    • water supply (infrastructure) – water management;
    • energy infrastructure – energy generation (including renewables);
    • transport infrastructure; and
    • other built environment and infrastructure – urban development.

     

    Additional insights:

    • This is an emerging instrument for adaptation action in the water sector.
    • It is a mature instrument for other purposes, with the majority of green ABS issuance to 2021 taking place in the United States. There is increasing use in China, and a limited number of sustainable securitizations in Europe.

     

    Considerations for using securitizing assets:

    • This instrument requires multiple revenue-generating projects.
    • Securitization requires legal expertise and the definition of strict terms and conditions.
    • This tool is typically promoted with the active support of the government.

     

    Adapted from the following sources:

    Chen, J. (2023, September 29). Securitization. Investopedia. https://www.investopedia.com/terms/s/securitization.asp

    European Banking Authority. (2022). EBA report: Developing a framework for sustainable securitisation. https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2022/1027593/EBA%20report%20on%20sustainable%20securitisation.pdf

    Harwood, A. (2021). Accelerating securitization in Africa to finance the SDGs: Future flow securitizations. Milken Institute. https://milkeninstitute.org/sites/default/files/reports-pdf/Accelerating%20Securitization%20in%20Africa.pdf

    Rado, G. (2018, August 17). Green securitisation: Unlocking finance for small-scale low carbon projects. Climate Bonds Initiative. https://www.climatebonds.net/resources/reports/green-securitisation-unlocking-finance-small-scale-low-carbon-projects#:~:text=A%20securitisation%20can%20be%20defined,invest%20in%20low%2Dcarbon%20assets

  • United States Property Assessed Clean Energy Asset-Backed Security

    The U.S. Property Assessed Clean Energy scheme finances energy efficiency and renewable energy improvements that residential and commercial property owners can repay over time through their property tax bills. Revenue from property taxes is redistributed to leading agencies. This scheme passes on the funding and credit risk to the asset-backed security investors through the securitization of the loans, freeing up financing for new loans.

    Adapted from the following source:

    Energy.gov. (n.d.). Property assessed clean energy programs. Office of State and Community Energy Programs. https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs

  • Beijing Enterprises Water Group

    The Beijing Enterprises Water Group in China operates 19 water treatment plants under takeover–operate–transfer or build–operate–transfer contracts in 16 municipalities. The proceeds of the green ABSs, backed by fees from water treatment services, are allocated to nine water infrastructure projects to support pollution prevention, resource recycling, and climate change adaptation categories under China’s green bond catalogue. The first Chinese green ABSs were issued in 2016, and the green ABS market has grown rapidly, comprising 11% of China’s green bond issuance in 2020.

     

    Adapted from the following sources:

    Climate Bond Initiative. (2018, March). Green securitisation: Unlocking finance for small-scale low carbon projects (Briefing paper). https://www.climatebonds.net/files/reports/green_securitisation_cbi_conference_final.pdf

    Climate Bond Initiative. (2020). China green securitization report: State of the market 2020. https://www.climatebonds.net/files/reports/cbi_cn_2020_sotm_04h_1.pdf

Pooled Investment Funds

Case Studies

  • Pooled investment funds are financial vehicles that combine capital from different entities and then deploy that capital to projects/initiatives. These entities can be public, private, and/or not-for-profit. The entities can offer the investment fund different forms of capital, including grants, equity, or loans.

    Often, when public finance is combined with private finance, the resulting pool of resources is referred to as a blended finance investment fund. Usually, these types of funds have specific development or sectoral objectives and will only invest in projects that align with those objectives.

    Given the inclusion of public capital in blended finance investment funds, the returns that the investment fund seeks when making an investment can be lower. This allows those structuring the project or initiative financing to use this blended finance to lower the risk/return trade-off for other co-investors in the project or initiative. In many cases, this de-risking is intended to attract private sector capital to a project or initiative that otherwise would not have received commercial capital.

    Pooled investment funds for adaptation are in and of themselves unlikely to emerge given the difficulties in generating consistent revenue streams from these types of projects. However, climate investment funds can pair adaptation projects with revenue-generating mitigation projects to alleviate this constraint. Moreover, the greater the proportion of public finance included in an investment, the greater the influence that this finance could have on ensuring that projects are developed/implemented in a manner that accounts for projected physical climate hazards and risks.

     

    Current or potential adaptation-relevant sector applications:

    • crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
    • ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
    • water supply (infrastructure) – water storage; water harvesting; water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
    • disaster risk reduction – early warning and observation systems;
    • energy infrastructure – energy generation (including renewables);
    • transport infrastructure;
    • other built environment and infrastructure – urban development;
    • social infrastructure – education; health facilities; and
    • industry and manufacturing.

     

    Additional insights:

    • This is a mature instrument, although funds focused on climate adaptation have only emerged in the 2020s.

     

    Considerations for using pooled investments:

    • The project/initiative should generate an acceptable return on investment for investors.
    • Different projects/initiatives will require different mixes of finance (grants, equity, loans) based on the projected risk/return trade-off.
    • Building a portfolio of adaptation projects requires adequate data to inform investment opportunities.

     

    Adapted from the following sources:

    Convergence. (2023). State of blended finance 2023: Climate edition. https://www.convergence.finance/resource/state-of-blended-finance-2023/view

    Gozzi, J. C., & Schmukler, S. (2015, October 23). Public credit guarantees and access to finance. European Economy. https://european-economy.eu/leading-articles/public-credit-guarantees-and-access-to-finance/

    Organisation for Economic Co-operation and Development. (n.d.). Blended finance. https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles/

  • Africa Rural Climate Adaptation Finance Mechanism (ARCAFIM) for the East Africa region

    ARCAFIM is a blended finance mechanism launched in 2023 that aims to increase support and finance for adaptation for small-scale farmers and rural enterprises in East Africa. The mechanism includes two pillars. The first is a risk-sharing mechanism that involves a blend of international funds (USD 110 million provided by the Green Climate Fund [GCF], Nordic Development Fund, and Finland) programmed through the International Fund for Agricultural Development (IFAD) and a contribution of USD 90 million from Equity Bank, a local commercial bank. The funding structure includes a credit risk-sharing model in which IFAD’s partners cover 20% of the first loss, IFAD’s partners and Equity Bank share 60% of the second, and Equity Bank is responsible for the remaining 20% senior tranche. Equity Bank will use the loan proceeds for on-lending under the ARCAFIM programme, with local affiliate banks providing climate change adaptation loans to small-scale farmers and rural enterprises. The mechanism includes a grant component supported by the GCF and Denmark that aims to overcome barriers to accessing financing to address climate change adaptation, including building the skills of financial institutions and increasing the financial literacy of farmers and enterprises.

    Adapted from the following sources:

    International Fund for Agricultural Development. (2023). Funding proposal: FP220: Africa Rural Climate Adaptation Financial Mechanism (ARCAFIM) for East Africa region. https://www.greenclimate.fund/sites/default/files/document/funding-proposal-fp220.pdf

    International Fund for Agricultural Development. (2023, December 2). IFAD launches innovative financing mechanism to support small-scale food producers to adapt to climate change in Eastern Africa. https://www.ifad.org/en/web/latest/-/ifad-launches-innovative-financing-mechanism-to-support-small-scale-food-producers-to-adapt-to-climate-change-in-eastern-africa

  • GAIA

    GAIA is a proposed USD 1.5 billion climate-focused blended finance platform that was launched in 2023. The creation of the platform was led by MUFG, a global financial group, and FinDev Canada, Canada’s bilateral development finance institution. The GCF has committed USD 150 million in equity to the platform. The platform will blend commercial capital with concessional and patient capital to provide long-term loans to support the transition to climate-resilient and low-carbon pathways in developing countries. Seventy percent of the portfolio’s expenditure will be dedicated to climate change adaptation projects, and at least 25% of the portfolio’s expenditure will be allocated to least developed countries and small island developing states. A technical assistance facility will be developed as part of the platform.

    Adapted from the following sources:

    FinDev Canada. (2023, November 2). GAIA – a climate-focused blended finance platform – received US$150 million approval from the Green Climate Fund. https://www.findevcanada.ca/en/news/gaia-climate-focused-blended-finance-platform-receives-us150-million-approval-green-climate

    Green Climate Fund. (2023). Consideration of funding proposal – Addendum XIV. Funding proposal package for FP223. https://www.greenclimate.fund/sites/default/files/document/gcf-b37-02-add14-funding-proposal-package-fp223.pdf

    Project GAIA. (2023). Environment and Social Management System (ESMS). https://www.bk.mufg.jp/global/productsandservices/corpandinvest/gcf/pg/pdf/system_english.pdf

  • Land Resilience Fund

    Launched in 2021 by WWF and South Pole, the Landscape Resilience Fund blends USD 1.3 million from the Global Environment Facility with USD 25 million from Chanel (a private company). WWF and South Pole plan to mobilize a total of USD 100 million in this fund by 2025, combining public, philanthropic, and private funding to finance sustainable adaptation solutions. The fund focuses on assistance to small and medium-sized enterprises that work with smallholders in vulnerable landscapes on climate adaptation projects. It helps smallholders access better farming materials, finance, training, and programs so they can develop more sustainable agricultural and forestry supply chains. When loans are repaid, they are re-invested in other small and medium-sized enterprises to create a self-sustaining tool for adaptation. Rather than financial returns, funders see environmental and social benefits that result from the projects.

    Adapted from the following sources:

    Landscape Resilience Fund. (n.d.). Shaping the future of climate adaptation finance. https://landscaperesiliencefund.org

    South Pole. (2021, June 10). New climate resilience fund brings private and public climate finance to vulnerable landscapes and farmers. https://www.southpole.com/news/new-climate-resilience-fund-brings-private-and-public-climate-finance-to-vulnerable-landscapes-and-farmers

  • Lightsmith Climate Resilience

    The Lightsmith Group announced the final closing of Lightsmith Climate Resilience Partners (the fund) in January 2022, with USD 186 million in commitments to growth-stage technology companies whose technologies address the physical impacts of climate change. The fund has initially been focusing on water efficiency and smart water management, resilient food systems, agricultural analytics, geospatial intelligence, supply chain analytics, and catastrophe risk modelling and risk transfer.

    The Lightsmith Fund is the first private equity fund that focuses on climate resilience, introducing a system to measure the impacts of investments on climate adaptation efforts. It brought together public and private investors, including the GCF, the European Investment Bank, the Asian Infrastructure Investment Bank, the KfW on behalf of the Government of Germany, the Rockefeller Foundation, and the PNC Insurance Group. Its blended structure is based on the Climate Resilience and Adaptation Finance & Technology Transfer Facility investment strategy and was developed with the support of the Global Innovation Fund, Nordic Development Fund, Global Environment Facility, Conservation International, and the International Climate Finance Accelerator.

    Adapted from the following sources:

    The Climate Finance Lab. (2022). Climate Resilience and Adaptation Finance & Technology Transfer Facility (CRAFT). https://www.climatefinancelab.org/ideas/climate-resilience-and-adaptation-finance-technology-transfer-facility-craft-2/

    Lightsmith Group. (2022, January 31). Lightsmith group closes inaugural $186 million growth equity climate fund, the first to focus on climate resilience and adaptation [Press release]. https://lightsmithgp.com/news-posts/lightsmith-group-closes-inaugural-186-million-growth-equity-climate-fund-the-first-to-focus-on-climate-resilience-and-adaptation/

Public–Private Partnership

Case Studies

  • The Public–Private Partnership Legal Resource Centre’s reference guide defines a public–private partnership (PPP) as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance” (PPP Knowledge Lab, 2017, p. 1).

    PPPs are created following a rationale that they deliver public assets or services more cheaply and effectively than projects purely funded and steered by the public sector and that they optimally divide counterparty risks between public and private partners. In other words, risks that are best borne by the public sector should remain with the public sector and the same principle should apply to risks and the private sector.

    There is no standard formula on how risks should be allocated; this depends on the characteristics of the projects and their revenues, the expertise of the private counterparty, and the institutional strengths of the public sector.

    The World Bank and the Global Center on Adaptation have noted that PPPs can be a key tool for integrating adaptation and resilience into infrastructure projects. The greater the proportion of public finance included in an investment, the greater the influence that this finance could have on ensuring that projects are developed/implemented in a manner that accounts for projected physical climate hazards and risks. The Global Center on Adaptation offers a course on climate-resilient infrastructure in PPPs, the World Bank provides resources on climate-smart PPPs, and the Public–Private Infrastructure Advisory Facility has developed climate toolkits for infrastructure PPPs.

     

    Current or potential adaptation-relevant sector applications:

    • crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
    • ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
    • water supply (infrastructure) – water management;
    • energy infrastructure – energy generation (including renewables);
    • transport infrastructure;
    • other built environment and infrastructure – urban development; and
    • social infrastructure – education; health facilities.

     

    Additional insights:

    • This is a mature instrument, with PPPs becoming widely recognized in the 1990s. They have been implemented in many countries, mainly for infrastructure projects.

     

    Considerations for entering into PPPs:

    • PPPs require long-term contracts, legal expertise, and the definition of strict terms and conditions. This complexity means that technical assistance may be needed by parties interested in creating a PPP.
    • Fulfillment of PPP conditions requires monitoring and evaluation capabilities.
    • Public entities may be uncomfortable with private ownership of traditionally owned public goods.

     

    Adapted from the following sources:

    Global Center on Adaptation. (2023). Knowledge module on PPPs for climate-resilient infrastructure. https://gca.org/knowledge-module/

    Public-Private Infrastructure Advisory Facility. (2023, July 20). New: Climate toolkits for infrastructure PPPs. https://www.ppiaf.org/feature/new-climate-toolkits-infrastructure-ppps

    Public-Private Partnership Legal Resource Centre. (2017). What is in the PPP reference guide? Public-private partnerships reference guide (Version 3). https://ppp.worldbank.org/public-private-partnership/PPP_Online_Reference_Guide

    World Bank. (2022). Climate-smart PPPs. https://ppp.worldbank.org/public-private-partnership/energy-and-power/climate-smart-ppps-1

    World Bank (2023). Public-Private Partnership Legal Resource Centre. https://ppp.worldbank.org/public-private-partnership/

  • African Parks and the Wyss Foundation

    African Parks is a non-profit conservation organization that manages protected areas for respective governments, who own the land and develop policies to protect it. The partnership uses three tools in its model for protected area management: long-term agreements, funding strategies, and management through separate legal entities registered in each host country and a board representing key stakeholders. Some activities address the climate vulnerability of communities, including the provision of maize to families in times of drought and livelihood diversification initiatives.

    The success of African Parks has drawn funders to support their work through PPPs. In 2021, the Wyss Foundation committed USD 108 million to African Parks. The initial 5-year commitment aims to support up to half of the annual budgets of nine existing parks under African Park’s management in Angola, Benin, Malawi, Mozambique, Rwanda, and Zimbabwe. The grant provides critical long-term support to the operating budget of African Parks by providing sustainable, multi-year financing.

    Adapted from the following source:

    African Parks. (n.d.). The African Parks model. https://www.africanparks.org/about-us/our-story/the-african-parks-model

    African Parks. (2021, June 8). The Wyss Foundation commits $108M to secure protected areas in Africa. https://www.africanparks.org/wyss-foundation-commits-108m-secure-protected-areas-africa

    Global Wildlife Program. (n.d.). Collaborative management partnerships: Case studies. World Bank Group. https://thedocs.worldbank.org/en/doc/80cfa22836e81e8de5c1d1b0d249fd5f-0320052021/original/CMP-Toolkit-Country-Case-Studies.pdf

  • Jamaica’s Public–Private Partnership Framework

    The Development Bank of Jamaica, with the support of the Inter-American Development Bank, strengthened the country’s PPP framework—including updating the PPP policy, preparing a toolkit for climate-resilient PPPs, and climate-related operational guidelines—to include climate resilience considerations at each stage of the PPP process. Jamaica, with support from the International Monetary Fund, committed resources to establish a project preparation facility to identify and develop a pipeline of climate-resilient PPPs across sectors.

    Adapted from the following sources:

    Development Bank of Jamaica Limited. (2023). P4 Knowledge Center. https://dbankjm.com/elementor-8793/

    International Monetary Fund. (2023, October 11). The Government of Jamaica is working with international financial institutions and donors to strengthen cooperation, crowd-in private investment and build climate resilience following the Resilience and Sustainability Facility arrangement with the International Monetary Fund [Press release]. https://www.imf.org/en/News/Articles/2023/10/11/pr23346-jamaica-working-international-financial-institutions-following-rsf-arr-imf

  • Santiago Water Fund

    The Santiago Water Fund, a PPP in Chile, aims to protect the Maipo watershed, which provides 80% of the capital city’s fresh water supply as well as supporting agriculture and industry. This supply is at risk due to changes in precipitation patterns caused by climate change. Set up in 2019, the fund has invested in a wetlands monitoring network, reforestation, and source-water protection, including the protection of native vegetation, forests, and wetlands. The fund relies on the cooperation of the regional government, the association of rural municipalities, a local water utility, Nestlé Corporation, Anglo-American Corporation, and The Nature Conservancy (an international non-governmental organization) on behalf of the Latin America Water Funds Partnership. The partnership, which is funded by the government of Germany and includes the Inter-American Development Bank, FEMSA Foundation, and the Global Environment Facility, provides support for capacity building, monitoring, research, and dissemination of knowledge.

    Adapted from the following sources:

    Alianza Latinoamericana de Fodos de Agua. (n.d.). Chile Water Fund: Santiago-Maipo. https://www.fondosdeagua.org/es/los-fondos-de-agua/mapa-de-los-fondos-de-agua/chile/fondo-de-agua-santiago-maipo/?tab_q=tab_container_copy_c-tab_element_704  

    The Nature Conservancy. (n.d.). Santiago Water Fund: Protecting water at the source to ensure a healthy Mediterranean Chile and planet. https://www.nature.org/en-us/about-us/where-we-work/latin-america/chile/stories-in-chile/santiago-water-fund/

Tax Increment Financing

Case Studies

  • Tax increment financing (TIF) is a form of land value capture financing based on the expected appreciation of land value. It assumes that once redevelopment projects are completed, land values will increase and, as a result, the taxation authority will receive higher tax revenue. The initial redevelopment is financed via upfront government resources or a bond, and it is typically the municipal government that borrows against future tax revenues.

    TIF schemes are typically used as an incentive mechanism to encourage redevelopment or revitalization with a focus on public infrastructure and public structures such as roads, water, and sewer lines. These schemes could be used to finance natural infrastructure and climate change adaptation projects using the anticipation of future tax revenue resulting from new development. As a hypothetical example, the development of a new public green space as part of an urban cooling initiative may cause property values to rise and lead to an increase in property tax receipts. While the prior (or base) amount of the property tax revenue continues to fund the maintenance of the public green space, the increase in tax revenue is used to pay bonds and/or reimburse initial investors.

     

    Current or potential adaptation-relevant sector applications:

    • water supply (infrastructure) – water management;
    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
    • other built environment and infrastructure – urban development;
    • transport infrastructure; and
    • social infrastructure – education; health facilities.

     

    Additional insights:

    • This is a mature instrument. It has been used for over 50 years by municipal governments in the United States, with some application in Australia, Canada, Hong Kong, New Zealand, and the United Kingdom. Similar instruments have been considered in Europe.

     

    Considerations for using TIF: 

    • Governments must have the capacity to tax and conduct the analysis and modelling required to set base and new tax rates.
    • Governments should be able to issue the bonds or obtain other financing required to fund the investment before increased tax revenue flows.
    • This scheme has high transaction costs, so it is only suitable for larger projects and for municipal governments that can take on debt.
    • It requires robust real estate and economic conditions.
    • It requires solid urban development projects, with long-term feasibility.

     

    Adapted from the following sources:

    Council of Development Finance Agencies. (n.d.). Tax increment finance resource center.  https://www.cdfa.net/cdfa/cdfaweb.nsf/resourcecenters/tif.html

    Schneider, B. (2019, October 24). Citylab University: Tax increment financing. Bloomberg. https://www.bloomberg.com/news/articles/2019-10-24/the-lowdown-on-tif-the-developer-s-friend

  • Chicago's Tax Increment Financing

    From 1984 to 2014, the City of Chicago, Illinois, United States, used TIF to fund public infrastructure and development projects: more than 150 TIF districts leveraged over USD 6 billion in private capital investment. In one project, Chicago's Central Loop TIF District funded the city's Green Roof Improvement Fund, which supported the installation of green roofs to manage stormwater on commercial buildings in the district through a 50% grant match, up to a maximum grant amount of USD 100,000 per project. The city also used TIF funds to implement actions identified in Chicago’s 2008 adaptation strategy, such as green infrastructure programs that address extreme heat risks and improve the capacity of stormwater management systems to handle extreme precipitation events.

    Adapted from the following sources:

    Georgetown Climate Centre. (n.d.). Tax credits, tax increment financing and land value capture. https://www.georgetownclimate.org/adaptation/toolkits/equitable-adaptation-toolkit/tax-credits-tax-increment-financing-land-value-capture.html

    United States Environmental Protection Agency. (2023). Chicago, IL uses green infrastructure to reduce extreme heat. Climate Change Adaptation Resource Center. https://www.epa.gov/arc-x/chicago-il-uses-green-infrastructure-reduce-extreme-heat

  • Medellin and Barranquilla, Colombia

    The World Bank supported a case study in Medellin, Colombia, to explore the barriers to TIF, develop a regulatory framework for TIF, and set out a roadmap for cities wanting to implement TIF. The city created a TIF district in a 26-hectare area that was divided into 45 strategic urban development units. A TIF was defined for a 16-year term to raise financing for investment in residential water services and social compensation for land acquisition. Pilot projects were undertaken in Medellin and Barranquilla, with the latter including an assessment of climate hazards in riverine and coastal areas with the aim of identifying options to improve the climate resilience capacity of the TIF investment area.

    Adapted from the following sources:

    Public–Private Infrastructure Advisory Facility. (n.d.). Colombia: Financing urban development in Colombia, implementing innovating LVC instruments – TIF Phase II. https://www.ppiaf.org/activity/colombia-financing-urban-development-colombia-implementing-innovating-lvc-instruments-tif

    The World Bank. (2020). Innovative instruments to finance urban development in Colombian cities (Report No. AUS0001740). https://documents1.worldbank.org/curated/en/921731593563388387/pdf/Innovative-Instruments-to-Finance-Urban-Development-in-Colombian-Cities.pdf

Works for Taxes Scheme

Case Studies

  • The Government of Peru devised a public investment mechanism in 2008 that allowed private firms to prepay a portion of their income taxes in the form of public works. The Works for Taxes scheme encourages joint work between the public and private sectors to reduce Peru’s infrastructure gap. Through this mechanism, private companies assume the upfront costs and management of new infrastructure programs while the government accepts the infrastructure projects in lieu of future tax payments.

    The mechanism could be applied to public investment in urban development, agriculture, irrigation, water and sanitation, tourism, public safety, transport, education, health, fishing, social development, culture, environment, and rural electrification. Because many of these sectors have clear links to climate change adaptation, there are many opportunities for adaptation considerations to be integrated into the instrument, such as by ensuring the climate resilience of new infrastructure. Slight revisions to project designs and the addition of adaptation impact metrics could improve adaptation outcomes.

    Colombia replicated the program in 2017 to encourage social and economic development in the most affected zones of the previous armed conflict. Companies with an annual income of over COP 1 billion (about USD 250,000) can pay 50% of their tax obligations through the funding of social and development projects. Adaptation to climate change and climate risk management is one of the priority areas for project development in Colombia’s program.

     

    Current or potential adaptation-relevant sector applications:

    • crop and food production – including agroforestry;
    • ecological services and management – forest management (including afforestation and reforestation);
    • water supply (infrastructure) – water management;
    • disaster risk reduction – early warning and observation systems;
    • energy infrastructure – energy generation (including renewables);
    • transport infrastructure;
    • other built environment and infrastructure – urban development; and
    • social infrastructure – education; health facilities.

     

    Additional insights:

    • This is an emerging instrument, developed in Peru in 2008 and replicated in Colombia in 2017.

     

    Considerations for using a Works for Taxes scheme:

    • This tool can be implemented by national and subnational governments.
    • It has attracted the participation of larger corporations that have established social responsibility programs, are able to pay the transaction and management costs, and have the high degree of liquidity that is needed to fund major public works programs.
    • It requires systems to prioritize and monitor public investment projects.

     

    Adapted from the following sources:

    Del Carpio Ponce, P. E. (2018). Peru’s works for taxes scheme: An innovative solution to accelerate private provision of infrastructure investment. EMCompass, Note 55. International Finance Corporation. https://openknowledge.worldbank.org/server/api/core/bitstreams/55282690-f795-50e2-87a2-0204d430d88b/content

    Oxi Consultoria. (2023). What are tax works? https://www.obrasximpuestos.com/obras-por-impuestos/

  • Peru’s Obras por Impuestos (Works for Taxes)

    Peru’s Works for Taxes scheme was launched in 2008. As of November 2021, 442 Works for Taxes projects worth approximately USD 1.6 billion had been carried out with the participation of private enterprises, national ministries, regional governments, local governments, and public universities. Several companies that have used the mechanism are from the mining sector. Projects have been or are being implemented in the agriculture, education, environment, health, sanitation, security, transport, and urban development sectors.

    In 2017, the government passed legislation to enable Works for Taxes to implement projects set out in the country’s disaster fund. This change was made in response to the damage caused by heavy rains and landslides earlier that year, resulting in a need to rebuild damaged infrastructure and create public works that are resilient to extreme weather and can prevent future infrastructural damage and casualties. In 2023, the regulatory framework was updated and now specifically approves projects to address national emergencies and to maintain infrastructure.

    Adapted from the following sources:

    Baker Mackenzie. (2023, May 9). Peru: Significant benefits for investors in the works-for-taxes (OXI) regime approved. https://insightplus.bakermckenzie.com/bm/projects/peru-significant-benefits-for-investors-in-the-works-for-taxes-oxi-regime-approved

    ProInversión (Private Investment Promotion Agency). (2021). What is it? Works for taxes. https://info.proinversion.gob.pe/define-oxi/

This inventory of innovative financial instruments for climate change adaptation was prepared between 2021 and 2022 and updated in 2024. The inventory aims to improve knowledge of how innovative financial instruments can play a positive role in scaling up investment in adaptation in developing countries.

The inventory was initially developed as a component of the Mobilizing Development Finance for Strategic and Scaled-up Investment in Climate Adaptation project that was implemented by the International Institute for Sustainable Development (IISD) in collaboration with the African Centre for Technology Studies (ACTS) in Kenya, Libélula in Peru, and the Prakriti Resources Centre (PRC) in Nepal. Funding for the project was provided by Canada’s International Development Research Centre (IDRC). Funding for the 2024 update was provided by the German Federal Ministry for Economic Cooperation and Development (BMZ) through the National Adaptation Plan (NAP) Global Network, whose Secretariat is hosted by IISD. 

The content of the inventory was developed by Matt Gouett, Deborah Murphy, Laurin Wuennenberg, Safa Rahim, and Jo-Ellen Parry. Input on its content was provided by representatives of ACTS, Libélula, and PRC, as well as members of the project’s advisory committee, comprised of representatives of four multilateral development banks, IDRC, and the governments of Kenya, Nepal, and Peru. Web design was initially provided by Harsh Vaniawala, of IISD, with the design of the updates provided by Modo Design Group.

Questions, suggested changes, or proposed additions to the inventory can be sent to info@napglobalnetwork.org.