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

Results-based financing is a method of funding through which the lender/funder provides capital that is contingent on the achievement of predefined and verifiable results. These methods are intended to improve development outcomes and accountability, as well as to drive innovation and efficiency.

Key Financing Criteria: 

  • If the instrument is a bond, the entity must have the institutional capacity to issue bonds.
  • Measurable parameters should be established to quantify and monitor the positive environmental and/or social impacts resulting from the investment.
  • The performance of evaluation schemes should be assessed by reasonable proxies. Overly sophisticated scientific models should be avoided to save additional transaction costs.
  • To measure the impact of the instrument, comparisons between reliable past measurements and a robust track record of measures/interventions should be made.

Adapted from the following source:

World Bank. (2019, June 28). Banking on impact: What you need to know about results-based financing. https://www.worldbank.org/en/news/feature/2019/06/28/banking-on-impact-what-you-need-to-know-about-results-based-financing

Adaptation Benefits Mechanism

Case Studies

  • The African Development Bank is piloting the Adaptation Benefits Mechanism, a program in which reputable international organizations will be able to certify the benefits of specific adaptation activities (Certified Adaptation Benefits) to project developers and/or governments. These project developers and/or governments will transfer these certificates to donors or climate change financiers based on pre-existing off-take agreements. The pre-existing off-take agreements are beneficial, as they allow the project proponent to use the agreement as extra security, or collateral, when seeking upfront loans or equity investments. This ability to use certificates as collateral may allow for projects to draw needed initial investors when they would not otherwise have found the investment opportunity to be attractive.

    The Adaptation Benefits Mechanism is designed to be a non-market mechanism under Article 6.8 of the Paris Agreement that aims to boost private sector investment and the commercial viability of adaptation projects across developing countries.

     

    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;
    • disaster risk reduction – early warning and observation systems; and
    • energy infrastructure.

     

    Additional insights:

    • This tool is at the pilot stage, and launched in 2019. Two pilot projects were under development in 2023: climate-resilient cocoa in Côte d’Ivoire and rapid-deployment dams to counter flooding in Lagos, Nigeria.

     

    Considerations for using the Adaptation Benefits Mechanism: 

    • The Adaptation Benefits Mechanism needs agreed-upon methodologies to capture the impact of adaptation activities.
    • The mechanism requires adequate means of monitoring and verifying delivery.
    • The mechanism must have buyers/investors willing to purchase Certified Adaptation Benefits.
    • Interest has been expressed in projects ranging from USD 1 million to USD 50 million.

     

    Adapted from the following sources:

    African Development Bank. (n.d.). Adaptation Benefits Mechanism: Giving resilience a value: Pilot phase information note. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/ABM_-_Giving_resilience_a_value_-_Pilot_phase_information_note.pdf

    African Development Bank. (2023, May 31). African Development Bank driving innovation to scale up climate adaptation. https://www.afdb.org/en/news-and-events/african-development-bank-driving-innovation-scale-climate-adaptation-61646

    African Development Bank & Climate Investment Funds. (2021). Market study on the willingness to use and demand for adaptation benefits to support adaptation to climate change in Africa: Final report. https://www.afdb.org/en/documents/market-study-willingness-use-and-demand-adaptation-benefits-support-adaptation-climate-change-africa

  • No examples yet, as this program is still in the pilot phase.

Biodiversity Credits

Case Studies

  • Biodiversity credits are an economic instrument that can finance actions that result in positive, measurable biodiversity-related outcomes. The credits are “verifiable, quantifiable and tradeable units of restored or preserved biodiversity over a fixed period” that “offer a potentially robust and scalable mechanism for increasing nature positive investment” (World Economic Forum, 2023, p. 4). The voluntary biodiversity credits markets represent a significant opportunity for private sector finance to contribute to the protection and recovery of nature by supporting measurable and verifiable biodiversity outcomes.

    The credits function as tradeable units that can be exchanged in a market space to incentivize investments in biodiversity. The approach begins with the measurement of anticipated outcomes, which can include protection, regeneration, stewardship, and adaptation to climate change impacts. An agreed methodology is used to translate the benefits into credits, and investors transfer capital to beneficiaries against an expected return. The final stage includes third-party verification and a specific agreed value of the biodiversity credit issued to the implementor/beneficiaries, which can include Indigenous groups, local communities, landowners, and governments. The credits can then be bought by the private sector, governments, development partners, and philanthropies.

    While no emerging schemes in 2023 had adaptation explicitly as an intended outcome, “it is likely credits with this intended outcome will emerge in the future” (Pollination, 2023, p. 14). Biodiversity underpins climate change adaptation by regulating climate and protecting natural systems from the impacts of climate change, which can improve the resilience of these systems and human communities. Therefore, actions to enhance and conserve biodiversity, if designed in a way that allows ecosystems themselves to adapt, can also help people adapt to climate change. Ecosystem-based adaptation provides a framework to help developers of biodiversity credit programs consider approaches that reduce communities’ vulnerability to climate change.

     

    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; fire management.

     

    Additional insights:

    • This is an emerging instrument at a very early stage of development. The first biodiversity credit transaction took place in 2023 when a Swedish bank bought credits from a forest cooperative.
    • At least 30 programs, with a concentration in Australia and Europe, were underway in 2023 to design biodiversity credits and test the fast-emerging market for these credits, including the development of guidance and methodologies for project developers and buyers.

     

    Considerations for using biodiversity credits:

    • Strong governance is critical in the design of credits and market architecture, which requires transparent and standardized information. The instrument’s success is dependent on the integrity of the credits and the markets.
    • Biodiversity credits require standard metrics for trading, including robust methodologies to set consistent values for resilience and to measure success. Developers need to show that investment in biodiversity credits leads to the desired results and that investors can have confidence in the credits.
    • A range of participants will need to be engaged to scale up biodiversity credits, including private sector actors, government, investors, development partners, and civil society groups.

     

    Adapted from the following sources:

    Biodiversity and Climate Change Adaptation Expert Group under the Nairobi Work Programme on Impacts, Vulnerability and Adaptation to climate change & Least Developed Countries Expert Group. (2023). Promoting synergies between climate change adaptation and biodiversity through the National Adaptation Plan and national biodiversity strategy and action plan processes [Technical brief]. https://unfccc.int/sites/default/files/resource/UNFCCC-NWP_synergies_NAP-NBSAP_technical-brief.pdf

    Pollination. (2023). Voluntary biodiversity credit markets: A review of biodiversity credit schemes. https://pollinationgroup.com/wp-content/uploads/2023/10/Global-Review-of-Biodiversity-Credit-Schemes-Pollination-October-2023.pdf

    Sarmiento, M., & Morgan, S. (2023, February 20). Biodiversity credits: An opportunity to create a new financing framework (commentary). Mongabay. https://news.mongabay.com/2023/02/biodiversity-credits-an-opportunity-to-create-a-new-crediting-framework-commentary/#ref5

    Terton, A., & Greenwalt, J. (2020). Building resilience with nature: Ecosystem-based adaptation in National Adaptation Plan processes: An analysis. NAP Global Network. https://napglobalnetwork.org/wp-content/uploads/2020/11/napgn-en-2020-ecosystem-based-adaptation-in-naps.pdf

    World Economic Forum. (2023). Biodiversity credits: Unlocking financial markets for nature-positive outcomes [Briefing paper]. https://www3.weforum.org/docs/WEF_Biodiversity_Credit_Market_2022.pdf

  • Natureplus, Australia

    Green Collar, an environmental market developer and investor in Australia, developed Natureplus, a biodiversity credit scheme. In 2023, during the pilot phase of the program, 20 projects were registered, and one project was issuing credits. The Natureplus standard sets out a means to account for and monetize changes in environmental conditions, which provides value for the restoration and conservation of nature. Credits, with one credit equal to 1 hectare of active restoration or conservation of habitat or species, are awarded to projects with third-party audits and verification.

    Adapted from the following source:

    Natureplus. (n.d.). Natureplus: A scheme helping to drive investment into global conservation outcomes. https://naturepluscredits.com

  • ValueNature biocredit scheme, South Africa

    ValueNature, a South African start-up, was facilitating biodiversity credit projects in 2023 through initiatives in South Africa, Uganda, and Zambia. The biodiversity credits scale up capital for the conservation and protection of landscapes and seascapes. A voluntary biodiversity credit represents a measured unit of biodiversity gain, which is determined by evaluating the minimum amount required to adequately ensure the persistence of biodiversity in an agreed area with decent management for a 10-year period. Eighty percent of the agreed sale price will go the biodiversity custodians (such as local communities, Indigenous groups, local governments, and landowners), with the remaining 20% being allocated to biodiversity assessments, reporting, verification, and the trading of credits. ValueNature’s pilot project in Uganda has received grant funding from the Government of the United Kingdom and private investment from a Swedish firm.

    Adapted from the following sources:

    Gordon, O. (2023, October 17). Can biodiversity credits stem the extinction cascade? Energy Monitor. https://www.energymonitor.ai/sustainable-finance/can-biodiversity-credits-stem-the-extinction-cascade/?cf-view

    ValueNature. (2024). Transparent, quantifiable return on investment through tangible environmental and social improvements. https://valuenature.earth/#project-facilitation

Conservation Impact Bonds

Case Studies

  • Conservation impact bonds (CIBs) are pay-for-success, outcome-based financial structures that can strengthen conservation efforts. They connect key conservation and finance stakeholders, aiming to transfer the risk of funding conservation from governments, communities, businesses, and donors (in developing countries) to impact investors.

    The core model is based on bringing together groups that place a monetary value on and are willing to pay for nature-based services with impact investors that provide funds for conservation and nature-based projects. Different models are emerging for repayment to investors, including one in which investors are paid their principal plus a return on investment if outcomes are achieved but no return on investment if the outcomes are not successful. Outcomes are measured using predetermined data that can include social, economic, ecological, and climate change metrics.

    These bonds can help both to address biodiversity loss and to support actions to enhance the ability of natural systems to adapt to climate change. Projects with potential adaptation benefits include restoring waterways, restoring watersheds, growing native plants, and implementing nature-smart climate solutions.

     

    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; fire management.

     

    Additional insights:

    • This is an emerging instrument, with a prototype for a CIB for healthy landscapes having been launched in Canada in 2020.
    • Long-term support for CIBs requires that early projects demonstrate financial viability and the ability to deliver measurable results.

     

    Considerations for using a CIB:

    • CIBs are place specific, and structuring the bond can be time-intensive and costly.
    • CIBs often require a third party to design and implement the bond as well as to bring together necessary stakeholders.
    • Government or development partner support has been a critical element in the launching of early iterations of CIBs. There is uncertainty as to whether some projects funded through the issuance of this kind of bond can generate profit and deliver the returns necessary to attract private sector investors.
    • Issuance of a CIB can be an important step in demonstrating whether or not private funders may be willing to finance a certain type of project.
    • CIBs need specific targets or goals against which to measure success and issue payment. Determining the additionality of environmental outcomes and the timeframes required for achieving demonstrable impacts poses challenges in measuring success.

     

    Adapted from the following sources:

    Lynch, M., & Kanter, M. (2022). Conservation impact bond: An innovative new tool for scaling collaboration and investment for landscape-scale conservation [Briefing note]. Ivey Centre for Building Sustainable Value & Carolinian Canada Coalition. https://www.ivey.uwo.ca/media/3797473/cib-policy-brief-february-2022.pdf

    Thompson, B. S. (2023). Impact investing in biodiversity conservation with bonds: An analysis of financial and environmental risk. Business Strategy and the Environment, 32(1), 353–368. https://onlinelibrary.wiley.com/doi/10.1002/bse.3135

  • Deshkan Zibi Conservation Impact Bond

    The Deshkan Zibi Conservation Impact Bond, launched in Ontario, Canada, in March 2020, is the prototype of the CIB model. As of April 2023, the bond was supporting 54 landscape/habitat projects that were delivered by habitat partners, including First Nations communities, landowners, municipalities, and businesses. The projects had specific outcome metrics (e.g., hectares of natural assets/climate-smart habitat that have been improved, number of native plants used in habitat improvements) that formed the basis of the bond’s financial returns mechanism. Investors are paid their principal plus a return on investment if outcomes are achieved; but if the outcomes are not successful, only the principal is repaid. The impact investor, VERGE Capital, provided CAD 130,000 through a loan with a 5% interest rate and a 3-year repayment schedule. 3M Canada (a multinational corporation) and Pollinators Canada (a non-profit) were the outcome payers. A CAD 150,000 grant from the Canadian government supported the development of the concept and the project portfolio, which was overseen by Carolinian Canada, an environmental charity. Implementation was undertaken in partnership with local Indigenous communities, the Oneida Nation of the Thames and the Chippewas of the Thames First Nation. A second phase was starting up in 2023. The Deshkan Zibi Conservation Impact Bond received the 2022 Finance for the Future Climate Leader Award.

    Adapted from the following sources:

    Carolinian Canada. (2023). Conservation impact bond (CIB). https://caroliniancanada.ca/cib

    Deshkan Ziibi Conservation Impact Bond Leadership Team. (2021). The Deshkan Ziibi Conservation Impact Bond Project: On conservation finance, decolonization, and community-based participatory research. Western University, London, Canada. https://online.flippingbook.com/view/751128259/6/

Environmental Impact Bonds

Case Studies

  • Environmental impact bonds (EIBs) use a pay-for-success approach to provide upfront capital from private investors for environmental projects. Traditionally, they are issued for one project or initiative, unlike other bonds that may be used for multiple investments. EIBs are used to pilot riskier investments or to scale up solutions that have already been tested in a pilot program. Investors pay for the costs of deploying environmental solutions. Payers such as public agencies or private institutions repay investors based on achievement (or not) of the agreed-upon environmental outcomes at the end of the program’s closing evaluation. The bond acts as a contractual arrangement between the project/initiative developer and the payer. The main difference between EIBs and traditional bonds is that the latter are often repaid with the general revenue of the issuer of the bond, while EIBs tie repayment to the revenue or cost savings generated by the successful environmental project or initiative.

    EIBs could be particularly useful in cases where a project delivers climate change adaptation benefits but lacks traditional revenue streams to attract investors interested in both a financial return and environmental impact. The issuer can work with a bilateral donor or foundation to structure an EIB to ensure the project is completed. For example, an artificial wetland could be constructed with funds derived from an EIB, and then the payment of interest and repayment of principal is based on demonstrated biodiversity or flood protection gains in the area. The borrower could repay more or less than the original amount of the loan based on the level of gains as defined in the EIB contract.

     

    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; fire management;
    • 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; and
    • other built environment and infrastructure – urban development.

     

    Additional insights:

    • This is an emerging instrument, with the first EIB closing in 2016.
    • As of 2021, the only EIBs proposed and released were in the United States.

     

    Considerations for using an environmental impact bond:

    • The payer is usually a public institution (often a municipal government) or philanthropic foundation—organizations willing to take on more risk without a guarantee of financial return.
    • Many EIBs require a third party—a foundation—to fund the structuring costs of the EIB.
    • A project needs to be larger than USD 5 million.
    • EIBs are case-specific, and structuring the bond is time-intensive and costly.
    • The issuance of an EIB can be an important step in demonstrating whether or not private funders may be willing to finance a certain type of project.
    • EIBs need specific targets/goals against which to measure success and payment.

     

    Adapted from the following sources:

    Brand, M. W., Seipp, K. Q., Saksa, P., Ulibarri, N., Bomblies, A., Mandle, L., Allaire, M., Wing, O., Tobin-de la Puente, J., Parker, E. A., Nay, J., Sanders, B. F., Rosowsky, D., Lee, J., Johnson, K., Gudino-Elizondo, N., Ajami, N., Wobbrock, N., Adriaens, P., … Gibbons, J. P. (2021). Environmental impact bonds: A common framework and looking ahead. Environmental Research: Infrastructure and Sustainability, 1(2), Article 023001. https://iopscience.iop.org/article/10.1088/2634-4505/ac0b2c

    Quantified Ventures. (2018, October 31). Sharing risk, rewarding outcomes: The environmental impact bond. https://www.quantifiedventures.com/blog/what-is-an-environmental-impact-bond

    Thompson, A. (2020, July 2). Environmental impact bonds: Where are they now? Environmental Finance Blog. University of North Carolina, School of Government. https://efc.web.unc.edu/2020/07/02/environmental-impact-bonds-where-are-they-now/

  • Forest Resilience Bond: Yuba Project

    Blue Forest Conservation, in partnership with the World Resources Institute and the United States Forest Service, initiated the creation of forest resilience bonds, a type of EIB. The EIB provided an opportunity for private investors to support public land management, forest restoration, and wildfire risk reductions. In 2018, the first bond raised USD 4 million in private capital from AAA Insurance of California, Calvert Impact Capital, the Rockefeller Foundation, and the Gordon and Betty Moore Foundation. Upon completing the project outcomes (ecological restoration across 15,000 acres in the Yuba River Watershed by Blue Forest Conservation), the paying beneficiaries (the State of California and the Yuba Water Agency) were responsible for repaying investors. The Yuba Water Agency and partners launched a second bond in 2021 that leveraged USD 25 million in total funding.

    Adapted from the following sources:

    Brand, M. W., Seipp, K. Q., Saksa, P., Ulibarri, N., Bomblies, A., Mandle, L., Allaire, M., Wing, O., Tobin-de la Puente, J., Parker, E. A., Nay, J., Sanders, B. F., Rosowsky, D., Lee, J., Johnson, K., Gudino-Elizondo, N., Ajami, N., Wobbrock, N., Adriaens, P., … Gibbons, J. P. (2021). Environmental Impact Bonds: A common framework and looking ahead. Environmental Research: Infrastructure and Sustainability 1(2), Article 023001. https://www.researchgate.net/publication/352385450_Environmental_Impact_Bonds_A_common_framework_and_looking_ahead

    World Resources Institute. (2021). New Forest Resilience Bond will finance $25 million of restoration to reduce wildfire risk in the Tahoe National Forest in California [Press release]. https://www.wri.org/news/release-new-forest-resilience-bond-will-finance-25-million-restoration-reduce-wildfire-risk

    Yuba Water Agency. (n.d). Forest Resilience Bond. https://www.yubawater.org/256/Forest-Resilience-Bond

  • Stormwater Management in the United States

    EIBs have been used to fund stormwater management projects in the United States. These bonds are comparable to traditional public municipal bond offerings and are priced competitively. Proceeds from the bonds fund innovative green infrastructure projects, such as those addressing flooding and water quality issues as well as stormwater runoff.

    The first EIB in the United States was issued in 2016 by the District of Columbia Water and Sewer Authority (DC Water), which wanted to pilot the use of green infrastructure to reduce the risk of combined sewer overflows polluting local watersheds—particularly as rainfall events become more frequent and intense due to climate change. This pay-for-success EIB was privately purchased by Goldman Sachs and the Calvert Foundation (the investors) for USD 25 million. Financing from the EIB was used by DC Water to cover the cost of implementing green infrastructure solutions such as rain gardens and permeable pavement. DC Water achieved the bonds’ expected performance objectives, determining that the construction of 77 green infrastructure practices reduced stormwater runoff by nearly 20% from previous levels. This result was within the expected outcome range established in the EIB, so no outcome payment from DC Water for outperforming expectations was due to investors and no risk share or underperformance penalty was due from the investors to DC Water.

    More recently, the Chesapeake Bay Foundation issued an EIB to finance three projects in the City of Hampton, Virginia. The city was facing a greater risk of tidal- and storm-related flooding in different locations, as well as requirements to reduce the level of nitrogen, phosphorous, and sediment pollution loads entering the Chesapeake Bay by 60% by 2025. After developing a plan to address these concerns, the city issued a bond solicitation on the open market with a short competitive process to raise USD 12 million. The selected bids collectively presented the city with an interest rate on the bond offering of less than 2%. The finance raised was used to implement three projects focused on reducing flooding and stormwater runoff within a local watershed and emphasized the use of natural infrastructure solutions in combination with traditional water infrastructure.

    Adapted from the following sources:

    Chesapeake Bay Foundation. (n.d.). Environmental impact bonds. https://www.cbf.org/how-we-save-the-bay/programs-initiatives/environmental-impact-bonds.html

    DC Water. (2021). Fact sheet: DC Water environmental impact bond results – Successful. https://www.dcwater.com/sites/default/files/finance/eib-factsheet.pdf

    Epstein, L. R. (n.d.). Using environmental impact bonds to finance green stormwater infrastructure in the Chesapeake Bay watershed: A case study. Chesapeake Bay Foundation. https://www.cbf.org/document-library/cbf-publications-brochures-articles/eib-whitepaper.pdf

    Goldman Sachs, DC Water, & Calvert Foundation. (n.d.). Fact sheet: DC Water Environmental Impact Bond. https://www.goldmansachs.com/media-relations/press-releases/current/dc-water-environmental-impact-bond-fact-sheet.pdf

Payment for Ecosystem Services

Case Studies

  • Payments for ecosystem services (PES) are transfers that are mainly used for either regulating services, such as watershed protection, flood control, or shoreline defence, or cultural services, such as landscape beauty. Under a PES scheme, payments of cash or other resources are made by those who benefit from ecosystem services, such as downstream water consumers, cities, and hydropower companies, to ecosystem service providers, such as farmers' land trusts and stewards of protected areas. PES operationalize a "beneficiary pays principle" approach to ecosystem services and create an opportunity for providers to generate income and funding. Payments by beneficiaries to the provider are directly linked to the successful protection/provision of contractually stipulated ecosystem services (outcome-based payment) or the execution of certain activities that enable/improve the provision of ecosystem services (input-based payment approach). The latter approach is more appropriate if it is too difficult to assess a precise ecosystem service and how a landowner can provide this service or if there is a tendency for a long time lag for monitoring and verification.

    Payments serve to remunerate providers of certain activities and required resources. These payments also help compensate the providers for reduced or loss of income because certain economic activities or economic rights are not used in order to provide the ecosystem services. There is a range of payment models depending on who is defined as the (direct or indirect) beneficiary and who is chosen to finally pay.

    Many climate change-related PES schemes focus on mitigation. These schemes may offer an opportunity for also providing adaptation benefits, such as flood abatement resulting from afforestation. Addressing adaptation needs requires tailored PES schemes that address the local context, particularly for the stewards of the protected area, as well as flexible contracts with suppliers.

    Several developing countries have implemented PES initiatives, including Brazil, Costa Rica, Peru, the Philippines, Tanzania, Uganda, and Vietnam. These efforts provide a depth of experience internationally in their application.

     

    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; and
    • water supply (infrastructure) – water storage; water harvesting; water management.

     

    Additional insights:

    • This is a mature instrument. PES have been used as a conservation and resource management tool since the early 1990s and have been implemented on all continents. In 2018, there were over 550 active programs around the world.

     

    Considerations for using a PES initiative:

    • PES leverage strong public institutions and private property rights that allow beneficiaries to internalize the benefits and pay for them. Subsidy schemes can be employed to support owners with limited financial means.
    • Public authorities should have technical knowledge of the initiative creating the ecosystem services as well as the ability to monitor usage (if necessary) and legally enforce payment.
    • PES initiatives in developing countries have often been supported by public funds, including payments issued by governments and grant funds received from development partners and international conservation organizations. Some schemes have secured investments from private entities.

     

    Adapted from the following sources:

    Kuhfuss, L., Rivington, M., & Roberts, M. (2018). The ‘Payment for Ecosystems Services’ approach – Relevance to climate change. ClimateXchange. https://www.climatexchange.org.uk/media/3271/payment-for-ecosystem-services.pdf

    Salzman, J., Bennett, G., Carroll, N., Goldstein, A., & Jenkins, M. (2018). The global status and trends of Payments for Ecosystem Services. Nature Sustainability, 1, 136–144. https://www.nature.com/articles/s41893-018-0033-0

    Smith, S., Rowcroft, P., Everard, M., Couldrick, L., Reed, M., Rogers, H., Quick, T., Eves, C., & White, C. (2013). Payments for ecosystem services: A best practice guide. Department for Environment, Food & Rural Affairs. Defra. https://www.cbd.int/financial/pes/unitedkingdom-bestpractice.pdf

  • CompensACTION

    The CompensACTION initiative promotes PES innovation on a large scale to increase the incomes of small-scale farmers in developing countries, while encouraging environmental and climate change outcomes, including helping farmers build their resilience to climate change. The initiative, launched in 2022 by the Government of Germany, aims to use public finance to increase private investment to scale up PES programs to compensate smallholder farmers for their contributions to preserving ecosystem services. As of September 2023, PES pilot programs had been initiated through the International Fund for Agricultural Development in Brazil, Ethiopia, and Lesotho. The Lesotho program includes payment for water efficiency, as well as for biodiversity conservation and carbon sequestration.

    Adapted from the following source:

    CompensACTION. (n.d.). CompensACTION for food security and a healthy planet. https://compensaction.com

    Wollenberg, E., Tennigkeit, T., Dinesh, D., Baumert, S., Rohrig, F., Kirfel-Ruhle, L., & Zeppenfeldt, L. (2022). Compensating farmers for ecosystem services: Lessons and an agenda for innovation [Policy brief]. CompensACTION. https://www.globallandscapesforum.org/wp-content/uploads/2023/08/Compensating-farmers-for-ecosystem-services-policy-brief.pdf

  • Ecological Payment Systems – Switzerland

    Since the early 1990s, Switzerland has introduced reforms to move away from market price supports to direct payments, including those for the provision of ecological goods and services. As part of further reforms to its agricultural policy framework for 2014–2017, Switzerland transitioned from providing direct payments to farmers per hectare of production or per head of livestock to payments linked to efforts to achieve federal Environment Targets for Agriculture. Direct payments for the environmental benefits were provided for voluntary participation in activities under six categories: maintaining the cultural landscape, sustaining the food supply, promoting biological diversity, enhancing landscape quality, using production systems that are in harmony with nature and animal friendly, and the efficient use of resources. The policy included transition payments to reduce the disruption to farmers’ incomes. The transition was supported by a slight increase to Switzerland’s 2014–2017 budget allocation for agriculture.

    Adapted from the following source:

    Organisation for Economic Co-operation and Development. (2017). Reforming agricultural subsidies to support biodiversity in Switzerland: Country study (OECD Environment policy paper No. 8). https://www.oecd.org/environment/resources/Policy-Paper-Reforming-agricultural-subsidies-to-support-biodiversity-in-Switzerland.pdf

  • Remuneration Mechanisms for Ecosystem Services and the Quiroz-Chira Water Fund

    Peru’s Ministry of Environment developed the Remuneration Mechanisms for Ecosystem Services (MERESE) to mitigate the risks to the hydrological system threatening the ecosystem of Peru. The MERESE is a voluntary agreement promoting initiatives designed for the conservation, recovery, and sustainable use of ecosystem services. It consists of two parties: the payers benefit from the ecosystem services, and the contributors facilitate the conservation and recovery of the ecosystem by providing relevant services. The initiative is enshrined in law and included in Peru’s National Adaptation Plan and Nationally Determined Contribution.

    Nature and Culture International, an international non-governmental organization, initiated the Quiroz-Chira Water Fund under the MERESE program. The fund was created to conserve the Chira-Quiroz basin in Peru, as it is a critical source of water contributing to agriculture, aquaculture, domestic consumption, and industrial use. The fund targeted raising and managing funds for the conservation and recovery of the forests in the area where the contributors were located. It was financed by a voluntary group consisting of five payers (two municipalities, two water boards, and Nature and Culture International) and five contributors consisting of various peasant communities. The water boards voluntarily contributed 1% of the water tariff they collected from users. The two municipalities committed to annual contributions of USD 17,000 and USD 15,000, respectively, and also provided technical and logistical assistance in the operation of the water fund. Nature and Culture International was the key player, as it provided technical, administrative, and logistical assistance to the water fund.

    Between 2014 and 2020, water fund flows went toward community development (53%), conservation and recovery of ecosystems (37%), and management of the water fund (10%). This innovative financing mechanism succeeded in harnessing political and citizen support to blend new and traditional funds for conservation activities.

    Adapted from the following source:

    Fonseca, A., & Lahud, J. (2022). Implementación de MERESE mediante el Fondo de agua Quiroz-Chira: Instrumental financieros innovadores para la adaptación [Implementation of MERESE through the Quiroz-Chira Water Funds: Innovative financial instruments for adaptation]. Libélula. https://libelula.com.pe/download/14106/

Restoration Insurance Service Companies

Case Studies

  • A Restoration Insurance Service Company (RISCO) is a social enterprise that partners with local communities in conservation and restoration activities that provide flood reduction benefits. Insurance companies pay an annual fee for these services to reduce their risk exposure. While reducing climate-related risks due to flooding, RISCO-led projects can also generate and sell carbon credits to organizations interested in offsetting their greenhouse gas emissions to meet climate targets.

    The first iteration of a RISCO, under development through a pilot initiative in Southeast Asia in 2022, targets coastal risk reduction through mangrove conservation and restoration in areas with high-value coastal assets. This initiative is intended to sequester carbon and reduce flooding and property damage risks. The aim is to generate revenue streams through insurance-related payments for flood-risk reduction benefits and by selling blue carbon credits.

     

    Current or potential adaptation-relevant sector applications:

    • 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:

    • pilot instrument, under development.

     

    Considerations for creating a RISCO:

    • RISCOs need a plan for deep engagement with local communities to develop conservation and restoration activities.
    • Insurance payments require site-specific calculations of the flood reduction benefits.
    • There must be insurance companies that are interested in insuring high-risk areas.
    • There must be a market for the generated carbon credits, which may include ascertaining the quality of the credits.

     

    Adapted from the following sources:

    Global Innovation Lab for Climate Finance. (2021). Restoration Insurance Service Company (RISCO). https://www.climatefinancelab.org/ideas/restoration-insurance-service-company-risco/

    Mazza, F. (2019, September 27). Restoration Insurance Service Company (RISCO). Climate Policy Initiative. https://www.climatepolicyinitiative.org/publication/restoration-insurance-service-company-risco/

  • No examples yet, as this program is still in the pilot phase. 

Stormwater Credit Trading Program

Case Studies

  • Stormwater credit trading programs are an economic instrument used by municipal governments to encourage individual firms to implement measures to manage stormwater runoff on their properties. Property owners in urban areas are encouraged to build green infrastructure or green their existing infrastructure to create or generate credits. Green infrastructure projects include the installation of green roofs, rainwater harvesting systems such as rain barrels, and permeable pavement that allows rainwater to seep back into the ground.

    There are various options for developing these credit trading programs. One option is to base the generation of credits on meeting a runoff retention standard, where a property owner can buy credits when they cannot meet the standard. Another approach is to generate allowances that are based on the maximum amount of runoff to be delivered to the sewer system allowed by each property, as calculated by the municipal utility or regulator. A property with runoff below its allowance generates credits that can be sold to property owners who exceed the desired runoff level. The opportunity to generate revenue encourages property owners to invest in green infrastructure that could qualify to generate credits.

     

    Current or potential adaptation-relevant sector applications:

    • coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures; and
    • other built environment and infrastructure – urban development.

     

    Additional insights:

    • This is a mature instrument. Credits to reduce stormwater fees and allowance-based credit trading systems have existed in the United States since the 1990s.

     

    Considerations for developing stormwater markets:

    • Strong public institutions and private property rights that allow owners to bear the costs of implementing stormwater management are needed. Subsidy schemes can be employed to support owners with limited financial means.
    • Public authorities should have technical knowledge of water management, economic instruments to establish allowances and trading systems, and data collection and analysis, in addition to monitoring and legal enforcement.
    • Quantitative instruments should be employed to assess runoff levels to prioritize where economic investments should be made first. For instance, as it may be more expensive to introduce or enhance green infrastructure in urban areas with less permeable ground cover, investment in these locations may be given lower priority.

     

    Adapted from the following sources:

    Bassi, A., Cuéllar, A., Pallaske, G., & Wuennenberg, L. (2017). Stormwater markets: Concepts and applications. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/stormwater-markets-concepts-applications.pdf

    Department of Energy and Environment. (n.d.). Stormwater Retention Credit Trading Program. Government of the District of Columbia. https://doee.dc.gov/src

  • Washington, D.C. – Stormwater Retention Credit Trading Program

    Development projects are required by the District of Columbia to retain 100% of the stormwater on their sites to avoid hazardous flooding. If all of the stormwater cannot be retained as required, developers can either pay a fee in lieu of the cost of implementing stormwater retention measures or they can buy stormwater credits as needed to keep their projects under the set limit. These credits are generated by other developers that construct stormwater management control structures (e.g., green roofs, rain gardens, permeable pavement, tree planting) in the district. Credits can be generated through actions taken on one property or aggregated from multiple properties.

    Washington, D.C.’s credit market completed 44 trades in both the 2020 and 2021 fiscal years, with the value of credits traded in the two years totalling over USD 1,600,000. The program has encouraged the growth of green infrastructure investment, creating more green space and stormwater retention capacity. The Washington, D.C., stormwater credit trading program was recognized in 2014 as an innovative climate program that increased climate resilience through green infrastructure that prevented flooding and reduced the urban heat island effect.

    Other municipalities in the United States, including ones in Michigan and Illinois, were developing credit markets for stormwater retention in 2023, building on the learning of the Washington, D.C., program.

    Adapted from

    Department of Energy & Environment. (n.d.). Stormwater Retention Credit Trading Program. Government of the District of Columbia. https://doee.dc.gov/src

    Department of Energy & Environment. (2014, September 25). District recognized at International Climate Leadership Awards. Government of the District of Columbia. https://doee.dc.gov/node/903872

    Jackson, R. (2023). Stormwater Retention Credit Program: Fiscal year 2020–2021 summary report. Department of Energy and Environment, Government of the District of Columbia. https://doee.dc.gov/sites/default/files/dc/sites/ddoe/service_content/attachments/FY2020-FY2021%20SRC%20program%20Report.pdf

    Rainplan. (2023, June 22). An intro to stormwater credit trading programs. https://www.linkedin.com/pulse/intro-stormwater-credit-trading-programs-rainplan/

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.