Editing IPCC:AR6/WGII/Chapter-5 (section)

==== 5.14.2.4 Finance needs and strategies for adaptation ====

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Current understanding of finance flows and needs for adaptation in crop agriculture, livestock, fisheries, aquaculture and forest products relies primarily on top-down projections, with limited data ( [[#UNFCCC--2018|UNFCCC, 2018]] ; [[#Buchner--2019|Buchner et al., 2019]] ; [[#Jachnik--2019|Jachnik et al., 2019]] ). By one estimate, in 2017/2018, agriculture, forestry and land use received 24% of public adaptation finance (totaling USD 7 billion; half via multilateral development finance institutions and one-quarter from governments) and 35% of international grants (with 71% used for adaptation) ( [[#Buchner--2019|Buchner et al., 2019]] ). According to data from [[#OECD--2020|OECD (2020)]] , finance flows for agriculture, forestry and fisheries have risen fairly linearly from ca. USD 1.46 billion in 2010 (the year the Rio marker on climate change adaptation was introduced) to ca. 5.5 billion in 2018. Over the entire tracked period, the three subsectors combined received a total of USD 29.82 billion for activities with principal and significant adaptation components. [[#footnote-001|4]] However, the data set only includes climate-related development finance from bilateral, multilateral and private philanthropic sources, whereas private sector finance flows are not captured as this is notoriously difficult to track ( [[#UNEP--2016|UNEP, 2016]] ; [[#OECD--2020|OECD, 2020]] ; cross-ref to Cross-Chapter Box FINANCE in Chapter 17). Most of the funding (85%) was directed towards agriculture, with forestry (12%) and fisheries (3%) receiving significantly less, but across the subsectors, there is consistency in the sense that policy and administrative management and development receive the lion’s share of support, which is predominantly given in the form of grants (72%), while debt instruments (26%) and equity and shares in collective investment vehicles (2%) contribute less. From a regional perspective, 80% were directed to Africa (47%), Asia-Pacific (27%), and Latin America and Caribbean States (7%), whereas Eastern Europe and Western Europe and Other States received (2%) each and 17% were destined for ‘developing countries’ without regional tags. Finally, it is noteworthy that 38% of adaptation finance in agriculture, forestry and fisheries is marked as also having mitigation benefits, and roughly a quarter of funding is reported as having principal or significant gender objectives.

Whether current levels of growth in adaptation finance for agriculture, forestry and fisheries is keeping up with estimated needs cannot be assessed because of the large uncertainties that surround adaptation cost estimates (Cross-Chapter Box FINANCE in Chapter 17). There is, hence, high agreement that better assessment of adaptation costs of climate impacts requires considerably more research ( [[#Watkiss--2015|Watkiss, 2015]] ; [[#Diaz--2017|Diaz and Moore, 2017]] ). A recent study focusing on investments needed to offset the effects of climate change on the prevalence of hunger concludes that investments in agricultural research and development (R&amp;D) have to increase from USD 1.62 billion to USD 2.77 billion per year between 2015 and 2050 ( [[#Sulser--2021a|Sulser et al., 2021a]] ). In addition to agricultural R&amp;D, significant investment increases in water and infrastructure in the range of USD 12.7 billion and USD 10.8 billion are required, respectively, a considerable portion of which is relevant to the food system. In total, [[#Sulser--2021a|Sulser et al. (2021a)]] estimate that annual investment between USD 21.47 billion and USD 29.8 billion are needed to avoid sliding back from climate-change-related increases in the prevalence of hunger but recognise the shortcomings of their approach and acknowledge that ‘a full analysis of adaptation to climate change in agriculture would require including many other social, economic, and environmental dimensions’. For comparison, [[#World%20Bank--2010|World Bank (2010)]] estimated global costs of USD 70–100 billion per year for agriculture, forestry and fisheries, infrastructure, water resources, health, ecosystem services, coastal zones and extreme weather events to adapt to an approximately 2°C warmer world between 2010 and 2050. While the World Bank includes more sectors, more recent publications consider the resulting figures to be significantly too low ( [[#Baarsch--2015|Baarsch et al., 2015]] ; [[#UNEP--2016|UNEP, 2016]] ; Rossi and Miola, 2017; [[#Hallegatte--2018|Hallegatte et al., 2018]] ; [[#Markandya--2019|Markandya and González-Eguino, 2019]] ; [[#Chapagain--2020|Chapagain et al., 2020]] ; WGII Cross-Chapter Box FINANCE in Chapter 17). Therefore, despite the methodological and data challenges, further efforts are needed to better capture the economic risks of climate change and provide estimates of adaptation costs at global to national scales as well as across sectors ( [[#Watkiss--2015|Watkiss, 2015]] ; [[#Diaz--2017|Diaz and Moore, 2017]] ).

Financial barriers limit implementation of adaptation options in agriculture, fisheries, aquaculture and forestry ( ''high confidence'' ) ( [[#Shukla--2019|Shukla et al., 2019]] ; [[#FAO--2020|FAO et al., 2020]] ). Finance strategies can contribute to adaptation in these sectors in different ways (Table 5.25) and to different degrees. Standardised strategies have not yet been developed for specific adaptation needs, and in current practice, finance strategies are opportunistically deployed, with developing countries facing particular challenges due to under-developed financial mechanisms ( [[#Omari-Motsumi--2019|Omari-Motsumi et al., 2019]] ).

'''Table 5.25 |''' Potential adaptation finance strategies for categories of climate-related risks in the agriculture, fisheries, aquaculture and forestry sectors.

{| class="wikitable"
|-
! '''Finance strategies'''

! '''Reduced food availability'''

! '''Low food safety /''' '''dietary health'''

! '''Diminished livelihoods'''

! '''Declining ecosystem services'''

|-
| '''Reduce vulnerability'''

| ''Avoid staple failure'' : Vouchers to producers for improved production inputs

| ''Diversify production strategies'' : Invest in alternative crops/species/harvest methods

| ''Increase producer capacity'' : Fund technical assistance programmes

| ''Incentivise improved management'' : Improved access to credit based on environmental performance

|-
| '''Anticipate/minimise impacts'''

| ''Minimise impact of extreme weather'' : Fund early-warning systems

| ''Diversify products in supply chains'' : Finance processing equipment for alternative food products

| ''Moderate food price spikes'' : National food reserves

| ''Minimise resource depletion'' : Subsidise micro-lending for water-efficient technologies

|-
| '''Steer capital towards climate resilience'''

| ''Develop climate-resilient production technologies'' : Fund R&amp;D for improved genetics (crops, fish, livestock) and management

| ''Build nutrition-sensitive food systems'' : Finance early-stage market building for diversified food products

| ''Increase resilience of supply chain infrastructure'' : Finance improved storage and transport facilities

| ''Disincentivise low-resilience production:'' Screen investments based on climate risk disclosures

|-
| '''Pool climate-related risks'''

| ''Distribute climate-related risks:'' Securitise investments in production systems

| ''De-risk diversified food supply chains'' : Invest in producer aggregation to improve supply chain efficiency

| ''Insure against supply chain risks'' : Subsidised index insurance programmes

| ''Detect high-risk production systems'' : Invest in supply chain monitoring/traceability mechanisms

|-
| '''Compensate for climate-related impacts'''

| ''Compensate for production losses'' : Financial transfers to affected producers

| ''Avoid food shortages'' : Subsidise food importation

| ''Avoid selling off productive assets'' : Fund social support for low-income households

| ''Ecological restoration'' : Direct development aid to land rehabilitation projects

|}

Many types of financial instruments are employed by diverse actors (Table 5.26) guided by their mandates (e.g., development, commerce), capacity (investor, intermediary, donor) and risk appetite. Actors within a sector or local production area can coordinate their financial strategies towards common objectives (e.g., reduced supply chain loss) or participate in joint financial action such as blended finance structures that combine commercial and concessionary finance to catalyse additional private investment, enrich the pipeline of bankable projects, and test business models ( [[#FAO--2020b|FAO, 2020b]] ).

'''Table 5.26 |''' Potential adaptation finance objectives for major actors in agriculture, fisheries, aquaculture and forestry sectors.

{| class="wikitable"
|-
! '''Actors'''

! '''Potential adaptation finance objectives'''

|-
| colspan="2"| '''Private sector''' : Focused on capturing positive externalities (i.e., lower risks or costs) from adaptation investments ( [[#Woodard--2019|Woodard et al., 2019]] ). Major considerations include fiduciary responsibilities; expected rates of return (i.e., risk-adjusted; benchmarked to comparable investments); investment characteristics (e.g., liquidity, structure, size) and contribution to investor portfolio; material business risks (e.g., supply chain reliability; stranded assets); cost control (e.g., product losses; insurance); legal compliance; and sectoral requirements (e.g., climate risk disclosure) ( [[#Havemann--2020|Havemann et al., 2020]] ).

|-
| Production companies or cooperatives

| * Supply chain transactions (e.g., trade finance)
* Sustainable agricultural infrastructure (e.g., capital investment in storage or processing facilities to reduce exposure to climate risks)
* Developing or accessing advisory services (weather data; agronomic information) ( [[#Orchard--2019|Orchard, 2019]] )
* Risk management (e.g., insurance/reinsurance; budget reserves)

|-
| Financial investors and intermediaries (e.g., banks, asset managers, venture capital; non-bank financial institutions)

| * Ownership shares in established companies (i.e., private equity) or large publicly traded companies (i.e., listed equities)
* Debt issuance (e.g., working capital; catastrophe bonds; emergency loans)
* Real estate investment
* Financial derivatives
* Technological research and development
* (Impact investors) Bespoke non-financial sustainability objectives (e.g., fairtrade products; financial inclusion) ( [[#Havemann--2020|Havemann et al., 2020]] )

|-
| colspan="2"| '''Public sector''' : Encompassing nearly commercial (e.g., specialised commodity boards; bond issuances), partially subsidised (e.g., low-interest loans) and fully subsidised (e.g., R&amp;D; grants) investments. Major considerations include avoiding negative impacts to citizens (e.g., food price spikes) and specific constituencies (e.g., catastrophic losses to producers) and maintaining/enhancing public revenues (i.e., taxes from economic activity in agriculture, fisheries, aquaculture and forestry).

|-
| Government agencies and multilateral institutions

| * Strengthen enabling environments for sustainable production and ecosystem protection (e.g., price transparency; information exchange; international coordination)
* Support demonstration projects for sustainable land and resource management (e.g., grants)
* Disaster risk reduction (e.g., national disaster funds; social protection programmes; contingent credit lines; sovereign/sub-sovereign insurance ( [[#Global%20Commission%20on%20Adaptation--2019|Global Commission on Adaptation, 2019]] )
* Increase resilience through early-warning systems, infrastructure, and capacity building (e.g., climate change adaptation funds)
* Increase revenues for adaptation activities (e.g., income/luxury taxes)
* Reduce production risks (e.g., agricultural subsidies)
* Promote advanced technology implementation (e.g., tax incentives)
* Coordinate and align donor funding with national priorities (e.g., multi-donor national climate change funds)
* Incentivise and de-risk commercial investments (e.g., interest rate reduction programmes, structured financing, guarantee funds) ( [[#Woodard--2019|Woodard et al., 2019]] )

|}

Expanding access to financial services and pooling climate risks can enable and incentivise climate change adaptation ( ''medium confidence'' ) ( [[#Shukla--2019|Shukla et al., 2019]] ). To mobilise financial instruments (Table 5.27) towards adaptation needs, individual actors can apply an adaptation lens to existing or new activities, accounting for investment characteristics (e.g., development stage; cash flow profile), requirements (e.g., amount; risk–return) and context (e.g., regulatory landscape) ( [[#Havemann--2020|Havemann et al., 2020]] ). Risk-layering can match financial instruments to severity and probability climate risks ( [[#Hochrainer-Stigler--2021|Hochrainer-Stigler and Reiter, 2021]] ).

'''Table 5.27 |''' Major types of financial instruments suitable to adaptation finance in agriculture, fisheries, aquaculture and forestry sectors (adapted from [[#Havemann--2020|Havemann et al., 2020]] ).

{| class="wikitable"
|-
! '''Financial instrument'''

! '''Description'''

|-
| colspan="2"| '''Equity''' : Ownership stake in a company (e.g., agricultural technology company; processing company) or collective investment vehicle (e.g., agriculture fund; Timber Investment Management Organization; commodity index fund) providing returns (via dividends and/or sale of equity shares) corresponding to business-related risk (e.g., higher return for higher risk and/or lower liquidity)

|-
| Listed equities

| Ownership of shares in a company listed in a public market

|-
| Private equity

| Ownership of shares in a company or other assets

|-
| Junior or risk-absorbing equity

| Ownership of lower-tier shares in a company (e.g., common stock) or collective investment vehicle (e.g., first-loss tranche)

|-
| colspan="2"| '''Debt''' : Capital provided directly or indirectly (via banks or other third-party institutions) to users with defined repayment terms (i.e., timeframe, interest rate); more likely to deliver adaptation benefits when coupled with capacity building (e.g., technical assistance, education, analytics) ( [[#Woodard--2019|Woodard et al., 2019]] )

|-
| Loan, bond, note, credit line

| Direct or indirect provision of capital (e.g., operating loans; dedicated credit line for agricultural trade); concessionary loans may allow for below-market interest rates

|-
| Soft loan

| Direct interest-free loan (e.g., funds provided in advance of good/service delivery)

|-
| Emergency loan

| Lending in response to climate risks or impacts with repayment terms (e.g., return period) that consider necessary relief, recovery and reconstruction

|-
| Catastrophe bond

| Risk transfer instrument in which insurers or reinsurers provide high interest payments to investors in exchange for a payout (and repayment deferment or forgiveness) activated by specific events (e.g., extreme weather)

|-
| Impact bond

| Subsidised investment providing capital upfront or based on defined outcomes

|-
| Subordinated loan

| Concessionary capital with a junior position (i.e., accepting higher risk of non-repayment and / or lower rate of return on investment) relative to other investors

|-
| Securitised investments

| Aggregation of equity or debt to offer marketable securities to a wider pool of investors with different risk–return appetites

|-
| colspan="2"| '''Guarantees''' : Commercial and concessionary guarantees that provide compensation for losses due to specified risks (e.g., political risk, performance risk); more likely to deliver adaptation benefits when linked to robust underwriting standards and verification protocols ( [[#Woodard--2019|Woodard et al., 2019]] )

|-
| Credit guarantee

| Compensation for specified losses incurred by agricultural lenders

|-
| Payment, performance, surety bonds

| De-risking mechanism for transactions between providers and buyers of goods/services; may be used in trade finance and other forms of intermediation

|-
| colspan="2"| '''Insurance''' : Policies and other financial instruments that provide compensation for losses based on defined terms and conditions.

|-
| Production insurance

| Compensation for specified losses related to production (e.g., insurance indexed to specific weather events) or supply chains (e.g., shipping insurance)

|-
| Market and price insurance

| Compensation for specified market-related losses (e.g., price or currency fluctuation)

|-
| colspan="2"| '''Grants''' : Concessionary funding provided by public or philanthropic entities to support climate adaptation costs or outcomes (no expectation of repayment)

|-
| Direct support

| Funding for provision of goods (e.g., fertilizer, seeds, nursery stock) or services (e.g., technical assistance, product storage) to producers, local companies or intermediaries (e.g., for agronomic or business management expertise); can reduce credit risk when part of blended finance arrangements

|-
| Performance-based grants

| Grants or other concessionary funding contingent on achievement of defined adaptation outcomes (with possible third-party verification requirement); may support development and testing of new approaches (i.e., design funding; challenges/prizes)

|-
| colspan="2"| '''Governmental instruments'''

|-
| Policy incentives

| Public policies designed to stimulate adaptation action among targeted groups (e.g., producers, consumers, agri-businesses, financiers) including direct or indirect subsidies (e.g., producer payments, tax breaks, health insurance), procurement policies (e.g., low carbon and sustainability criteria; nutrition-sensitive school feeding programmes) and other fiscal measures (e.g., infrastructure development; funding R&amp;D in climate-resilient practices or technologies) ( [[#Shukla--2019|Shukla et al., 2019]] )

|-
| Development aid

| International or domestic programmes that directly or indirectly fund adaptation actions including financial transfers (e.g., producer support or anti-poverty programmes) and subsidised credit ( ''medium confidence'' ) ( [[#Shukla--2019|Shukla et al., 2019]] )

|-
| Planning grants

| Financial support to governments for adaptation planning (e.g., via readiness programmes)

|-
| colspan="2"| '''Other instruments'''

|-
| Fintech

| Data analytics and risk analysis models used to better assess borrowers’ repayment risk (e.g., due to crop failure) and reduce transaction costs (e.g., streamlined lending processes); applications may include financial inclusion (e.g., micro-financing; lending to small- and mid-size operators), alternative repayment programmes (e.g., for larger capital borrowing), insurance (e.g., more granular risk assessment) or digital strategies (e.g., crowdfunding, smallholder credit) ( [[#Agyekumhene--2018|Agyekumhene et al., 2018]] )

|-
| Payment for Ecosystem Services (PES)

| Funds delivered to land and resource managers in exchange for compliance with specified sustainability practices or environmental outcomes; PES depends on willing payers (i.e., direct and indirect beneficiaries of ecosystem services such as governments, companies, conservation groups, philanthropies)

|}

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