Private sector finance for adaptation in LDCs: Perceivable, potential, or improbable?
Clarisse Kehler Siebert & Adis Dzebo, Stockholm Environment Institute
There are many pieces in the enormous, internationally-negotiated climate change jigsaw puzzle that don’t quite fit yet – or perhaps never will. Two of these pieces are private sector finance and adaptation – specifically the idea that private sector resources should and will finance adaptation. Part of the problem might be that private finance for adaptation is a broad and often undefined concept. For example, are we discussing local or foreign private actors, and are they financing the adaptation of their own operations and value chains, or that of the communities in which they operate? And part of the problem might be that there are certain aspects of adaptation that simply are public goods, such as parts of good development practices, like community capacity building – that are simply neither profitable nor part of conventional business models. While these might sound like very ‘niche pieces’ in an already rather specialised puzzle, they are actually quite important to the climate finance debate: what is actually being committed as climate finance – not only in terms of amount, but in terms of financial instruments and sources of finance – and can these amounts and instruments address both mitigation and adaptation needs?
This fuzzy area of what and whether private finance is expected to address when it comes to adaptation is visible in the mandate of the impending Green Climate Fund’s (GCF) Private Sector Facility (PSF). According to the GCF’s founding document, the PSF is supposed to finance mitigation and adaptation at national, regional and international levels; to promote local private investment; and to support activities to enable private sector involvement in Small Island Developing States (SIDS) and Least Developed Countries (LDCs).
In an ongoing research project, we have asked what this ‘private sector involvement’ in LDCs might look like. Interpreting ‘involvement’ to mean ‘investment’, using National Adaptation Programmes of Action (NAPAs) to indicate the LDC’s adaptation priorities, and using foreign direct investment (FDI) as indicative of where the private sector autonomously finds investment opportunities.
We have to date looked at pan-African LDC data as well as at four specific African countries. In all cases, we found that very little FDI goes to African LDCs at all – less than 1.5% of global total FDI flows – and that, of these small FDI flows, there is little to no overlap with the activities and sectors that are adaptation priorities. In some country studies we also observed competition between FDI and adaptation priorities – e.g. FDI investment in large-scale agriculture in Ethiopia is in competition with small landholders for water rights, while water resources and agricultural development are central to Ethiopia’s adaptation and development planning. In Sierra Leone, there is comparable tension between foreign biofuel investments and domestic food production. In very basic terms, this means that presently, foreign private actors do not pursue low hanging fruit in the sectors and activities that are adaptation priorities in African LDCs – and in some cases, foreign investment is even counterproductive to adaptation activities.
There are a number of conclusions to draw from this. First and quite obviously, there are certain adaptation efforts that the private sector will never fund, and this is the space for public funds. developed countries individually, and the United Nations Framework Convention on Climate Change (UNFCCC) Parties collectively, will need to continue to consider large, predictable, public financial flows to many adaptation priority areas into the foreseeable future. Secondly, if foreign investment is to increasingly fund adaptation in LDCs through the PSF, a series of actions need to happen: the issue needs to be acknowledged as a challenge by the GCF; the space where private funding is plausible and desirable needs to be defined; and policy innovation is required to inform and engage the private sector in identifying opportunities, and incentivising and facilitating their ‘involvement’ in LDCs.
These quite pragmatic conclusions do not address the equity issues that make the puzzle even more complex: whether private finance should be considered climate finance at all is among the many questions of justice and basic principles at the heart of the UNFCCC and of international law more generally.
For the time being, the early take home message from our research on foreign private investment in sectors of adaptation priority in LDCs is that the question of private foreign ‘involvement’ in adaptation needs to be on the radar of the GCF PSF, and challenged by other actors including LDC governments and civil society. In practical terms, foreign private ‘involvement’ in LDCs should not hinder adaptation, and hopes that there will be substantial private flows towards helping LDCs to adapt to the adverse effects of climate change are, at present, premature.
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