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The role of the private sector in climate adaptation funding

In this article, we will take a closer look at the role of the private sector in funding climate adaptation.
businessman drawing a graph
© University of Groningen

The UN Climate Negotiations in Cancun reaffirmed developed countries’ commitment to delivering approximately 100 billion US dollars per year from 2020 onwards.

However, in reality, projections show that this target is impossible to reach (OECD, 2016).

Funding climate adaptation

Therefore, it is only logical to seek opportunities to fund climate adaptation that are beyond public funds. There is some data on private sector investment in developed countries.

The opportunities to invest in climate adaptation, for international companies located in developed markets, include private investment in energy efficiency and land use.

Companies from the Global North also invest in adaptation or development related activities in the Global South. For example:

Cafedirect trains thousands of coffee and tea farmers in Africa and Latin America to adapt, while Unilever Tea, at its growing farms in East Africa, responds to deforestation and changing rainfall patterns by investing in efficient irrigation equipment, drought-tolerant tea varieties, and reforestation (UNFCCC, 2014). In both cases, the benefits of companies’ investments in their supply chains trickle down to (smallholder) farmers, which enables them to increase their agricultural outputs

(Pauw, (2015) p.5)

High-rise office buildings in Manhattan, New York

Private-sector engagement in adaptation finance in developing countries

There are two broad types of financing for climate finance:

  1. International financing
  2. Domestic financing

International funding

International adaptation finance may take three forms:

  1. Shareholder holdings: capital contributions may be made into adaptation projects (equity), or in creditor claims that need to be repaid with interest (bonds or loans), and hybrid capital instruments. Investors in this category include banks and private equity funds.
  2. Investment in insurance: this helps people and societies to reduce their vulnerability by distributing risks and costs from extreme weather-related events. Nevertheless, this kind of investment is difficult to implement on a micro-scale level due to expense.
  3. Philanthropy: governments of developing countries could incentivize philanthropy for adaptation, but it would remain a modest flow, and incentives might divert resources away from urgent development needs.

Domestic funding

The second type of climate finance is domestic financing. Roughly 90% of the population in developing countries depends on the private sector for their income (SER, 2011).

This fact signals that contributions from the private sector, on the domestic front, need to come from activities of small-to-medium-sized (SMEs) enterprises. One of the largest sectors in developing countries is agriculture.

The table below gives a summary of business opportunities and new markets of adaptation connected to the agricultural sector.

Summary of business opportunities and new markets of adaptation

The case study conducted by Pauw (2015) identifies possible incentives for private sector engagement in climate adaptation of the agricultural sector in Zambia.

The incentives can be summarised as:

  • improved infrastructure (such as roads, water availability and energy access),
  • tax rebates (on seeds, fertilisers, construction material etc),
  • information and capacity building (for example through agricultural extension services), and
  • stimulate investment (through pilot projects).

References

W. P. Pauw (2015) Not a panacea: private-sector engagement in adaptation and adaptation finance in developing countries, Climate Policy, 15:5, 583-603,

OECD (2016), 2020 Projections of Climate Finance Towards the USD 100 Billion Goal DOI

SER. (2011). Advies Ontwikkeling door duurzaam ondernemen. Den Haag: Sociaal Economische Raad.

Sierra, K. (2011). The green climate fund: Options for mobilizing the private sector. A brief for the GCF transitional committee. London: CDKN.

© University of Groningen
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