Climate risk management and finance in the lead-up to COP27

Scaling up climate risk management and access to climate and risk finance is a key need up for further discussion at the global climate change conference COP27 in November

Climate change has turned into a key risk factor that affects countries around the world, especially vulnerable developing countries such as Sri Lanka. Extreme weather events—including floods, storms, and droughts—are becoming more frequent and intense while other short- and long-term climate impacts exacerbate or multiply existing risk factors, including those related to supply chains, markets, the environment, or production systems.

For this reason, comprehensive risk management and access to finance are key needs for developing countries as well as an integral part of climate action on all levels. As such, it is instrumental to ask how climate action can enhance risk management, and, vice versa, how risk management frameworks can contribute to climate change adaptation and addressing climate-induced losses and damages.

Climate risk management and COP27

In November, a global climate change conference will take place for two weeks in Sharm El Sheikh, Egypt. Commonly referred to as COP27, this 27th meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) will bring together representatives of almost 200 countries (including Sri Lanka) as well as thousands of other stakeholders from different sectors and regions.

Throughout different workstreams and negotiation tracks, parties to the UNFCCC will discuss a range of issues, including several that are relevant to climate risk management and finance. The conference will provide a space for countries to showcase their solutions and work towards accessing support to enhance existing frameworks, policies, and interventions, as well as finding new and innovative approaches to mobilise funding and support.

In general, risk management encompasses distinct steps and elements, for example, risk assessments and analytics, risk prevention, risk reduction, risk transfer, risk retention, and a toolbox of financial instruments. In the context of climate change, this is particularly relevant for adaptation—i.e., actions that reduce negative climate change impacts and take advantage of new opportunities—and loss and damage, which describes the consequences of climate change that exceed the practical or theoretical limits of adaptation.

For both, there are workstreams and relevant processes such as those related to climate finance and formulating a new collective quantified goal on finance, National Adaptation Plans, the Global Goal on Adaptation, the Warsaw International Mechanism for Loss and Damage Associated with Climate Change Impacts, the Santiago Network, and the 2022-2024 Glasgow Dialogue on loss & damage.

Accessing and mobilising finance

There are several mechanisms to access and mobilise climate and risk finance for developing countries. First, major climate funds, including the Green Climate Fund (GCF), the Adaptation Fund (AF), the Green Environmental Facility (GEF), or the Special Climate Change Fund, are mandated to fund readiness support and the implementation of relevant projects through national designated authorities (countries’ official focal points) and accredited entities (including international organisations, UN entities, and direct access entities) that can receive disbursements of money.

Second, multilateral development banks (such as the World Bank, the Asian Development Bank, or the Asian Infrastructure Investment Bank) and other bi- or multilateral development partners can bankroll a variety of climate-related interventions across different sectors.

Third, the private sector has considerable potential and resources to invest in climate action, for example through impact investment, thematic bonds, venture capital, private equity, public-private partnerships, or blended finance. There is also a multitude of other mechanisms and pathways to access climate finance in innovative ways, for example debt-for-climate swaps, philanthropies, premium and capital support for insurance schemes, or even crowdfunding.

Another perspective to look at climate finance is not from where the money is coming, but what it is spent on. Key categories include climate change mitigation, adaptation, and other relevant areas, such as disaster risk reduction, climate-smart development, or humanitarian support and relief. Regarding direct climate funding—i.e., mitigation and adaptation—, the vast majority of funds currently flows towards the former, with only a smaller share going towards adaptation according to recent assessments.

Besides mitigation and adaptation, climate-induced loss and damage is a key element of the Paris Agreement but currently has no dedicated fund or facility, which has been a topic of increasingly urgent discussion as climate impacts already exceed the limits of adaptation and cause significant economic and non-economic losses and damages. The broader discussion on climate finance is accepted by many stakeholders to encompass finance needs to address climate-induced losses and damages at the global and national levels, including actions aimed at addressing climate and disaster risks and impacts which can exacerbate existing social, economic, and environmental vulnerabilities.

Looking forward

Climate and risk finance is intended to support country-driven strategies while considering the priorities and needs of developing countries. It is important for governments and stakeholders to understand the financial needs of developing countries, the potential sources of finance and support, and how finance and technical support could be allocated in an equitable and balanced manner.

COP27 and the discussions leading up to it, present opportunities to highlight these needs, contribute to the evidence base on climate impacts, and aim to enhance access to climate and risk finance as well as other means of support for comprehensive and effective risk management mechanisms that can protect vulnerable economic sectors, communities, and groups.

(The writer works as Director – Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular writer to several international and local media outlets.)