UN Adaptation Gap Report 2021: The Gathering Storm and What It Means for Private Equity

Governments and regulatory agencies have exponentially increased their push toward the decarbonisation of industries in recent years. The recent 2021 United Nations Climate Change Conference, COP26, emphasised major investments in clean technology and innovation to significantly cut back emissions. Even more recently was the release of the “UN Adaptation Gap Report 2021: The Gathering Storm”, which places even greater emphasis on financing and implementation of adaptation to the growing impacts of climate change, particularly in and for developing countries. Let’s take a closer look at the context of industry climate change initiatives, the pillars of the UN Adaptation Gap Report, and the impacts of those pillars on private equity.

Climate crisis at COP26

As evidenced at COP26, world leaders are prioritising climate change and environmental sustainability. Specifically, the two most prominent climate change initiatives governments and companies will be expected to comply with are investing in clean technology and climate change adaptation efforts.

Clean technology

Member governments have raised investment in clean energy innovation by $5.8bn a year since 2015, and continue to raise it (S&P Global). Around half of the emissions savings in 2050 will need to come from technologies that are today at demonstration or prototype stage. Some of these technologies include: systems that capture and recycle CO2 emissions, regenerative agriculture techniques that cut down on food waste and pesticide use, and a fuel additive that reduces greenhouse emissions from used fuel and reduces overall fuel usage. Accelerating innovations in energy and land use could reduce the cost of decarbonising the energy system by 28%, saving $2.7tn a year by 2050.

Climate change adaptation financing

Hand-in-hand with investment in clean technology comes the financial increase in adaptation to climate change. Urgent efforts are recommended to increase the financing and implementation of actions designed to adapt to the growing impacts of climate change. The top priority of these efforts is financing. Developed countries, including the United States, previously agreed to deliver $100bn for climate change adaptation in developing countries, but many failed to reach this goal. Global leaders expressed concern at COP26 that too much time has been spent in the planning phases of climate change adaptation, particularly for developing countries, resulting in a significant push to shift from planning to execution. The largest obstacle in making the shift to execution is the lack of financing. In a COP26 report, developed countries confirmed that the previously agreed-upon $100bn target would be reached by 2023.

UN Adaptation Gap Report 2021

While policies and planning are growing for climate change adaptation, financing and implementation are still far behind where they need to be. The UN Adaptation Gap Report found that the costs of adaptation will likely land in the higher end of an estimated $140-300bn per year by 2030 and $280-500bn per year by 2050 and will be five to ten times higher for developing countries. These estimates are far higher than the $79.6bn provided to developing countries for adaptation planning and implementation in 2019. As mentioned above, developed countries are failing to meet the previously agreed-upon $100bn per year goal for developing countries, demonstrating the significant financial deficit between where countries are and where they need to be. The report calls for urgent efforts to increase the financing and implementation of actions designed to adapt to the growing impacts of climate change. It also places significant emphasis on integrating climate change adaptation into the work currently underway toward emissions reduction.

Missed opportunities of COVID-19

The Adaptation Gap Report expresses that there are missed opportunities for funding climate change adaptation in coordination with COVID-19 recovery stimulus initiatives. The report clarifies that less than one-third of 66 countries studied explicitly funded COVID-19 measures to address climate risks up until June 2021. For example, one country utilised COVID-19 recovery initiatives to improve water management practices to address reduced water availability as part of its management plan. At the same time, the heightened cost of servicing debt, combined with decreased government revenues, may hamper future government spending on adaptation, especially within developing countries.

Weak financing for climate change adaptation

While the report commends the heightened efforts in planning for climate change adaptation initiatives, it also emphasises the lack of movement of those plans into the execution stage. The primary factor cited for this slow-moving execution is a lack of financing. As mentioned earlier, the report found that the costs of adaptation are likely in the higher end of an estimated $140-300bn per year by 2030 and $280-500bn per year by 2050 — for developing countries alone. Climate finance flowing to developing countries for mitigation and adaptation planning and implementation reached $79.6bn in 2019, but with the direction we’re heading, that number pales in comparison to what will be needed. The report all but calls on governments of developed countries to step up, as estimated adaptation costs in developing countries are five to ten times greater than current public adaptation finance flows. This gap is widening.

What does this mean for Private Equity?

While there is an upward trend in climate finance, based on current projections, it seems unlikely that the US $100bn target for 2020 has been met, particularly the inferred adaptation component of this target. Governments and companies are working and investing to try to close this gap quickly, but climate conditions are worsening even quicker and not enough is being done yet to keep up.

Where Private Equity comes in

Sustainable private equity is key as investors scrutinise climate-related risks in their portfolios and investments. Private investments need to be under the microscope more than ever, and organisations can implement technology and processes to better understand the carbon impact of their investments and how to offset the negative effects with positive ones. Subsequently, as companies better understand the environmental impact that their current investments have on climate change, they are making the switch to more sustainable private equity investments.

The Adaptation Gap Report, however, indicates that working to balance negative climate impact is no longer enough — organisations need to proactively create and implement decarbonisation strategies to lessen their overall carbon footprint and that of their industries as a whole. A major shift from standard partnerships that benefit the reputation of major companies to active investing in organisations that foster innovation in climate change adaptation is occurring. As the report discusses, the costs of adaptation in developing countries will cost exponentially more than in more developed areas, which is why financing adaptation initiatives in these countries is a top priority to world leaders and governments.

While still a relatively new concept, ESG impact investing is proving to be a promising source of new returns. An example of this approach in action is the Reconor Group, an environmental services provider in Denmark that treats and remediates soil and recycles waste. With investing from private equity firm Agilitas, the Reconor Group has gained market share, added capabilities and services, expanded, is now a leading provider of sustainable environmental solutions, and has provided substantial returns to Agilitas. It’s this kind of private investing that will do more than simply offset one company’s carbon footprint, but will provide financing opportunities for climate change adaptation worldwide.

ESG portfolio risk assessment with ethiXbase

In order for private equity firms to contribute to the financing and implementation of climate change adaptation, they need to make their way into ESG impact investments. However, understanding the right investments to make for the benefit of your portfolio and the climate crisis can be challenging. The experts at ethiXbase offer the leading ESG portfolio risk assessment solution for private equity firms. With our ESG reporting and risk management solution, you can provide your stakeholders with a comprehensive, authentic, and holistic view of ESG risk and portfolio resilience through a centralised, data-driven dashboard. To learn more about how this leading ESG solution can benefit your private equity firm, request a demo with the team at ethiXbase.

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