The Business Case for Adaptation Finance of “Brain Trust”

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By Dr. Dalia A. Kader, Chief Sustainability Officer, Commercial International Bank, and Chair, Sustainable Finance Committee, Federation of Egyptian Banks

This article seeks to re-examine the relationship between financial systems and food systems by introducing “Brain Trust”, a potentially transformative solution to mobilise adaptation finance (AF) in building resilient food systems on the African continent.

Introduction

The climate crisis is unfolding much faster than the capacity of our global systems to adapt. The evolution of the international financial system needs to move up to the level necessary to manage the climate challenge. After more than 30 years of trying to mobilise climate finance, the outcome reveals systemic gaps. Climate mitigation has yet to perform as required to meet the 1.5-degree Celsius challenge. Global warming is rising, with a detrimental impact on human food systems. Climate adaptation is inevitable to fight hunger and drought. However, the incremental progress won by COPs (Conferences of the Parties), along with evolving regulatory and policy efforts, still falls short of driving the needed system evolution. The situation is compelling for the African continent, with around 278 million Africans facing starvation and drought.

Until the global financial architecture witnesses long-overdue reform, the urgent need and potential room for African financial institutions to step in with speed and agility and innovate new business models for adaptation finance will remain. Brain Trust is one such initiative that leverages existing success stories on the part of banks and maximises their capacity to monetise environmental and social risks while validating the triple bottom line of adaptation finance. Notwithstanding the need for policy reform, commercial banks have the power and agility to help drive sustainable system transformation.

This article outlines efforts to reconceive the role of African financial institutions in enabling robust food systems. The goal is for African banks to take the helm in rethinking adaptation finance through enacting solutions such as Brain Trust, a potentially transformative blueprint to mobilise adaptation finance into building resilient food systems on the African continent. Focusing on demonstrating the business case of adaptation finance, Brain Trust targets enticing private finance towards sufficient and sustainable food systems in Africa, with a focus on agriculture and water.

Brain Trust

Brain Trust was launched by Commercial International Bank (CIB) on the margins of COP27 (the 27^th Conference of the Parties to the United Nations Framework Convention on Climate Change), which took place in Sharm El Sheikh, Egypt, from November 5 to 20, 2022. Brain Trust is one of a series of events entitled “For Africa and from Africa to the World”. The conceptual project is grounded in and inspired by actual climate-finance transactions under Commercial International Bank’s (Egypt’s largest private-sector bank) Green Bond issuance.

The underlying vision of the Brain Trust construct is to revise the role of commercial banks in Africa towards helping to establish sustainable and sufficient food systems in Africa. With the overarching belief that “Africa can feed itself”, the central postulate is that Africa has enough resources to be self-sufficient if banks enact a new approach and methodology for adaptation finance.

The Brain Trust paradigm challenges the current approach to adaptation finance. Brain Trust reconceives the role of African financial institutions as progressive drivers to take the helm of rethinking adaptation finance business models. The objective remains twofold: first, to demonstrate the business case of adaptation finance with a focus on agriculture and water through monetising the environmental and social risks and returns. Second, to release adaptation finance from the confines of public finance and concessional loans to private finance—from seeking billions of dollars in broken pledges to trillions of sustainable investments.

When approaching the trajectory of climate finance and sustainable food systems in Africa, it is essential to reckon with several staggering facts and figures. The most alarming is that global warming and rising carbon emissions are causing tremendous imbalances that threaten humans and damage our food systems. Planet Earth has been experiencing its seven warmest years on record since 2015. There is an increasing consensus among leading international experts affiliated with the Intergovernmental Panel on Climate Change (IPCC) that global warming continues to rise with no signs of the desired improvement. Even if high-emitting countries take strong actions to combat climate change, the emissions caused by past actions have a locked-in effect on global warming, creating intense repercussions for social and economic development for all nations.¹ In light of the above, climate finance becomes a compelling need.

As widely admitted and documented, Africa remains the most vulnerable continent, unduly paying the price of a series of crises. Facing the extreme weather conditions of flooding, drought, storm surges and declining crop yields, the climate crisis is taking its toll on human lives and livestock, with an estimated 278 million African inhabitants suffering from starvation and malnutrition.² As demonstrated by the Red Cross, hunger contributes to 45 percent of African children’s deaths.³ The effects of the climate crisis are compounded by the detrimental impacts of the COVID pandemic, during which the food crisis has been exacerbated by severe fiscal distress.

On a contrasting note, Africa harbours an abundance of natural resources, a young population and 60 percent of the world’s arable land. As reported by the World Economic Forum (WEF), Africa has the potential to be a significant player in global food networks and relieve much of the stress on global food security.⁴ Thus, Africa is facing a dichotomy of threats and opportunities; this is where the role of financial institutions could make all the difference in shaping the continent’s destiny. Adaptation finance emerges as imperative, especially for the agriculture and water sectors.

Climate finance crystallised with the advent of the millennium as a “compelling necessity” focusing on climate mitigation and adaptation. Unfortunately, climate finance has neither materialised nor picked up with the pace and scale required. The situation is all the truer for adaptation finance, which focuses on funding traditional infrastructure projects, dams and coastal fortifications for agriculture, crop-yield improvements, and water desalination and treatment.

The concept of “adaptation” surfaced in both the United Nations Framework Convention on Climate Change (UNFCCC), negotiated in 1992, and the Kyoto Protocol in 1997. In 2001, the IPCC stressed the urgency of adaptation finance from a “good to have” to a “must have” on an equal footing with mitigation finance. Since then, the concept of adaptation finance has steadily featured on the agenda of a trail of COPs (Conferences of the Parties). While COP7 (2001) set up a programme to address the needs of the least developed countries (LDCs) and laid the groundwork to help implement National Adaptation Programmes of Action (NAPAs), COP13 further developed Bali’s action plan. In 2010, the Cancun Adaptation Framework (CAF) was established, stressing that adaptation must be addressed at the same priority level as mitigation. In 2015, the seminal Paris Agreement introduced Article 7, defining a global goal regarding adaptation with the objective “of enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change”.⁵ COP27 in Sharm El Sheikh successfully introduced the “Loss and Damage” fund.

Despite all the iterative global efforts to address adaptation over three decades and the incremental successes introduced by each round of COP, adaptation finance has critically lagged and fallen far short of meeting the climate challenge, while the perils of global warming are currently being demonstrated each day across the globe. The global food system is at the top of the sectors hampered by this deficiency. 

The US$100-billion global goal pledged by developed countries for both the mitigation and adaptation plans since 2009 has yet to materialise fully—currently amounting to only US$83.3 billion, according to the Organisation for Economic Co-operation and Development (OECD). Adaptation finance’s share of total climate finance to developing countries was 34 percent in 2020, significantly below mitigation finance. The current adaptation finance needs are estimated to be five to ten times greater than current international adaptation finance flows.⁶ The United Nations Environment Programme’s (UNEP) “2016 Adaptation Gap Report” observed that by 2030, adaptation costs are likely to range from US$140 to $300 billion per annum, and by 2050, these costs could rise to between US$280 and 500 billion per annum. The report warned that the adaptation finance gap (AFG) is widening and stressed that public and private-sector funds are needed to close it.⁷

On a brighter note, we should be mindful of another fact that opens a window of opportunity to redress the adaptation finance gap. The OECD’s “Global Outlook on Financing for Sustainable Development 2021” (2020) reported that asset managers, banks, institutional investors and others, including DFIs (development finance institutions) and MDBs (multilateral development banks), hold an estimated US$379 trillion in investable assets.⁸ However, less than 1 percent would be required to address the adaptation finance gap.

African financial institutions should leverage the opportunity and work on developing bankable and investable adaptation projects. The above facts and figures reveal the cracks within the financial system and the critical mismatch between demand (adaptation financial needs) and supply (global investable assets), stressing the need to reform our approach to adaptation finance and rethink a global financial architecture with revised roles and different business models.

The crux of the problem is that adaptation finance has been stereotyped as not profitable or lucrative enough to “crowd in” private funding. The lack of perceived economic viability is a critical concern that must be fundamentally addressed. Thus, adaptation finance has been pigeonholed and confined to the realm of public development finance and concessional loans rather than becoming the domain of private finance. Despite a series of COPs and international frameworks, public funding has not delivered the expected results over the past two decades. Even if mobilized, public funding alone cannot adequately close the gap in adaptation funding. Hence, private-sector investment is imperative for closing the adaptation finance gap.

The situation points out critical gaps in the architecture of the global financial system. Brain Trust—an envisioned Africa-led initiative—is a step change to close the adaptation finance gap, addressing the misalignment between global private funds and adaptation projects in Africa’s sustainable and sufficient food systems. The gap urges African banks to adopt a new role.

Brain Trust introduces a fresh mandate and business opportunity for African financial institutions to proactively innovate new narratives and business models for adaptation finance in order to overhaul the conventional philosophy and practice framing the discipline of “adaptation”. The objective is to demonstrate the business case for adaptation projects and develop bankable projects with identified and stable revenue streams and adequate risk-adjusted returns that would entice private investors. Brain Trust will create new revenue streams for banks (fee-based services) and enable private investors to secure risk-adjusted returns while positively impacting the environment and society and complying with developing regulations. The Brain Trust paradigm includes three main components:

Monetising environmental and social benefits is necessary to remediate market failure

Adaptation finance is critically impaired and constrained by an accounting system that still falls short of monetising environmental and social risks and opportunities. Banks with robust sustainable-finance systems and functioning environmental and social as well as climate risk management (CRM) systems have the technical capacity to manage, assess, monitor and demonstrate the business case of adaptation finance on behalf of private investors. As such, banks will proactively deal with market forces and the transition risks that come with new policies and regulations (e.g., carbon taxation, repricing or scarcity of resources, removal of subsidies) and technological advancements. In most cases, factoring in these transitions could make projects profitable, bankable and investable.

The perspective of adaptation finance having a business case has been grounded in numerous reports and regional projects attesting to triple bottom-line benefits. According to the World Bank, investing in climate adaptation would deliver significant returns, with an average 4:1 benefit-cost ratio.⁹ Furthermore, Africa has witnessed several successful agriculture and water programmes with reasonable success, as demonstrated by plenty of promising adaptation initiatives led by the African Development Bank (AfDB), International Fund for Agricultural Development (IFAD), Food and Agriculture Organization of the United Nations (FAO), Coalition for Climate Resilient Investment (CCRI) and many other international endeavours. However, the fact remains that these initiatives need to be leveraged, assessed, consolidated and further scaled. The business case of adaptation finance has been well demonstrated practically under Commercial International Bank’s Green Bonds, 18 percent of which qualified as adaptation projects towards desalination and water treatment. The transactions were commercially viable loans with proven business cases for the bank and clients, with water savings positively impacting the triple bottom line.

Adaptation Finance Governance Mechanism (AFGM)

Brain Trust urges banks to exercise their convening power and establish project-specific multi-stakeholder governance mechanisms to structure investable adaptation projects. The governance mechanism will be contextualised to each project, bringing about its specific and required ecosystem of financial institutions (FIs) and multilateral development banks (MDBs), entities representing science, academia and technology as well as policymakers. Its mandate will be to conceive, design and package an adaptation project.

Structuring Investable Projects

With the establishment of the AFGM, banks will be able to innovate along several dimensions to develop investable adaptation projects that would entice private investors, including the following:

• Projectdesign from a conceptual and operational perspective to ensure that the projects identify economically viable revenue streams;
• Innovative climate finance;
• Instruments—e.g., green/blue/sustainable bonds, sustainability-linked loans, green sukuks/securitization, as determined by the nature of the project;
• Appropriate financing structures, such as blended finance, PPP (public-private partnership) and other composite structures to identify value at risk (VaR) and return on investment (ROI), minimising the overall funding costs; 
• De-risking mechanism to attend to the untested nature of the project and offload African countries’ sovereign risks or to address tenor mismatches;
• Data and disclosure to ensure diligent ESG (environmental, social, and corporate governance) reporting;
• Audited and rated projects with pre-set weighted criteria for scoring that will help private investors allocate their finances;
• Branding African sustainable investment: Brain Trust targets the structuring and packaging of an African sustainable-investment brand that fulfills the highest investment standards and accommodates the concerns of global investors for quality assurances and certifications.

Brain Trust seeks to reconceive adaptation finance along new conceptual and operational parameters that testify to its economic, environmental and social viability. The framework invigorates the role of banks in Africa to ensure that adaptation projects are well packaged to address the interests of private investors who have vested interests in investing in sustainable projects. Brain Trust inherently redresses a market failure that has permeated our global financial system for more than a century—one that has persistently identified the business cases of polluting and environmentally harmful projects but failed to recognise the value of investing in food systems.

References

¹ IPCC (Intergovernmental Panel on Climate Change): “Climate Change 2021: The Physical Science Basis,” Working Group 1 Contribution to the IPCC Sixth Assessment Report.

² FAO (Food and Agriculture Organization of the United Nations): “The State of Food Security and Nutrition in the World (SOFI)” report, 2022.

³ British Red Cross

⁴ WEF (World Economic Forum)^: “How Africa can help feed the world. What’s needed for true food security,” January 11, 2023.

⁵ UNFCCC (United Nations Framework Convention on Climate Change): “25 Years of Adaptation under the UNFCCC Report,” Adaptation Committee, 2019.

⁶ UNEP (United Nations Environment Programme): “Adaptation Gap Report 2022: Too Little, Too Slow—Climate adaptation failure puts world at risk,” 2022.

⁷ UNEP (United Nations Environment Programme): “The Adaptation Finance Gap Report 2016.”

⁸ OECD (Organisation for Economic Co-operation and Development): “Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet,” November 9, 2020.

⁹ World Bank Group: “Enabling Private Investment in Climate Adaptation and Resilience: Current Status, Barriers to Investment and Blueprint for Action,” Arame Tall, Sarah Lynagh, Candela Blanco Vecchi, Pepukaye Bardouille, Felipe Montoya Pino, Elham Shabahat, Vladimir Stenek, Fiona Stewart, Samantha Power, Cindy Paladines, Philippe Neves and Lori Kerr, March 2, 2021, Washington, D.C.