Transformation of climate risks into economic advantages in developing nations

Transformation of climate risks into economic advantages in developing nations

In a significant shift, India's Jharia Master Plan, a £511m hazard mitigation programme in a coal-dependent district, has been approved by the Indian cabinet in June 2023. The plan, however, is not formally designated as a climate finance project, highlighting a gap in the current climate finance framework for developing countries.

The Jharia Master Plan, which includes social infrastructure, resettlement, skills development, and land-use management, signaling a shift in how environmental risk is managed, demonstrates that emissions reduction and resilience can be achieved through public administration, land governance, and institutional reform. Yet, its climate impact remains invisible in formal reporting, preventing it from accessing carbon markets and outcome-based finance.

This oversight is not unique to Jharia. Across many low- and middle-income countries, resilience outcomes are being generated through domestic policy and public investment strategies that originate within development planning rather than environmental programming. In Ethiopia, for instance, the national agricultural research system has developed rust-resistant wheat varieties that have delivered productivity gains of up to 40% in targeted areas.

The current climate finance framework tends to overlook institutional innovation and governance-led solutions by primarily focusing on large-scale, capital-intensive projects and conventional financing mechanisms. Finance instruments are often structured for large-scale projects, making it difficult for smaller enterprises, which often drive localized innovation and effective governance, to access funding. They face high transaction costs, complex application procedures, and lack of technical support.

Financial systems frequently perceive small and medium enterprises (SMEs) as high-risk due to their limited collateral, informal business models, and lack of climate-relevant data, despite evidence showing these SMEs can deliver strong climate impacts and financial returns. The current climate finance agenda emphasizes scaling up resources, but much of this effort centers around funding low-emission and climate-resilient development paths through grants, concessional finance, and non-debt instruments, with less explicit attention to strengthening the institutional and governance frameworks that enable these transitions.

Adaptation finance needs and the implementation of Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) require coherent financing strategies that not only provide funds but also enhance domestic resource mobilization and private sector engagement within effective governance contexts. However, current mechanisms often fail to integrate systemic governance innovations that can improve efficiency, accountability, and responsiveness of climate finance at local and national levels.

There is a broad call for a systemic shift in financial systems to integrate climate considerations across development finance, implying the need to rethink financing frameworks to be more inclusive of local institutional capacities and innovations. In Rwanda, for example, the national Green Fund (FONERWA) has supported the development of local financial instruments aligned with climate goals, and a green bond issued by Prime Energy Plc in 2023 raised £5.5m on the Rwanda Stock Exchange.

Other countries are experimenting with devolved finance and performance-based disbursement. In Kenya, over 326,000 farmers have adopted improved agricultural practices through public initiatives, leading to an average 41% increase in yields across key value chains, according to the World Bank's Climate-Smart Agriculture Project.

As we move towards a more sustainable future, it is crucial to acknowledge and support the transformative potential of institutional innovation and improved governance mechanisms in enabling local adaptation, resilience, and sustainable climate action. This requires a shift in how climate finance is designed and evaluated, including developing methodologies for quantifying avoided emissions in unconventional settings.

1. The Jharia Master Plan, a £511m hazard mitigation programme, demonstrates how emissions reduction and resilience can be achieved through public administration, land governance, and institutional reform.
2. The plan, however, is not formally designated as a climate finance project, which highlights a gap in the current climate finance framework.
3. Across many low- and middle-income countries, resilience outcomes are being generated through domestic policy and public investment strategies, originating within development planning rather than environmental programming.
4. In Ethiopia, for instance, the national agricultural research system has developed rust-resistant wheat varieties that have delivered productivity gains of up to 40% in targeted areas, but these outcomes are not formally recognized in the climate finance sector.
5. The current climate finance framework tends to overlook institutional innovation and governance-led solutions, primarily focusing on large-scale, capital-intensive projects and conventional financing mechanisms.
6. Financial systems perceive small and medium enterprises (SMEs) as high-risk due to their limited collateral, informal business models, and lack of climate-relevant data, despite evidence showing these SMEs can deliver strong climate impacts and financial returns.
7. Adaptation finance needs and the implementation of Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) require coherent financing strategies that not only provide funds but also enhance domestic resource mobilization and private sector engagement within effective governance contexts.
8. In Rwanda, for example, the national Green Fund (FONERWA) has supported the development of local financial instruments aligned with climate goals, enabling a green bond issued by Prime Energy Plc to raise £5.5m on the Rwanda Stock Exchange.
9. Other countries are experimenting with devolved finance and performance-based disbursement, as shown by public initiatives in Kenya that have led to an average 41% increase in yields across key value chains.
10. As we move towards a more sustainable future, it is crucial to acknowledge and support the transformative potential of institutional innovation and improved governance mechanisms in enabling local adaptation, resilience, and sustainable climate action.
11. This requires a shift in how climate finance is designed and evaluated, including developing methodologies for quantifying avoided emissions in unconventional settings, such as the Jharia Master Plan, and fostering an environment conducive to innovation in governance, technology, and research in areas like climate-change, environmental-science, finance, business, education-and-self-development, and AI.

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