Investing in Tomorrow's Cities: How to Make Climate Adaptation (Truly) Rewarding

Investing in Tomorrow's Cities: How to Make Climate Adaptation (Truly) Rewarding

By SMU City Perspectives team

Published 4 April, 2024


To direct private investment to green activities the state must strengthen the rules governing financial markets. Such a regime could include regulators strengthening rules and standards to ensure transparency as well as to prevent ‘greenwashing’.

Tran Bao Phuong Nguyen

Research Fellow, SGFC

In brief

  1. Climate adaptation is an urgent issue and the financial industry needs to be radically reimagined to address it effectively.
  2. Climate finance can be galvanised and innovated via communication, collaboration and capacity building. 
  3. Key entrepreneurial approaches include innovative financial instruments such as bonds tied to environmental metrics, and Public-Private Partnerships that blend financing, along with data-driven solutions. 

Asian cities like Singapore, Bangkok, Manila and Ho Chi Minh face very real risks of huge economic losses should their adaptation measures be inadequate. Singapore faces up to 20.2% gross domestic product (GDP) loss in a two-degree warmer scenario, a warning of how adversely megacities will be affected. Climate financing is a key player in enabling all other sectors to respond swiftly to climate change effects and is especially critical for cities with dense populations living in low-lying areas. 

An introduction to ‘adaptation finance’

Adaptation financing refers to capital used to strengthen communities' protection from climate change effects. This includes physical infrastructural projects such as sea walls, social and governance projects such as social safety nets and projects aimed at improving knowledge to enable more informed decision-making. According to the 2023 United Nations Environmental Programme (UNEP) Adaptation Gap Report, adaptation costs are between 10 and 18 times the current amount of available financing internationally. 

In the white paper,  “Are Markets Interested in Adapting to Climate? Insights From Singapore,” Dr Tran Bao Phuong Nguyen, Research Fellow at Sim Kee Boon Institute for Financial Economics, outlines the strengths and shortcomings of Singapore’s current approach to urban adaptation. The paper ultimately calls for a transformation of the whole financial system through market structure changes, changing market activities through education and a culture of urgency, and mixing financial investments. 

The paper outlines the global recognition of the role of finance in combating climate change. At the Conference of Parties in 2022 (COP27), the need to transform the whole financial system to combat climate change was stressed. However, at the international policy level and in many contexts, the actualisation of financing to invest in adaptation infrastructure is challenging; Dr Nguyen found that stakeholders are unclear of the returns, gains and regulations incentivising and supporting adaptation projects. She shares more on what government stakeholders, financial institutions and other regional cities can consider in their pursuit of transforming financial systems to serve urgent adaptation needs.

Lessons from Singapore’s adaptation approaches

While Singapore has been doing a great job in spearheading climate action in the region, Dr Nguyen found that there is a need for a stronger and clearer roadmap towards climate adaptation. While Singapore has several funds pledged towards climate change financing, her research highlighted that transparency and clear articulation of the adaptation needs, financing available and resulting financing gap constitute a critical first step that is missing for most cities, including Singapore.  She says: “There is still much room for communication and collaboration between public and private sectors. We found that investors would like the government to communicate in greater detail, and to incentivise and contribute to raising capital for climate adaptation projects.”

She suggests having more frequent dialogues with government representatives, investors and academics to discuss potential financing models and evaluate ongoing efforts. “The government has the pivotal role of identifying the overarching vision, based on research. They can then take the lead in shaping a market that incentivises participation. Research has suggested that the governance of climate change adaptation requires new roles for both public and private actors so that responsibilities are shared and necessary resources are mobilised.” 

Additionally, Dr Nguyen highlights that there remain gaps in the technical expertise and the skills necessary to understand and assess climate risks. She says: “Investors are mainly hesitant to participate in adaptation investments as they are unsure of the risks and the returns of the project, possibly due to a lack of track records for adaptation efforts.” Therefore, sharing in-depth information to clarify details and expectations of adaptation projects could help to incentivise on-the-fence investors. Dr Nguyen suggests creating a cross-sectorial community and joint effort between various stakeholders that would not have necessarily connected under the climate adaptation agenda, creating a novel collaborative mechanism for convening and knowledge sharing. Actors from across the science, technology, investing, business, nonprofit, and community sectors should work together to identify breakthrough, cost-effective strategies. Due to its complexity, climate adaptation lends itself to an entrepreneurial approach with multi-stakeholder collaboration. 

Taking an entrepreneurial approach 

Such an approach can encourage innovation. Says Dr Nguyen,“An entrepreneurial approach to climate adaptation finance involves leveraging innovative and market-driven strategies to address the challenges posed by climate change. This combines principles like risk-taking and creativity to implement financially sustainable solutions for climate adaptation.” 

Key elements of an entrepreneurial approach may include innovative financial instruments like climate bonds, Public-Private Partnerships (PPPs) using blended financing and resourcing approaches, using technology and data solutions by leveraging data analytics for risk assessments, and social impact investments, she identifies.

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Dr Nguyen highlights how governments in cities like Singapore and other states could adopt a forward-thinking entrepreneurial approach to adaptation financing. 

She advises, “First, the state should embrace its role as ‘investor of first resort’, rather than waiting to step in only as ‘lender of last resort’. Secondly, we must rethink the relationship between the public and private sectors, especially when it comes to sharing risks and rewards. When public entities take risks to achieve societal goals, the private sector should not appropriate the financial rewards. Thirdly, to direct private investment to green activities the state must strengthen the rules governing financial markets. Such a regime could include regulators strengthening rules and standards to ensure transparency as well as to prevent ‘greenwashing’.”

Moreover, as a strong financial hub with savvy investors, Singapore’s government could opt for an entrepreneurial approach using more diverse financial instruments instead of relying on debt mechanisms or state reserves, she points out. She also observes: “The benefits of building expertise (in mechanisms, partnerships, business models and tools, among other strategies) in sustainable finance is valuable not only to Singapore but also to neighbouring nations, who are all grappling with needs to finance urban adaptation.”

Dr Nguyen shared examples of other global efforts to adopt the entrepreneurial approach. “The Netherlands has successfully applied a decentralised, multi-level governance approach in water management, integrating public-private partnerships and innovative engineering solutions that  combine flood protection with spatial planning and recreation for its Room for River programme. In addition, the United Kingdom has been exploring innovative financial instruments such as natural capital bonds and green bonds to fund a diversity of adaptation projects that enhance resilience to flooding and other climate-related risks. Australia also supports initiatives that use technology, data, and sustainable practices for both climate adaptation and for raising agricultural resilience.”

Innovative financial instruments: A deep dive into Miami’s pioneering bond

Dr Nguyen points to Miami’s “Miami Forever Bond” as an example of an innovative financial instrument. Miami is a particularly flood-prone city in Florida in the United States of America. The government recognised the city’s vulnerability to flood risks and other climate disasters and implemented a pioneering financial instrument that will transform the city by investing USD$400 million into key categories to address its most pressing needs. These include sea level rise, flood prevention, housing, public safety and cultural facilities. 

She shared that the bond is structured such that the government of Miami issues the bond, which private investors can purchase, and the funds raised through issuance are directed towards infrastructure projects which enhance climate change adaptation. The bond has a unique mechanism which ties repayment to performance metrics; lowering interest rates when adaptation milestones are achieved. If the city achieves pre-determined milestones, the interest rates on the bond decrease. In Dr Nguyen's view, this instrument helps to align public and private financial incentives with adaptation goals while linking financial incentives to environmental outcomes.

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Collaborative effort needed for adaptation finance

Dr Nguyen emphasises that the development of adaptation financing is a long-term commitment. “Everyone must be aware of the urgency in enabling actions; this means that adaptation decisions and allocating adaptation funds are a matter for current budget cycles and investment decisions. Managing climate risks will be a continual, iterative process over many years that has to start now.”

Tackling climate change adaptation needs requires rethinking the roles of public and private actors to share responsibility and mobilise necessary resources. “Everyone should contribute in their own capacity.”

She stresses that the radical redesign of financial architecture is not the responsibility of any single stakeholder, saying: “All stakeholders should possess sufficient awareness on the urgency of adaptation activities, thus actively contributing to the planning, execution and evaluation of adaptation activities.” 

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